Electricity-gas pricing trade-off

Published September 20, 2021
The government has decided to start giving price signals to consumers based on energy availability and its cost of supply.
The government has decided to start giving price signals to consumers based on energy availability and its cost of supply.

With a gas price hike of 7-14 per cent due in the first week of next month as required under a determination of the Oil & Gas Regulatory Authority (Ogra), the government has started thinking a little differently. Finally, it has decided to start giving price signals to consumers based on energy availability and its cost of supply.

To begin with, it would be introducing a sort of punitive tariff, described in official jargon as inverse tariff, for more than 40pc of higher-end residential gas consumers in winters — November to February — to force them to give up gas consumption for water and space heating. This in part would discourage extravagant waste of a scarce domestic source and its expensive import in foreign exchange.

As a trade-off, it is offering a relatively cheaper electricity tariff on incremental consumption to residential, commercial and general consumers to encourage them to use more electricity that it believes is in surplus at present and generate capacity payments for unutilised capacity. The scheme offers at least Rs7.40 per unit discount on additional consumption and only those using above 300 units per month would benefit.

The scheme offers at least Rs7.40 per unit discount on additional consumption and only those using above 300 units per month would benefit

It may be an insufficient solution to challenges in gas and electricity sectors and may involve shortcomings at this stage but must be expected to evolve over time to an ideal energy mix and pricing model for all energy sources that are not only fair, just and equitable but sustainable as well. For that, all competing fuels — local and imported natural gas, coal, fuel oils and LPG — would have to be examined equally on the basis of cost and output per molecule.

In the meanwhile, the government may have to examine the availability and affordability of efficient appliances in the market that encourage consumers to shift from gas to electricity for space and water heating for economic reasons.

The Ogra has for years been asking the governments to charge at least the true cost of gas supply, rather than a highly subsidised rate, to every consumer category but political compulsions had restrained any change. In fact, all political parties had been extending a pipeline network for which they increasingly failed to ensure gas supplies.

The gas companies had an unfair vested interest in system expansion because they get a return on asset even if it is non-productive and incomplete, rather than on the sale of their product — natural gas — and hence have no incentive to be efficient.

No wonder, Ogra has advised the public representatives and the government to come up with policy guidelines for competition based development and expansion of natural gas national grid and new residential gas connection in view of the expiry of the monopoly of the two gas companies — Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC).

“Please be advised that exclusivity of the gas companies to operate in franchise areas is no longer valid and hence new development schemes are to be awarded on a competitive basis,” it had written. There is no beginning on that front though.

In its recent gas prescribed price determination, the Ogra has put on record that the last seven-year performance showed SNGPL could not even provide connections to even 390,000 per annum but was now demanding over Rs45 billion for new connections of 1.2 million. “It is the obligation of gas companies to ensure that only economically, technically and commercially viable projects are planned and proposed for seeking approval of the relevant authorities on merit keeping in view all relevant factors unless funding for such projects is made by the government to make them viable, but with due regard to the gas supply demand projections and gas companies’ obligations towards security and continuity of supplies,” the Ogra said.

But despite frequent issues of gas shortages and pressure drops faced in the country in total disregard and contravention of the license conditions, the gas company had not devised any strategy or action plan to resolve the pressure drop issues of the existing consumers and potential new consumers. It “exhibited a lack of proper planning and vision to systematically and efficiently serve its existing customers” and was “adding to the miseries of its consumers due to issues of pressure drop and increasing gas shortages.”

In addition, an examination of the last seven-year data indicated that SNGPL had been able to install 2.53m gas connections against 3.50m allowed connections, thus more than 969,000 of gas connections limit remained unutilised only during the last seven years, besides the total admitted pendency of over 2.8m applications. The situation is not so bad in the SSGCL area in terms of connections pendency but issues of pressure drops and gas shortages are almost of the same nature.

The regulator has also recommended that gas companies be made to ensure the completion of already approved network development plans and new gas connections already funded by the consumers through tariff instead of pressing the regulator to burden consumers with imprudent costs of unreasonable targets.

While the country is facing a gas shortage, particularly in winter, as indigenous gas production is on a continuous decline, the gas companies have been reluctant to allocate pipeline capacity to the private sector to bring in imported gas, resulting in a frequent drop in system pressure, gas load shedding and load management issues.

On the other hand, the government has not been able to deliver on the weighted average cost of gas (WACOG) due to provincial opposition. Resultantly, the supply of expensive imported liquefied natural gas (LNG) to residential consumers in the winter months has already increased SNGPL’s circular debt to about Rs130bn and counting.

But once the WACOG is achieved, it would result in the continuation of the existing monopoly of the public sector gas companies. The delivered cost of local gas currently averages about Rs670 per metric million British thermal unitscompared to Rs1,400 to Rs2,200 per unit for imported LNG. After all, if the Sui companies get WACOG of both local and imported gas, no private sector entity would be able to compete with its expensive imported product.

Gas companies concede that a prudent business model requires a ban on the extension of transmission and distribution systems in new towns and villages until domestic gas production matches the requirement of domestic consumers and existing industrial and commercial gas demand or their affordability levels increase. However, additional assets even without completion qualify for a depreciated return.

The Ogra has repeatedly been asking the government to formulate an appropriate policy to “award new gas distribution network projects through some competitive mechanism, which facilitates the new entrants and promote competitive market, bring efficiency and accelerate economic activity with the help of private participation in the gas sector” to extend equal opportunity to all gas market players in a fair and transparent manner.

Published in Dawn, The Business and Finance Weekly, September 20th, 2021

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