Cost of power generation

The average cost of fuel used for electricity production doubled last month compared to Jan 2021, raising serious inflationary concerns among commercial and residential consumers alike. Even if we look at the Nepra data for Dec 2021, fuel costs were still up by almost 50%.

Although the increase is mainly for reasons beyond the government’s hands — prices of coal, natural gas and petroleum products have been rising sharply all over the world — it is clear in hindsight that the push to encourage consumers to use electricity instead of gas over the winter could come back to bite everyone.

The impact of the increasing fuel prices is also magnified because furnace oil, diesel, coal and natural gas make up over 61% of our total electricity generation fuel sources, with consumption of these fuels as a share of all sources increasing by over 5% in the last year. In fact, high-speed diesel, which only represents 6% of total power production, has become so expensive that it has been blamed for almost single-handedly blowing up the average price. A unit of electricity produced from diesel cost almost Rs26 last month, compared to Rs14 for coal, which had also increased and accounts for over a third of total power production. Unfortunately, this is where the government can be balanced. Despite its small share, diesel use is actually up almost 12-fold since last year, thanks to a short-sighted reaction to high gas prices some months back.

Imported LNG cost almost Rs17 per unit, while local natural gas cost just over Rs7 per unit, representing 7% and 14% of total generation. Nuclear, which costs barely Re1 per unit, accounted for 14% of total generation. Reports also say that generation from clean sources such as hydel, wind, and solar were negligible due to poor weather, which also influenced the cost spike. Reports now suggest that consumer power tariffs will rise by over Rs6 per unit in our March bills, which, if approved by the government, would represent an increase of over 93%. Even the best-case scenarios for consumers are of a lesser increase, with the cash-strapped federal government absorbing some share of the loss.

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