High electricity prices

ByUmair Ali

Trainee lawyer


August 2, 2023

High Electricity Prices

Umair Ali describes the
negative impact of escalating electricity tariff

High Electricity Prices – Pakistanis are hit by a never-ending increase in the tariff of electricity that has made life unbearable for a large majority of population. On top of the escalating electricity prices are the frequent power breakdowns in the name of load-shedding flying in the face successive dispensations’ claims that the country possesses extra power than required. The incumbent dispensation has tried to justify the recent price hike on the pretext that it was undertaken on the behest of the IMF that is breathing on the country’s neck to cough up more revenue. Apparently the price escalation is the outcome of the country’s largest-ever fuel price adjustment charges and the size of the various taxes being collected by the government on them. The consumers have been hit hard by the spike in their bills in recent months, with the average electricity cost more than doubling for low- to middle-class households and many families are finding it difficult to pay their bills. With the steep rise in fuel price adjustment charges, the burden of government taxes in the electricity bills has also increased significantly. The almost fifty per cent enhancement in the base tariff that it committed to the IMF that it will implement from July through October is another factor for the swollen bills being delivered to the consumers who are already struggling to make ends meet in the face of soaring prices of food and fuel eroding real wages and rapidly declining purchasing power.

It was expected that price increase spiral will not stop even after a downturn in international fuel prices as long as there is no move to undertake long-standing power sector reforms in order to sharply cut system losses, control the allegedly rampant corruption in the distribution companies, stop widespread power theft by the powerful, and, more importantly, reduce reliance on imported fuels by shifting to local fuels for generation and encouraging renewable energy. The prediction in this context proved right as NEPRA raised the national average tariff by around Rs.5 per unit to ensure Rs.3.28 trillion in funds to the loss-making power distribution companies (Discos) during the current fiscal year. The Rs.4.96 hike, set to come into force from 1 July after formal notification by the government, would provide Rs.477 billion in additional revenue to Discos.

The revised national average tariff for the 2023-24 fiscal year has been determined at Rs.29.78 per unit which is Rs.4.96 per unit higher than the previously determined national average tariff of Rs.24.82. The increase is justified on the pretext of rupee’s devaluation, high inflation and interest rates, addition of new capacities and overall low sales growth. Now it is reported that the real applicable average national tariff would now stand between Rs.50 and 56 per unit after including surcharges, taxes, duties and levies, besides monthly and quarterly adjustments. The major increase was seen in the capacity charges, which increased to Rs.17 per unit from Rs.11 last year with a financial impact of Rs.623 billion, or Rs.5.94 per unit. This was partially offset by Rs.2.6 per unit reduction in energy charge, i.e. from Rs.10.20 to Rs.7.63. The overall capacity charges are projected at Rs.1.87 trillion for the current fiscal year against Rs.1.25 trillion last year. The distribution margin to Discos has also been raised by 94 paisas per unit to Rs.3.1 netting in Rs.341 billion besides various prior-year adjustments of Rs.73 billion at 67 paisas per unit for the current year compared to Rs.42bn last year.

It is insisted by the incumbent government that the increase in electricity tariff was one of the key requirements of the $3bn standby arrangement (SBA) signed with the IMF to ensure further progress on structural reforms, particularly with regard to energy sector viability and SOE governance. Last year as well the government increased the national uniform electricity tariff by Rs.7.91 per unit, involving an additional financial impact of Rs.893 billion on consumers and the result was that the electricity consumption dropped by 2.6 per cent but the increase in power sector circular debt continued throughout the year. NEPRA The said that the electricity sales of Discos were anticipated to drop from 113,002 gigawatt-hours in the 2022-23 fiscal year to 110,165 GWh in 2023-24, down by 2,837 GWh. The sales revenue for all the Discos was thus projected at Rs.3.281 trillion for the next fiscal year compared to Rs.2.8 trillion last year. NEPRA has mentioned that it reached the decision based on petitions filed by Discos to meet their revenue requirements and permissible transmission and distribution losses. It added that power companies for Multan, Gujranwala, Hyderabad, Sukkur, Quetta, Peshawar and tribal areas had filed requests for adjustment or indexations under multi-year tariff regime for 2023-24. Moreover, power companies for Islamabad, Lahore and Faisalabad filed multi-year tariff petitions for 2023-24 to 2027-28 fiscal years, and also requested interim tariff for 2023-24.

Though domestic consumers have been badly hit by the increase in electricity price yet the business community also finds itself in peril. Businesses are worried that the fresh hike will adversely hit their competitiveness by spiking their costs, making them a lot more expensive both for domestic consumers and foreign buyers. With the economy reeling because of the balance-of-payments crisis, high energy prices and soaring inflation, several industries have shut down or slashed production to reduce costs. The expected recovery in manufacturing after the IMF-mandated tariff increase may remain elusive at least in the near term. It is a dilemma for the government as one the one hand it has to meet the conditions of the new, short-term IMF programme needed to avert default and improve Pakistan’s debt repayment capacity over the next several months. On the other hand, it is under tremendous pressure to revive industrial activity for economic growth and job creation. The Stand-by Arrangement stipulation to produce a primary budget surplus of 0.4 per cent this financial year has restricted fiscal space as well as the government’s ability to continue financing massive power tariff price losses beyond a specific threshold to prevent power sector debt from increasing more rapidly than it already is.

The jitteriness of the business sector in certainly justified when it points out that the failure of successive governments to execute long-standing politically unpopular and tough structural reforms responsible for Pakistan’s economic predicament. The businessmen point out that despite several hikes in electricity tariffs over the last few years successive governments failed to contain the growing circular debt. They mention that the situation has come to this pass owing to the lack of political will on part of successive governments to fix the distribution losses, recover bills from powerful defaulters and control theft. This implies that the official policy makers are just content to manage the symptoms rather than addressing the causes of the ailment. The solution suggested by many economists that the government is required to design a framework to fix the deep-rooted energy sector to cut losses, taxed under-taxed sectors such as real estate, retail and agriculture in order to bridge the fiscal gap and launched a credible privatisation plan to offload loss-making public sector businesses like PIA to reduce pressure on the budget. The Weekender


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