Power tariff increase: Not worth it

You say one thing while in the opposition, and quite the other while in the government. That also seems to apply perfectly well in the energy sector of Pakistan. All tariff increase is bad in opposition and inefficiencies are offered as the solution. When in government, increase is substituted by inevitable “rationalization”, and system inefficiencies are no longer the vital cog.

It has happened all too often in the past few years, and the government’s recent decision in principle to go for an insane round of electricity price revision, is colored with the same paint. Cutting to the chase, if the Circular Debt Management Plan is brought in action, and the tariff rationalization is done as per the laid-out rates and time – the power consumers face never-seen-before increase in tariffs in such a short span.

Experts have been plenty of late, and the elephant in the room is known to all and sundry. That is the capacity payments to the power producers. Enough numbers are out there telling how the capacity payments have become the largest component of the Power Purchase Price and how they are slated to grow even further in the years to come. Of course, that needs some funding. Hence the tariff increase.

Only that it was never that simple. You can still go on and keep reminding everyone how the previous government agreed to lopsided contracts and added so much capacity without much regard to the ground reality. You can then also talk about the ‘unprecedented’ negotiations with the IPPs that will reportedly result in savings of hundreds of billions in tens of years. Nothing will mask the fact that you, not the previous government, has been at the helm for the past 32 months.

All what one has ever heard when it comes to solution the power sector woes are revenue measures. The IMF has been fond of revenue-only measures and it has good self-serving reasons. Why is the government presenting revenue-only measures is baffling though. Not because tariff increase is not part of the solution; It very much is. But because it is not the entire solution, which is what keeps getting portrayed. Why? Because tariffs, are not the entire problem. Do the math.

Inability to foster higher demand, worsening T&D losses (over and above the allowed limit), significantly insufficient billing recovery (90% actual vs 100% assumed), transmission constraints, high surcharges, violation of merit order, capacity issues with demand projection – all of this combined make for equally if not more important problems. Solving only one end of the equation will only add more imbalances and could do mor damage than good.

Here is how. Suppose the power base tariff goes up by Rs3.6 per unit by July 2021. The total base tariff will have increased by Rs5.55 per unit in a span of six months. Only the PPP tenure saw the power prices increasing more during a complete tenure. PTI is only half-way through and has already surpassed the tariff increase for the lowest consumption categories, that PPP achieved in five years. PML-N did nothing, which itself is a big reason why much of this could have felt less painful, but that is for another time.

For CPI purposes, the proposed increase will yield an increase of at least 86 percent year-on-year for electricity tariffs by August 2021. And in all likelihood, it will be much more than that, because for the simplicity of argument, the proposed quarterly adjustments and additional surcharge have not been considered. This could even run north of 100 percent. A one hundred percent increase in CPI terms for electricity promises to contribute more than 4 percentage points alone to the headline inflation. You may want to read this paragraph again to believe your eyes.

What necessitated two base tariff revisions spread over two months (and three in six)? Recall that the previous base tariff revision shows the Power Purchase Price of Rs1.5 trillion or Rs15.04 per unit (another story how that too is optimistic based on unrealistic T&D losses assumptions). Mind you, there is no prior year adjustment pending at this point, and the quarterly adjustments have also been made rapidly in the past six months. There is hardly a backlog there.

The revisions would naturally all be based on increase in capacity payments, but what is the wizardry behind back-to-back base tariff revisions? For a moment, let us argue that the power system’s health leaves no other option, then why can’t there be a proportionate reduction in GST and host of other surcharges that the power consumers pay?

Surely when the base tariffs go up as insanely as this, so will the GST. Why has there not even been a murmur on how base tariff can be protected without increasing the price further for the end consumer? Surely, all the weight of GST expectation should not fall on the power consumers. But reports suggest there are talks of imposing a fresh surcharge equal to 10 percent of the sector’s revenue requirements. That could be another Rs1.5 per unit to the injury.

It is ironic the proposals are reportedly part of what is termed as Circular Debt Management Plan (CDMP). It was not long ago when a detailed report on circular debt was tabled the Senate of Pakistan, that showed how every rupee raised in tariffs adds to the circular debt woes. While there is no denying such measures will slow down the incremental flow of the circular debt stock to some extent, the problem won’t go away.

Recall that low recovery and high line are a massive issue – and there is sufficient literature out there that confirms how both these variables change for the worse when the tariffs go up. When in fact the focus should have been around mending these two, the tariff increase is likely to push them further back. And good luck with hoping to revive the demand at these rates. You would do well to even maintain it where it is, let alone grow it.

All this while the government keeps talking about how exports are the cornerstone of the growth policy. Try selling power at Rs30/units and thereabouts to exporters, or even domestic-oriented industries – having already taken back the captive facility.

The numbers may still go on and justify the proposed increase. The manner won’t. Common sense won’t. Socio-economic realities won’t. Economics won’t. How hard is it to plot the disastrous consequences of power at these rates with respect to direct and indirect inflation, growth, monetary policy consequences and so forth? Energy affordability is worth much more than balancing a few equations because the IMF says so. Here is hoping, the plan does not see the light of the day.

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