Hidden Costs Drive Power Prices Up 70%Hidden Costs Drive Power Prices Up 70% Salman Siddiqui, July 11, 2024 Karachi: A study reveals that Pakistani consumers are being burdened with hidden costs in their electricity bills, including US inflation and interest on circular debt. These expenses have significantly raised power prices, prompting the government to consider renegotiating power purchase agreements (PPAs) with plant operators. US Inflation and Indexation Many IPPs continue to bill their electricity sales in US dollars, protecting themselves from currency depreciation and local inflation. However, consumers are still charged for US inflation under the “capacity payments” banner, which is pegged to the US economy. Circular Debt Interest The government has borrowed money to settle circular debt, resulting in interest costs being passed on to consumers. The share of capacity payments in the total tariff has increased to 70% due to these added expenses. Impact on Consumers The proposed electricity tariff hike has sparked protests and demands for its withdrawal. The government has reduced tariffs for industrialists but is proposing a 12-30% increase for households, making the tariff “regressive” with higher prices for smaller consumers. Call for Renegotiation Energy experts urge the government to renegotiate PPAs with IPPs to remove foreign currency indexation and reduce the impact of US inflation. They also recommend addressing transmission challenges and reducing excess generation capacity. Decentralization Challenges The government aims to convert the single end-user tariff into competitive tariffs at the distribution company level. However, decentralization is not seen as feasible in the next five to six years.
Costs include US inflation, debt interest as experts seek PPA renegotiation
Salman Siddiqui |
July 11, 2024
KARACHI:
A study of Pakistan’s end-user electricity tariffs shows that households and businesses are being forced to pay unexpected hidden costs, including US inflation and interest on circular debt. These factors are significantly increasing the price of electricity for end-users to unaffordable levels, forcing the government to soon renegotiate power purchase agreements (PPA) with power plant operators.
Many Independent Power Producers (IPPs) continue to bill their electricity sales to the government in US dollars on a monthly basis, under the US dollar indexation of their productions and sales, leaving no room to charge additional US inflation to Pakistani consumers. The US indexation protects IPPs from the effects of rupee depreciation against the dollar and local inflation. Interestingly, local energy consumers are also charged for increases in local (Consumer Price Index/CPI) inflation rates.
Speaking at a seminar titled “Understanding Tariff Setting Process, and Tariff Components,” Dr. Khalid Waleed, an energy expert at the Sustainable Development Policy Institute (SDPI), said many IPPs have pegged their capacity costs to the US economy. US inflation is factored in under the banner of capacity payments. “Electricity is becoming more expensive in Pakistan as US inflation rates rise,” he said.
The latest proposed hike in electricity tariff has sent the end consumer tariff through the roof, leading to protests and sit-ins in several parts of the country, demanding the government to withdraw the hike. The government has withdrawn the proposed hike for protected consumers and reduced tariffs for industrialists by Rs6-7/unit to make them competitive at local and international levels. However, the household tariff is proposed to be increased by 12-30%.
Also speaking at the seminar organised by the Centre for Economic and Energy Journalists (CEEF) in association with SDPI on Tuesday, Waleed said the capacity payment of an imported coal-fired power plant has increased by 216% in five years, from Rs 3.27 per unit in 2019 when the plant in Punjab was commissioned to Rs 10.34 per unit in 2024. The capacity payments for many other IPP plants are higher than this.
He said that the share of capacity payments in the total tariff has increased to 70% due to the indexation of the plants in US dollars and other costs, including interest payments on circular debts. He explained that the government has borrowed money to settle the circular debts through the Power Holding Company. Therefore, the interest costs paid on the loan are charged to the end consumers.
He said that the share of fuel component in the total energy tariff is around 20%, while the remaining 10% is burdened with various taxes. The electricity tariff charged to local consumers is ‘regressive’ in nature, which means that the electricity tariff is more expensive for smaller consumers and relatively cheaper for consumers who use larger quantities of electricity units every month.
He said many components in the energy tariffs are linked to the global economy and have nothing to do with the local economy, making the tariff unviable. He urged that the government should renegotiate the tariff with IPPs, as a previous government did to end the US dollar indexation of some power plants, as many purchasing power agreements expire in 2050-2055.
According to Ahad Nazir, another energy expert at SDPI, capacity costs are rising rapidly due to the continued decline in power consumption from the national grid, as individual consumers reduce their dependence on the expensive grid by installing solar panels on roofs.
Furthermore, the private sector and the government have continued to invest in power plants and have paid scant attention to poor transmission lines. Accordingly, the installed electricity generation capacity has increased to 43,000 MW, while the transmission capacity has stagnated at 23,000 MW nationwide. This has led to a surplus of generation capacity of almost 20,000 MW, which has led to increasing capacity payments in the tariff.
He said the government is working to convert the single end-user tariff into competitive tariffs at the distribution company level. However, decentralization of the single electricity tariff is not seen as possible in the next five to six years.
