Rs55b windfall expected from gas tariff hike

In line with International Monetary Fund (IMF) commitments, the government is projected to collect over Rs55 billion in prior year adjustments (PYA) during FY25, following an increase in gas tariffs for captive power plants (CPPs).

The tariff was raised from Rs3,000/mmbtu to Rs3,500/mmbtu for CPPs, pushing the weighted average gas tariff to Rs1,722/mmbtu, with an expected annual average of Rs1,689/mmbtu, said Hamdan Ahmed, an analyst at Optimus Capital Management. Additionally, the Oil and Gas Regulatory Authority's (OGRA) oil price assumption of $81.8/bbl, compared to FYTD25 prices of $76.5/bbl, suggests an upside potential to revenue estimates.

The power sector stands to benefit from this shift. If CPPs transition to the national grid, a net tariff reduction of Rs0.2-0.5/KWh could be achieved across all consumer segments.

"A net tariff reduction of Rs0.2-0.5/KWh for all consumers is achievable if CPPs shift to the grid," said Ahmed.

Additionally, capacity charges may decrease by Rs0.6/KWh, particularly as the majority of CPPs — around 3,676 GWh — are concentrated in the South. Increased reliance on low-cost nuclear and Thar coal plants would further aid in lowering electricity tariffs, he wrote in a research report.

On the other hand, the gas sector faces limited direct impact, though a complete shift of CPPs to the grid could lead to a Rs35 billion under-collection, necessitating a modest 5% gas tariff hike to meet revenue requirements. However, short-term challenges remain, including excess RLNG in the system, potential disruptions to domestic gas supply, and risks of exploration and production (E&P) curtailments. Despite this, the weighted average cost of gas remains below imported RLNG, favouring its reallocation to productive industrial use.

In line with IMF commitments, the government is expected to accelerate the grid transition of CPPs through levies, which could weigh on energy-intensive industries such as chemicals, textiles, and cement. However, Ahmed anticipated that electricity tariff reductions may offset some of the financial strain on these industries. Additionally, exploration and production companies (E&Ps) and the PSO could benefit from a gradual recovery in circular debt stock, which is around Rs2.8 trillion.

It is pertinent to mention that OGRA had notified an increase of Rs500/MMBtu in gas tariffs, effective February 1, 2025, for CPPs, with the primary beneficiary being the textile sector. Gas prices remained unchanged for all other consumer categories. Contrary to the Petroleum Division's proposal of a Rs100/MMBtu hike in unprotected residential consumer tariffs, the government opted to maintain the current rate. The Economic Coordination Committee also clarified its plans to gradually bring gas tariffs for CPPs at par with RLNG rates and instructed the Petroleum Ministry to take measures to impose a grid transition levy on CPPs.

The revision in gas prices for CPPs would reduce the gap between CPP tariffs and RLNG prices to a minimum of $0.12/MMBtu, compared to an average of over $6.5/MMBtu over the past three years, thus meeting IMF guidelines for tariff alignment, wrote JS Global.

However, contrary to common belief that companies using CPPs would shift to the national grid after the hike, they may choose to maintain CPP utilisation despite the increased price. The transition to the grid is estimated to take six months, and fluctuations in power supply could prove costly, said Ahmed.

"The supply, even at the increased price, is a sigh of relief for CPPs," wrote Shagufta Irshad of JS Global in her report. A 17% or Rs500/MMBtu hike in gas tariffs, compared to a potential complete cut in gas supply, would still provide relief for CPPs, especially in the textile sector.

Although the industry has arranged for alternative fuel and power sources — including multi-fuel-fired plants, increased solar power capacities, direct RLNG purchases from private companies, and power supply arrangements with respective power utilities—a complete disconnection remains a threat. This is particularly concerning as an uninterrupted power supply from the grid throughout the year remains uncertain.