THE government decision to grant billions of rupees to K-Electric (KE) as tariff differential subsidy and to earmark hundreds of billions for the current fiscal year has left many wondering about what actually is going on in the power sector. Queries abound about the grant of such a substantial subsidy and the KE’s use of it.

The answer is relatively straightforward. Electricity tariff, regulated by the National Electricity Power Regulatory Authority (Nepra), is uniform nationwide. This includes a privatisation agreement and a multi-year tariff known as the ‘GoP KE tariff’. The consumer tariff structure is designed to subsidise protected customers, and, to a certain extent, other customer categories. Industrial and commercial consumers partly provide this cross-subsidy. Any shortfall and other expenses, as agreed upon by the government at

the time of the sale of KE, are covered by a budgeted subsidy, or one that is approved by the Economic Coordination Committee (ECC).

What often goes unnoticed and is completely ignored is the existence of the national gas allocation policy. This policy gives priority to grid power plants over other consumer categories, excluding domestic, commercial, and the process gas usage of zero-rated industries.

As of today, the gas tariff for grid power plants is 1,050 per metric million British thermal unit (mmBtu), while it stands at 2,500 and 2,400 per mmBtu for captive entities, with varying re-gasified liquefied natural gas (RLNG) blends in winter and summer. These rates were half for captive till a couple of months ago. Electricity generated by inefficient captive power gensets on natural gas, with various blend ratios, averages a cost of Rs25-30 per unit. Most of these gensets operate at 35 per cent efficiency, and at least half of them lack combined cycle or heat recovery mechanisms. Yet, they continue to receive approximately 175 to 210 million cubic feet per fay (mmcfd) gas per month from the Sui Southern Gas Company (SSGC) network, which previously cost about Rs15-17 per kWh before the recent gas tariff hike and blend ratio.

Besides, 135 mmcfd was committed by the ECC in 2018 to KE for its grid plants, but it was later retracted. KE continues to use RLNG, now priced at Rs4,300 per mmBtu. During the aforementioned period, about 63 mmcfd was the monthly average. This has led to electricity generation costing Rs23-27 per kWh at KE’s various plants on absolute RLNG.

A total subsidy of Rs190 billion was paid to KE for the period between April 2022 and March 2023. Had the committed 135 mmcfd natural gas been supplied to KE, as approved in 2018, the subsidy expenditure for the period would have been just Rs84 billion.

This would have also resulted in lower monthly fuel charge adjustments (FCAs) for the consumers. Considering the fact that this scenario is in effect since 2018, with a minimum saving of Rs100 billion per year in five years, the impact on the government’s pocket would have lowered by a minimum Rs500 billion by now.

In effect, the government is actually indirectly subsidising private-owned captive power plants at the expense of taxpayers’ money. This misallocation causes the hardships faced by industrial and domestic users.

Captive power, often masked under industrial categories, allows a few individuals to enjoy cheaper electricity at the expense of grid users. It is time for the government to transition them to the grid and not get blackmailed by their strike threats and influential lobbying. This should be implemented at the national level, as the same gas can produce twice the electricity at 25pc of the cost. Besides, the shifting of captive power to grid will also significantly reduce capacity charges.

Rehan Jawed
Head of Nepra and Ogra Standing Committee at Korangi Association of Trade & Industry Karachi

Published in Dawn, February 3rd, 2024

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