The government of Punjab provided special relief to its residents (taken back now): consumption of up to 500 units would have a support price of Rs14 per unit to mitigate the effects of rising electricity bills. The move led to political and policy issues for other smaller provinces as the power sector is mainly the responsibility of the federation and smaller provinces have little kitty compared to Punjab.
The government of Punjab provided special relief to its residents (taken back now): consumption of up to 500 units would have a support price of Rs14 per unit to mitigate the effects of rising electricity bills. The move led to political and policy issues for other smaller provinces as the power sector is mainly the responsibility of the federation and smaller provinces have little kitty compared to Punjab.
The continuously rising price of electricity has also affected the population of Sindh which has the highest number of people living below poverty. Sindh's response has been to bring in a 'sustainable policy' to provide relief to protected consumers and has demanded a phase-wise approach of immediate, mid-term and long-term steps to tackle the issues of the power sector.
To analyze policy options for the residents of Sindh, let's start with the country’s energy generation portfolio and cost per unit of its production as provided by the Private Power and Infrastructure Board (PPIB) report of 2023-24. The electricity produced from RLNG, furnace oil and imported coal was the most expensive at per unit cost of Rs51.42, 48.56, and 40.54 respectively. However, the cheapest power produced was from Thar coal, solar, and local natural gas at the cost of Rs23.97, 15.04 and 23.97 respectively. Sindh is contributing to the cheap generation of electricity through solar, wind, Thar coal and natural gas. However, the per unit price is calculated through a cumulative mechanism of average pricing for all types of fuels consumed.
Calculating prices: The rebasing of tariffs happens every June, determining the expected tariff of electricity for the next fiscal year. Accurate setting leads to stable electricity rates for the coming twelve months. The main factors that define the tariff include PKR-USD parity, USD-based interest rates, PKR-based interest rates, and fuel costs, which can be local coal, renewables, FO, etc. Depending on the variables, the costs are adjusted every quarter.
The capacity charges are another component of the tariff, where it is assumed for this year that increased economic activity would reduce the tariff by an average of 3.0 per cent for all consumers, including both protected and non-protected, by the end of this fiscal year. Currently, the cost of generation, transmission, and distribution of power is around Rs35.5 per unit, of which the average energy cost is Rs10.9 per unit, while the capacity cost is around Rs18.4 per unit. Further, it includes transmission costs of Rs1.54 unit and distribution costs of Rs4.6 per kWh.
High costs reasons: It is stated that capacity charges to IPPs, currency devaluation, high fuel costs, and system losses are the main reasons for expensive electricity. One of the major problems is the increasing capacity charges of IPPs (increase from Rs11.0 in 2022-23 to Rs17.1 in 2023-2024) due to lesser utilization of contracted capacity. At present, capacity charges outweigh fuel expenses in the generation cost.
One solution being suggested is the financial restructuring of IPP contracts. This ambitious intervention will lead to the re-profiling of power sector debts and ultimately lead to the lowering of capacity charges. This includes isolating the tariff from the dollar indexation to right the currency depreciation impact on every unit produced by IPPs. The new profiling will enable demand growth to catch up with capacity payments and reduce them on a per-unit basis.
Second, stimulating demand for domestic and industrial sectors without requiring long-term infrastructure investments. It is estimated that for every 10 per cent increase in price, consumption reduces by roughly 3.0 per cent. Due to an increase in electricity prices, a large number of industries have moved off-grid and reduced their electricity consumption, moving towards gas (which is also priced in a highly inefficient manner) or other sources of energy.
Large-scale consumers have gone off the grid, and the capacity charges burden is being paid by those who are part of the grid, which has made electricity more expensive for them. Therefore, as on-grid consumption increases, capacity charges would reduce, making electricity affordable for industries and other sectors also. This would kick in more electricity consumption and thereby reduce capacity charges. As per Nepra, DISCOs currently have 348,541 applications for new connections pending with the grid due to a lack of capacity. The NTDC's report has identified that over 6,500MW of demand could not be served during peak hours due to systemic constraints. It means that the demand is already there unserved despite paying GENCOs; it is for the government to utilize it.
