Energy: a mix of pain and gain

Consumers, saddled with high tariffs, later get some relief

ISLAMABAD:

Year 2024 passed with some pain and gain for the energy sector. Though consumers got some relief in tariffs, in the broader sense they continued to be saddled with exorbitant prices.
Over the years, Pakistan’s energy sector has been plagued by chronic issues that resulted in endless sufferings for consumers. The new government of Prime Minister Shehbaz Sharif has come to power with pledges of providing much-needed relief to the masses.
However, it has so far not been able to make any difference as energy tariffs perched on record high levels, an outcome of rupee depreciation and a loan deal with the International Monetary Fund during the Pakistan Democratic Movement (PDM)-led government. Despite the government’s claims of slashing electricity prices, they are still significantly high and beyond the affordability of consumers.
The energy sector comprises different categories like oil, gas and electricity. Let’s take a look at these sectors as to how they performed in the outgoing year and what impact they left on consumers.
Pakistan’s electricity sector has been behind many ills that have afflicted the entire energy chain for years. Power distribution companies (DISCOs) suffer hefty losses, impacting consumers and adding to circular debt.
Additionally, faulty agreements with the independent power producers (IPPs) burdened consumers with trillion of rupees in capacity payments for idle capacity of these plants. Of late, the government tried to rectify the situation by revising agreements with the IPPs.

Circular debt
PM Sharif recently claimed at a press conference that electricity prices had gone down by Rs11.33 per unit for industrial consumers and Rs4.66 per unit for domestic consumers since June 2024. In spite of tall claims, power supply is very expensive at Rs44.04 per unit, which is the base tariff. Including all taxes, the price goes up to Rs64 per unit. In the overall consumer tariff, the government collects more than 50% in taxes.
Circular debt is a key contributor to the electricity tariff hike. It continued to accumulate and reached Rs2.636 trillion in 2024, which constituted 2.5% of Pakistan’s gross domestic product (GDP). It is far higher than the government’s target to keep the debt below Rs2.31 trillion.
According to official data, the circular debt had been at Rs2.551 trillion by the end of December 2023. The debt level consistently rose despite the fact that the government raised electricity prices on account of annual and quarterly tariff adjustments as well as fuel cost adjustments. Poor recovery of electricity bills from consumers and transmission and distribution losses mainly contributed to the surge in circular debt.

Shift to solar energy
As electricity prices touched historic highs during 2024, the consumers were more inclined to switch to solar energy. According to available data, so far 7,000 megawatts have been added to the energy system through solar resources.
Also, officials say, 80MW is included in the national grid through net metering every month while the entire agriculture sector has shifted to the off-grid solar network.
However, there are signs of some relief for the consumers due to the steps being taken by the government, targeted at revising deals with the IPPs to put an end to capacity payments.
Consumers have been forced to cough up 70% of the entire energy cost in capacity payments to those power plants that did not produce a single unit of electricity.
Total energy cost is Rs9.25 per unit while consumers are compelled to pay Rs18 per unit in capacity charges. They have been paying Rs2.5 trillion worth of capacity charges annually to the idle power plants.
The present government has so far terminated contracts with five IPPs and is negotiating with another 18 IPPs to do away with capacity payments. It has also finalised a deal with eight bagasse-based power plants for reducing tariffs and capacity payments, in further relief to the consumers.
Hence, it can be said that year 2024 was somewhat lucky for the consumers who had been burdened with trillion of rupees worth of capacity charges.

Oil and gas
The outgoing year did not prove to be good for the oil and gas sectors. The petroleum industry continued to face the threat from smuggled products coming from Iran. To some extent, the government sprang into action to control the illegal trade but overall the oil sector faced hard times.
On the other hand, exploration companies awaited necessary payments as circular debt mounted, which caused cash flow problems for future projects.
Moreover, the exploration firms endured an unending delay because the government did not notify the allocation of 35% of newly discovered gas to third parties. This policy had been approved by the previous caretaker government, but it took over a year to reach consensus. It allowed oil and gas exploration companies to fetch a better price from the private sector and improve cash flow for new projects.
Moreover, liquefied natural gas (LNG) imports hit the exploration companies hard, forcing them to curtail gas production to make way for LNG supplies. Owing to the curtailment from local fields, consumers suffered as LNG prices were higher compared to the locally produced gas.
Separately, the exploration firms expected the government to notify the tight gas policy approved during the caretaker setup. But the entire year passed and they saw no progress on that front.
The government could be a direct beneficiary of the tight gas policy as state-owned Oil and Gas Development Company (OGDC) had 82 such wells whereas a private company operated only two tight gas wells. OGDC injected tight gas into the system from one of its wells but no decision came from the government.