ISLAMABAD: Amidst Pakistan’s struggles to ensure a reliable energy supply to provide impetus to industry and economic growth, there exist inexplicable imbalances between the power and gas sector policies. A case in point is the pricing policy for both sectors.
On the one hand, the government claims to have excess power capacity in the system, while the country’s power tariffs are the highest in the South Asia region. Pakistan still continues to follow an Incremental Block Tariff (IBT) regime, despite the fact that the structure was introduced at a time of power shortages and is no longer relevant today when power is in oversupply. On the other hand, gas prices are consistently low in accordance with the international RLNG prices, while the Ministry of Energy continues to caution severe gas shortages in the country for the next couple of years.
The price of a commodity is a prime factor in determining consumption. Astonishingly, in Pakistan, the price of a commodity which is abundant (electricity) is kept high discouraging its usage and consumption of one that is in shortage (gas) is low on account of low international prices. The rationale behind this inadequate approach towards solving the energy crises in Pakistan is mind boggling. Pakistan’s cost of power production is 26 per cent higher for the industrial sector compared to other regional countries like Vietnam, Sri Lanka, Malaysia, Bangladesh, South Korea, Thailand and India, and it is 28 per cent costlier for residential areas than the regional countries.
To add to the consumers’ and investors’ woes, inconsistent regulation between NEPRA (responsible for regulation of the power sector) and OGRA (responsible for the regulation of oil and gas sector) gives vague signals to the consumers and investors, creating disharmony in pricing strategies between gas and electricity. Additionally, since both are sources of energy, the variability in tariff on gas and electricity is $6.5/MMBTU (power generation at 40 per cent costs approx. Rs10.5/Kwh) and 9.0/kwh (Rs15/Kwh), creates opportunities for arbitrage in the system.
Hence, the prices must be set in equilibrium at $6.5/MMBTU for gas and 7.5/kwh for electricity as one of the measures in establishing an efficient system design. It is to mention that charging a higher tariff for electricity than gas generated electricity is in fact taxing the SMEs as they don’t have self-generation and resultantly cannot compete. The importance of provision of a level-playing field can be estimated from the fact that 70-80 percent employment is in the SME sector and their growth results in the largest employment generation.
Moreover, the compliant user is trending towards renewables that will leave the government incapacitated in generating revenues from tariff hikes. In a recent meeting, the textile industry was informed that there will be a gas shortfall of approx. 350 mmcfd in Karachi, which will be met partly by new pipelines infrastructure (150), APTMA (70) and others (100). In return for the curtailment of gas consumption to meet the deficit, the textile industry in Punjab will be provided reduced tariff (7.5 cents/Kwh) for the months of shortfall.
However, the said structure was not included in the summer submitted to the Economic Coordination Committee (ECC). The adverse effects of such an omission on the industry, and resultantly on the economy, cannot be underestimated, especially given that the country’s policies for energy inputs are massively misleading. The ministry is proposing to shift captive power generating industry back to the grid, which is contrary to the pricing structure explained and stated above.
In a nutshell, Pakistan is in dire need of a paradigm shift, where there is balance and equilibrium between gas and power sector policies, including measures like fixing power tariff for the Export Oriented Industry (EOI) in accordance with the gas prices or should be set at a maximum of 7.5 cents/Kwh, all inclusive. Doing away with the (irrational) IBT structure and introducing a regressive structure rather than progressive, the lower tariff must be charged as per unit consumption increases.
Tariffs must be in tandem or designed in a way that gas consumption (particularly by households) is discouraged, where there is excessive consumption e.g. space heaters and water geysers roughly consume 400 mmcfd and 200 mmcfd respectively. The resource can instead be diverted to the power sector to reap the greater economic benefits. It is pertinent to mention that gas is available at 1/4th of the price of LPG and as mentioned earlier, is only available to 25 percent of the population.
This is tragic given the fact that the increased electricity consumption can help address gas shortages as well as reduce the burden of capacity charges for the government. Furthermore, anything above the variable cost, which is 3.5 cents/Kwh, is profit i.e. 4.0 cents/Kwh, hence, even if tariffs are rationalised at regionally competitive levels, the energy sector will be getting higher revenues to cover capacity charges.
In the absence of pragmatic policies and reforms comparable with international best practices, Pakistan’s power and gas sectors are currently be set to cause even greater distress to the economic well-being of the country. The power sector already is causing a dent of 2 percent per annum in GDP growth as estimated by Dr Hafeez Pasha.