Third, industries that are heavy electricity consumers continue to drop off from the grid because of the pricing differential with natural gas. Gas and electricity should be priced in a manner that can bring maximum economic value. At the moment, local gas is being allocated to mildly efficient captive power plants rather than to highly efficient utility-scale power plants. Re-allocating the same to utility-scale power plants would reduce the generation cost.
Fourth, the federal government collected roughly Rs318 billion in sales and withholding tax, mostly from households, which made up almost 20 per cent of their electricity bill. Reducing it could stimulate demand from the domestic segment, whose consumption has remained flat for the last five years. The GST adds a lot of overhead to the electricity and gas bills. Further, it is a large multiplier or adder to the cost of other goods and services.
In all of the Asean region, which includes the most progressive and fast-developing economies, the general GST rate is 10 per cent or even lower. These countries include Vietnam, Thailand, Malaysia and Indonesia. Even developed countries like South Korea, Australia and Japan have a 10 per cent GST rate. China has 13 per cent GST. In India, in many states (Assam, UP, Bihar, Delhi, Odisha, etc) GST on electricity retail is at a reduced level of 5.0 per cent , although the general GST rate is 15 per cent. The IMF does not bind the government on GST. A GST rate of 5-10 per cent on energy will reduce some of the burden on the people, although total GST elimination is more desirable.
Fifth, late payment surcharges are also excessive at 10 per cent. If one delays payment of electricity bill by one day, he is liable to pay 10 per cent of the bill amount. The late payment charge should be reduced to 2.0 per cent for the first month and higher for the later delays. Sixth, transmission and distribution inefficiencies are considerable. The government has planned to build modern infrastructure to connect the north-south transmission connectivity. Cheaper power produced in Sindh cannot be used in the absence of a proper transmission line, which is resulting in billions of rupees in losses to consumers. The investment in such infrastructure will bring cheap electricity in the future.
So what are the policy options for the Sindh government? For one, the Sindh government has already announced a scheme of providing solar units to families registered with BISP at Rs6000 per unit, which costs Rs55,000 in the market. The scheme could be extended to all those consuming 200 units at 20 per cent of the cost and at half price for those consuming 500 units.
The federal government should be convinced by provinces to reduce GST from 20 per cent for residential consumers, or there should be slabs of GST up to 500 units to reduce household bills.
The poor face issues in paying bills on time due to the current economic conditions, hence reducing the late payment surcharge to 2.0 per cent for consumers up to 500 units will bring relief to them. Fair pricing of gas will help Sindh get its share from the divisible pool as Sindh produces two-thirds of natural gas. This will help reduce capacity charges in the long term, and bring in more revenues to the province.
Expediting work on the transmission system should be a priority for the province so that cheap power produced from Thar coal and the wind corridor can be transmitted easily. After establishing a transmission system, there is a need to invest more in wind and solar energy generation in the province.
The province should explore the generation of hydel electricity from its water resources to contribute more to renewable energy. The energy generated from resources of Sindh and consumed in Sindh should be given more benefit to local consumers in the form of some provincial government rebates to industrialists. This will help attract investment in the province and placate the industrial community. There should be a reduced cost of electricity in the winter to lower the impact of capacity charges.
Sindh can play a huge role in reducing the generation cost of electricity, such as using local fuel instead of imported fuel. Politically, it can negotiate with the centre to bring sustainable solutions to the issues of the power sector. Without making it a political issue, the federal and provincial governments can resolve the issues of expensive electricity, which has economically marginalized the poor and middle classes of the country and affected industrial activities in the country.
The writer holds a Masters in Public Policy and Management from the University of Melbourne and is working as an additional secretary in the government of Sindh.
He can be reached at: tariqcholyani786@gmail.com
