Nepra (National Electric Power Regulatory Authority) has just released its State of Industry Report for 2020-21. This is a report of outstanding quality which has been produced annually since 2006. It contains in a very detailed manner all the key facts on the power sector and their analysis. Hopefully, one day reports of similar quality will be prepared by other regulatory agencies like Ogra (Oil and Gas Regulatory Authority), SECP (Securities and Exchange Commission of Pakistan) and CCP (Competition Commission of Pakistan) and released in time like the Nepra.
Given the central role of the power sector in the national economy the statistics presented in the report also give an insight into broader developments in the national economy. For example, there is a strong link between electricity consumption and level of output in different sectors of the economy. Also, the change in electricity tariffs has a significant impact on the price level.
The good news is that over the last four years there has been a major expansion in installed capacity for power generation of over 11,000MW. Cumulatively, the increase in capacity is 39 percent. This has resolved the problem of power outages which at their peak seven to eight years ago used to cause a loss of almost 2 percent of the GDP annually.
The big increase of over 6,100MW is in thermal power generation capacity. Bulk of this is in coal-based plants set up by Chinese investors. Hydel and renewable energy plants with low running costs have added almost 3,400MW to the system capacity. The emphasis in coming years should be on investment in renewable energy.
The total electricity consumed is 115,440 Gwh in 2020-21. There appears to have been a drop of only 1 percent in 2019-20 despite the first Covid-19 attack in the last quarter. There is a strong recovery in total electricity sales in 2020-21 of almost 8 percent. This is a clear indicator that the GDP may have expanded faster than the estimate of 3.9 percent by the PBS (Pakistan Bureau of Statistics).
Domestic electricity consumption showed a growth rate of 4 percent in 2019-20 and 5 percent in 2020-21. The more time spent by family members at home during Covid-19-related lockdowns and shutdowns has increased the residential demand for electricity.
Both the industrial and commercial sectors appear to have been hit badly by Covid-19. Electricity consumed by these sectors fell by 6 percent and 11 percent, respectively, in 2019-20. However, there has been a strong recovery in 2020-21 with electricity sales to the commercial consumers increasing by 7 percent and to industrial consumers by as much as 17 percent. This again highlights the under-reporting by the PBS of the growth of the manufacturing sector in 2020-21.
There are indications that the economy of Karachi may have shown faster growth than that of the rest of the country. Between 2018-19 and 2020-21, the overall per capita consumption of electricity has increased by 12 percent in Karachi as compared to 4 percent in the country. This is the first good news about Karachi after a long time.
Overall, at the provincial level the fastest cumulative growth between 2018-19 and 2020-21 is observed in electricity consumption in Sindh and Khyber-Pakhtunkhwa of 9 percent in each case. The growth in Punjab has been 6 percent. The worrying development is that electricity consumption in Balochistan has shown no growth.
The performance of the sector in terms of the level of distribution and billing losses of the DISCOs is vital from the viewpoint of restricting the growth of circular debt in the sector and reducing the need for escalation in power tariffs. The performance here is disappointing. Distribution losses of the Discos with CPPA-G (Central Power Purchasing Agency-Guaranteed) have increased slightly and remain at close to 18 percent. In the case of K-Electric this loss was as high as almost 23 percent in 2018-19. Fortunately, it has come down somewhat to under 21 percent in 2020-21.
Distribution losses are relatively high in Pakistan. This reflects the higher priority given over the last many years to power generation, rather than to transmission and distribution. Only 8 percent of the federal PSDP has historically been allocated for the latter type of projects. In the latest federal PSDP (Public Sector Development Plan) the share still remains low at below 8 percent. This will have to be raised to at least 15 percent in coming years.
Billing losses have ranged from 3 percent to 5 percent. The magnitude varies substantially among the DISCOs. The loss in revenues is almost Rs 65 billion.
Turning to the level and growth in electricity tariffs, they have increased sharply since 2017-18. There was a big jump in January 2021, as part of the agreement with the IMF on steps for management of the circular debt in the sector. The escalation in average tariffs over the three years is 26 percent for domestic consumers, 45 percent for industrial consumers and 42 percent for commercial consumers. It is estimated that the rise in electricity tariffs has contributed 18 percent to the rise in the Consumer Price Index from 2017-18 to 2020-21.
The result is that electricity tariffs continue to be relatively high in Pakistan. The industrial tariff in the country is 13.6 cents per kwh as compared to 11.7 cents per kwh in India and 10.5 cents per kwh in Bangladesh. Similarly, the average domestic tariff is 9.2 cents per kwh while in India and Bangladesh it is 7.8 cents and 6.6 cents per kwh, respectively.
Finally, there is the issue of the size and rate of increase in the circular debt of the power sector. According to the report, the size of this debt was 1127 billion at the end of 2017-18 and has risen to Rs 2280 billion by the end of 2020-21. Therefore, the debt has shown an exponential growth and doubled in only three years. This is not sustainable.
The biggest increase was in 2019-20 of Rs 531 billion. The rise in 2020-21 is much smaller at Rs 130 billion, due to larger payment of subsidies and a big tariff increase. The target must be to reduce losses and improve the liquidity position throughout the supply chain in the sector.
Overall, the power sector has shown a mixed performance in recent years. There has been a big expansion in capacity and the problem of load-shedding has been eliminated. However, distribution losses remain very high and there has been a major escalation in tariffs which has contributed to higher inflation in the country. On top of all this, the level of circular debt must be controlled by resort to non-tariff enhancement measures, including renegotiation of agreements with the IPPs with the understanding that there will no build-up in arrears henceforth in payments due to them.