The country is stuck in a low-growth trap. A shift in the economic model from consumption to export-oriented growth necessitates the availability of affordable electricity. The age-old practice of passing on prices to the consumer will only add more burdens on the consumer and further restrict growth.

Electricity consumption per capita has consistently declined over the last five years, wherein prices have increased by more than 100 per cent. We have reached a point where any further increase in prices will only further constrain growth. Reducing electricity prices remains one of the most critical policy measures to unlock growth in the short run.

It is estimated that for every 10pc increase in price, consumption reduces by roughly 3pc. Compound the same over many years, and the results are detrimental for an economy that is supposed to grow at mid-single-digits to meet its growth potential.

The power sector is a complex labyrinth, and each policy measure can be split into immediate, medium-term, or long-term interventions. This article largely focuses on immediate interventions that can restructure electricity tariffs so that they become affordable again for domestic, commercial, and industrial users.

It is estimated that for every 10pc increase in price, consumption reduces by roughly 3pc

Such immediate interventions, as discussed here, can reduce capacity charges on a per-unit basis, stimulating demand for domestic and industrial sectors without requiring long-term infrastructure investments.

Due to an increase in electricity prices, an increasing number of industries moved off the grid and reduced their electricity consumption, moving towards gas (which is also priced in a highly inefficient manner) or other sources of energy.

As such, large-scale users went off the grid, and capacity charges have to be paid by those who remain on the grid, making electricity more expensive for them. Capacity charges for the current year are estimated to be Rs10.8 per kWh.

As additional power capacity comes online and the rupee depreciates to historic levels, capacity charges may grow by at least 15pc every year. Demand needs to increase by at least 15pc to neutralise the impact, else capacity charges will increase further on a per-unit basis.

For every 15pc growth in demand (more than growth in capacity charges), capacity charges drop by Rs1 per kWh. In such a scenario, demand needs to be stimulated to grow faster than capacity charges. The government collected roughly Rs318 billion in sales and withholding tax, mostly from households, which made up almost 20pc of the electricity bill.

Reducing it can stimulate demand from the domestic segment, whose consumption has remained flat for the last five years.

Although there will be a fiscal deficit that needs to be filled, it can be filled by expanding the tax net rather than discouraging electricity consumption, which makes electricity more expensive and is, thereby, an anti-growth measure.

As domestic consumption increases, capacity charges would reduce, making electricity affordable for industries as well. This would kick in more electricity consumption and thereby reduce capacity charges.

Another fairly ambitious intervention is reprofiling the power sector debt so that the sovereign assumes the foreign exchange component of the debt while also isolating the tariff from any depreciation of the rupee.

There is roughly $4bn of foreign currency debt on the balance sheets of the China-Pakistan Economic Corridor (CPEC) backed power plants. A sovereign guarantee already covers the debt, so it is effectively a sovereign risk, wherein repayment in foreign currency is the government’s responsibility.

The US dollar-based debt effectively exposes the capacity charge to indexation to the rupee — which further increases the tariff as the rupee depreciates.

Isolating the tariff from the dollar indexation can significantly reduce the growth of capacity charges, consequently reducing them on a per-kWh basis. Isolating the tariff from rupee depreciation can enable demand growth to catch up with capacity payments and reduce them on a per-unit basis.

There is a possibility of novating dollar-based debt to either the sovereign or a Special Purpose Vehicle (SPV), effectively making it sovereign debt. The principal and interest repayment components of the tariff can then be priced in Pakistani currency, and the Central Power Purchasing Agency (CPPA) can transfer the same to the government directly for settlement of the relevant debt rather than to the power plant.

We have reached the stage of the economic cycle where ambitious goals must be set to unlock growth — the status quo cannot continue for long.

Industries that are heavy electricity users continue to move off the grid because of the pricing arbitrage that exists with gas. Gas and electricity must be priced in a way that can extract maximum economic value.

Currently, expensive gas is being allocated to mildly efficient captive power plants rather than to highly efficient utility-scale power plants. Reallocating the same to utility-scale power plants can reduce the generation cost.

Stimulating demand through the steps mentioned above can also reduce capacity charges, incentivising industries to revert back to the grid. This catalysis a positive loop in which grid utilisation increases and the tariff goes down.

Similarly, to further spread out the burden of capacity charges, Independent Power Producers (IPPs) should be allowed to enter into bilateral arrangements with private buyers, such that they can allocate any excess capacity to such buyers. This can reduce the capacity charge that the consumer needs to pay, further reducing electricity prices.

This can also be achieved by enabling energy wheeling at reasonable prices in the range of $0.015 per kWh. Wheeling can be restricted to high-value-added segments such as export-oriented sectors, which can enter into bilateral arrangements with IPPs, and any high-intensity import substitution projects.

This would effectively allow the redistribution of capacity charges and reduce per-unit costs.

Without these interventions, we will continue to see more industries eventually move off-grid, establish their own private energy generation capacities, and accelerate movement off the grid, increasing capacity charges per unit. The same has been happening for the last five years, as industrial electricity consumption is declining.

The power problem needs to be treated and solved as an optimisation issue, rather than a cost-plus problem — the latter being the preferred easier option, but one that destroys economic value in the process.

Published in Dawn, The Business and Finance Weekly, March 25th, 2024

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