Reforming the power sector in Pakistan

The power sector in Pakistan faces a myriad of serious and complex issues. Most of these challenges have been inherited, but resolving them is a herculean yet achievable task. The challenges stem from multiple issues, including bad governance, the overarching influence of political economy in the power sector, delays in decision-making, and lack of economic growth. Due to sluggish economic growth, the expected increase in electricity demand did not materialize, while the difference between peak demand during summer (29,000 MW) and winter (12,000 MW) continued to increase.

The inefficiencies mentioned above are embedded in the price of electricity, which is a central issue. The continuously rising price of electricity eats into household income, fuels inflation, and makes export-oriented businesses uncompetitive. Given the role of political economy, it also becomes a burning issue for various political forces to capitalize on, especially when electricity bills swell during the high consumption months from June to August. We continue to address this issue by initiating policies to decrease costs, such as using local fuel instead of imported fuel, while drastically reducing the electricity component of generation costs over the years.

The rebasing of tariffs occurs every June, determining the expected tariff of electricity for the next fiscal year. Accurate determination leads to stable electricity rates for the coming twelve months. The main factors that determine the tariff include PKR-USD parity, USD-based interest rates, PKR-based interest rates, and fuel costs, which can be local coal, imported coal, RLNG, etc. The latest rebasing of electricity tariffs will be in effect from July 2024 and will have a minor impact on most electricity consumers on a month-to-month basis. Once the tariff is determined by NEPRA, the federal government injects social protection measures like subsidies and imposes or maintains cross-subsidies that the more affluent classes can afford to protect lower-income classes.

This year, after the new tariff determination, for 16.8 million Protected Consumers, who make up 58 percent of all domestic consumers, the expected increase on a month-to-month basis, relative to June 2024, is less than 2 percent. Similarly, for the same period, consumers in the non-protected segment will see an average increase of 9 percent. More importantly, as the economy improves and demand for electricity picks up while interest rates start declining, electricity tariffs are expected to reduce as necessary quarterly adjustments are made.

By January 2025, it is expected that the tariff will reduce by an average of 3 percent for all consumers, including both protected and non-protected, compared to June 2024. It is important to note that as the economy improves and monetary easing starts, electricity prices may have peaked. Sustaining economic growth could flatten or reduce electricity prices from this point onwards, both due to a better economic environment and the reform agenda aimed at reducing inefficiencies and moving towards a market-oriented regime.

After many years, industrial tariffs have been reduced to encourage industrial units to increase production and consequently increase employment. We will continue to support industries through tariff reductions and other schemes to catalyze economic growth.

It is important to inform the people of Pakistan that we have an enviable energy mix, with more than half of electricity generation coming from low-carbon sources, such as hydel, nuclear, and other renewables. Our electricity generation fuel cost is Rs 10.9 per kWh (reducing to Rs 9 per kWh during summer due to hydel power). Due to the addition of new capacity over the last few years, which will support future growth, our capacity costs have increased to Rs 18.4 per kWh. We continue to make efforts to flatten or reduce these costs through various interventions. Moreover, transmission costs are around Rs 1.54 per kWh, and Distribution Companies' costs are around Rs 4.6 per kWh. All of this accumulates to an average cost of Rs 35.5 per kWh for the entire power produced.

Almost three-fourths of electricity generated is through indigenous resources, ensuring energy security for the country. The utilization of indigenous sources will increase as more hydel and nuclear projects come online, while projects operating on imported coal are converted to local Thar coal. Furnace oil plants that are to retire between 2027 and 2034 are hardly being utilized due to high energy costs, contrary to popular belief. Moreover, the government continues to explore various options to reduce the financial impact of these plants through interventions.

Infrastructure investment through CPEC over the last few years has positioned Pakistan to benefit from sustainable growth in the future. The front-loaded capital components of these projects are currently a strain on consumer cash flows. However, as the majority of debt for these projects is retired over the next few years, the total cost of generation from these projects will reduce substantially, and so will the overall electricity cost. Large-scale infrastructure projects are long-term investments with a life of more than 30 years, ensuring affordable electricity in the future.

We must work on creating more demand through market-oriented reforms and rationalizing tariffs to gradually eliminate subsidies and inefficiencies. This also provides an opportunity to create an industrial policy to utilize the excess supply now available. We will continue to focus on creating new demand through accelerating electric mobility solutions or inducing new industrial demand.

Efficiency is key, requiring a shift from a centralized model to a market-oriented model in terms of electricity pricing. The government is working on reforms to improve efficiency by incentivizing it. We must stop providing incentives without inducing efficiency and productivity gains.

Transmission and distribution inefficiencies are considerable. The government is addressing these issues by building infrastructure to bridge the North-South transmission constraint. Cheaper power produced in the South cannot be used due to such constraints, causing billions of rupees in losses to consumers. The lack of investments and planning for such infrastructure post-2018 is the reason for these gaps, which need to be filled as soon as possible.

Distribution losses attributed to low recovery are being addressed through a multi-pronged strategy, with both technical and financial components. A phased approach to reforming distribution companies through a mix of privatization and long-term concessions remains crucial in eliminating inefficiencies and unlocking productivity gains. A decentralized tubewell solarization program will also help reduce losses attributable to agriculture while improving the country’s carbon footprint.

The government is committed to a market-oriented pricing mechanism with a reduced carbon footprint. The solar strategy will continue to evolve to incentivize widespread adoption of solar without hurting grid stability. Balancing consumer interests is crucial.

The power sector plays a crucial role in any economy. An energy-poor economy cannot see increased income levels for its people. We have the infrastructure in place to generate affordable energy. Now, we need to weed out inefficiencies and encourage productivity gains, which will catalyze the industrial growth of the country.

I am confident we will achieve these goals in a reasonable timeframe. By making the required policy interventions, we will set our course right for decades to come by the will of Allah. We are striving for an environment where Distribution Companies do not make annual losses of Rs 600 billion, where electricity prices do not escalate due to lack of transmission infrastructure, where middle classes in one region do not pay for expensive power due to theft in other regions, and where the government and policymakers are not running the electricity business. We aim to create an environment where the government does not sign new contracts to buy more power, and this can be done between buyers and sellers of power through an open market and in a competitive manner. Policymaking without vested interests and a market-oriented focus will steer the sector towards efficiency, induce productivity gains, and provide necessary infrastructure and support to strengthen the economy in the years to come.