Power tariff expected to rise 11% to cover subsidy cut

KARACHI: A power tariff hike of 11 per cent is expected in fiscal year 2011 in order to cover the recent subsidy cut, according to JS Global Capital.

Subsidy levels to the power sector have been slashed by 51 per cent to Rs87.3 billion in the recently announced federal budget for fiscal year 2011. Out of these, Rs40 billion will be used for payment of interest on the power sector’s term finance certificates (TFCs) while Rs47 billion will be used to partially absorb the cost passed to the consumers.

“The IMF programme already requires a further six per cent hike in tariff and it is expected the government will announce a further increase of five per cent to stay within the announced subsidy level,” said JS Global Capital analyst, Umer Ayaz in his research report on Thursday.

This analysis is based on the weighted average generation cost from both hydel and thermal sources and taking KESC’s current tariff of Rs7.2 per unit as a proxy for the average per unit consumer price, said the analyst.

Assuming oil price of $77 per barrel and 65 per cent thermal generation, the average power generation cost comes to Rs8.5 per unit for the fiscal year 2011.

The government move will be positive for the energy chain in the form of slowdown in circular debt accumulation, said the analyst.

Impact on inflation

Fuel and electricity prices rising 10 per cent will have a direct impact of 0.4 per cent on the Consumer Price Index, a main indicator of inflation.

Overall inflation stands at 13.3 per cent during the first nine months of fiscal year 2010.

Fluctuating oil prices

Oil imports alone account for 34 per cent of the country’s power generation.

Estimates suggest that a 10 per cent annual increase in international oil prices could raise the total generation cost by around Rs0.3 per unit, an additional burden of Rs2 billion per month, said Ayaz.

Published in the Express Tribune, June 11^th, 2010.