Pakistan Reader# 207, 18 September 2021
Government equalizes power tariff for electricity consumers and Pakistan Oil refining policy 2021 agreed in principle as well
On 13 September, the Cabinet Committee on Energy (CCoE) had decided to reduce the per unit electricity tariff for the winter season for all domestic, commercial, and general services consumers. The decision was taken to nudge the consumers to utilise the surplus power capacity in the system during winters for space heating as per the summary submitted by the power division. This decision by government in form of an incentive has come along with clearance of payment dues worth USD 786 million dollars to independent power producers (IPPs). While in the same meeting the CCoE has agreed to, in principle, the newly drafted Pakistan Energy Refining Policy 2021.
Background
Pakistan’s power sector generates electricity from primary fuels and serves as a secondary energy source for household consumers, industry, commerce, and other sectors of the economy. Fuel oil accounted for 35.9 per cent of Pakistan’s electricity in 2013; hydropower, 31.1 per cent; natural gas plants, 28.2 per cent; and nuclear plants, 4.7 per cent. During winters there is shortage of natural gas so to rationalise surplus capacity in the grid, the government has been offering seasonal reduced tariff policy. Peak demand of power during winters drops as low as 12,000 MW against the peak demand of 26,000 MW and beyond during summers.
The flat rate now, on incremental consumption would effectively be applicable to those consuming over 300 units and above per month currently charged at Rs 20-23 per unit, excluding taxes. Those under 300 units and almost 70pc of total consumers are charged at a maximum of Rs 12.15 per unit. Hence, the slab-based incentive is to induce more electricity led consumption over fuel-based consumption. The fuel imports have a significant impact on the foreign exchange reserves, so the upcoming season the country can aims to stablise the fluctuating foreign exchange reserve and focus more on managing other micro-indicators of economic health.
The Pakistan Energy Refining Policy 2021 is timely for existing indigenous petroleum refineries existing in Pakistan in terms of upgradation process, the incremental revenue associated with it. The new policy yet to be approved received strong observations from finance minister and planning minister regarding the upfront incentive package offered to existing refineries in the country. Upfront incentive to refineries are given in the form of tax equity and guarantee from the government. The petroleum division, in its response, said that the government would contribute 25-30 per cent for the up-gradation of refinery projects while in return the government could seek USD 3 million of supply guarantees from the refineries.
The draft policy provided for “Special Reserve Account” for upgrade, modernisation, or expansion to be maintained by each local refinery in a separate bank account to be opened in the National Bank of Pakistan. Any incremental revenue (net of taxes) earned by the refineries based on the revised tariff structure (over and above the existing pricing mechanism for refineries), was propose to be transferred to the Special Reserve Bank Account and appear separately in Company’s books of accounts for exclusive utilization on upgradation, modernization or expansion projects.
The problematic cleared payment to IPPs
The payment clearance worth USD 786 billion is a big amount for the finance-stricken government machinery to clear in one go. The award of payment is part and parcel of the arbitration setback received by Pakistan at the London Court of International Arbitration proceedings. The cause behind the independent arbitration was governments realizing excessive profits achieved by independent power producers. In a similar event, this week lawmakers at the senate standing committee on Cabinet Secretariat sought explanations from National Electric Power Regulatory Authority (NEPRA) about the increased electricity bills. The government through NEPRA has been imposing fines on a few IPPs over such issues. To his defence, the NEPRA chairman explained that the devaluation of the rupee was one of the major factors. “Circular debt is due to government subsidies extended to people,” he added. Pakistan is currently facing a severe and multifaceted energy crisis. Electricity shortages exceeded 7,000 megawatts in 2011; the gas shortfall is two billion cubic feet per day. The energy shortages are estimated to cost around two per cent of GDP annually. This shortfall is the result of the failure, over successive governments’ tenures, to invest enough to expand power system capacity. Low and declining investment and savings rates (including in power) reflect macroeconomic weaknesses. The efficiency of Pakistan’s utilities—both in producing electricity and collecting dues—varies considerably. Some companies compare with the best in South Asia. Others do not achieve half of those performance levels. Supply costs thus remain higher than warranted.
References
Khaleeq Kiani, “Cheaper winter tariff approved for electricity consumers,” Dawn, 14 September 2021 Sufyan Khalid, “Government will negotiate power purchase agreements with 12 independent power producers,” Lahore Herald, 16 July 2021
Waqas Ahmed, “Power tariff hike irks Senate panel,” The Express Tribune, 15 September 2021
Mushtaq Ghumman, “IPPs established under 2002 policy: Power Division backed out of IAs?,” Business Recorder, 13 July 2021
“Pakistan- countries and regions- IEA”, International Energy Agency,
“Energy Government of Pakistan”, Finance Ministry, Government of Pakistan
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