Our new finance minister, Shaukat Tarin, has strongly urged the IMF to reconsider its demand for raising electricity tariff by 5.36 rupees per unit over the next two years. We hope he succeeds in persuading the Fund’s managers against its demand as this quantum of rate increase, in plain words, is akin to pushing the power sector into dire straits from which escape may be too difficult, if not impossible. Rate hikes may be an easy way out for the government to circumvent the issue. But this will only mask the chronic problems of the power sector for a while, and not resolve them. Our government, therefore, should focus on rooting out the systemic ills of this sector instead of resorting to such quick-fixes which are sure-fire recipes for disaster.
Frequent increases in electricity tariff are ill-advised for a host of reasons. First, electricity consumers are already drowning under the heavy burden of their monthly bills and any further increase in these will only add to their miseries. Second, the additional burden will be necessarily borne by good (paying) consumers whose number in the system and average consumption is already on the decline. Third, it will amount to condoning the prevailing inefficiencies in the system. Fourth, it will further encourage consumers to desert the grid by seeking alternatives to grid supply. And, fifth, it will reinforce the growing feeling among citizens that our government is either incapable of solving their problems or is cruelly insensitive to their miseries.
Electricity tariffs in Pakistan are already amongst the highest in the region. Higher tariffs stifle both human as well as economic development. If these exceed the affordability limits of households, higher rates adversely affect their quality of life, compelling them to cut corners on food, health, and education expenses. Higher tariffs also hurt the competitiveness of the products and services of agricultural consumers, commercial businesses, and industries, forcing them to seek alternatives, shift elsewhere, or in extreme cases, closedown.
In a business-as-usual scene, the higher electricity rates will be largely borne by good consumers who pay their bills regularly and not by those who steal electricity or do not pay their bills. There is already evidence that average electricity consumption by consumers in the country is gradually on the decline. It could be due to consumers’ tightening their belts or due to their switching to roof-top solar photovoltaic (PV) systems. Any additional increase in electricity tariffs may just be the proverbial “last straw on the camel’s back” that could trigger massive grid defection by consumers and could bring the whole power sector to its knees.
Such rate hikes alone have not delivered their intended results in the past as they amount to condoning the mismanagement, malpractices, and inefficiencies currently rampant in every part and level of the power sector. The government’s resolves to rid the power sector of its ills that always accompany these rate hikes dissolve in thin air quickly and are forgotten as soon as the rates are applied, until it’s forced again by the IMF and other lenders to further increase the tariffs.
This has been the case for our previous rulers and is also true for the present government. Our present government had come to power with promises to root out malpractices from every institution of the country and set new standards of good governance in the country. Almost three years into power, and it remains mostly clueless on how to fix the cancer that ails the power sector. Such tariff hikes haven’t worked in the past and these won’t work this time either, except, as Mr. Tarin has noted correctly, unleashing a new wave of inflation in the country and further increasing the citizens’ miseries.
There are numerous options that the government can use to alleviate the power sector’s perennial woes, provided it’s willing to use imagination and back it up by demonstrating a strong political will. A couple of such prospects are discussed below that our government can use to alleviate the crisis. These are barely scratching the surface of many others that exist and should be used instead of relying exclusively on rate hikes.
System “load factor” is a metric commonly used in the power industry to gauge the extent of utilization of supply facilities. A higher load factor means that the supply facilities in the system are being used efficiently and reflects positively on electric supply costs. A lower load factor, on the other hand, indicates that even though assets are being kept to serve demand, these are used only sparingly, thus affecting adversely on these costs. Good utilities strive to maintain load factors in their systems above 80 percent with deliberate efforts and do not let these fall below this threshold.
The load factor in our system has gradually declined from what used to be 70 percent only a decade back to slightly over 60 percent now. This means that the share of the round-the-clock industrial and similar loads in the grid has either gone down or that of the non-productive sectors such as domestic and commercial consumers has increased. In other terms, the load curve has become more “peaky”. A system with less peaky and flatter demand profile enables the utility to serve it using base-load generation (capital-intensive but more-efficient and cheaper to operate) while for a system with sharp peak demands it’s compelled to use quick-start and fast-response power plants (less capital-intensive but less-efficient and more expensive to run).
An option which is well within the government’s reach is to seek improvement in the system load factor by incentivizing demand from industrial and agricultural consumers and discouraging it from consumers that exacerbates the overall system load factor. Only a five percent improvement in the system load factor could provide additional 30,000GWh to the system worth 500 billion rupees of revenue annually (valued at DISCOs current average sale price of 17.18 rupees per unit), thus considerably lessening the severity of the present crisis.
We often hear lower-than-expected power demand blamed for the under-utilized existing generation capacity thus leading to rising capacity costs. Recent statistics from the National Transmission and Despatch Company (NTDC), indicate that the actually served peak demand in its system in FY2019-20 was 22,696 MW against 36,166MW of installed capacity whereas the computed demand in its system was estimated to be 26, 252MW. This reflects a disturbingly high reserve margin in the system of roughly 60 percent against an industry standard of 15 to 20 percent. This should have caused some stirs in the power sectors’ policy and decision making circles.
It’s ironic that, despite having surplus capacity in the system, over 3,500MW of demand went un-served last year. There may be some valid constraints preventing the NTDC from serving this demand, but the government should identify these constraints and encourage serving it in the future by removing these constraints. This measure can also add roughly 20,000 GWh of energy worth 300 billion rupees annually that also can help further alleviate the present crisis.
Another promising option to flatten the currently peaky “annual demand curve” in the country is developing feasible options for storage of electricity produced from the under-utilized power plants during lean demand periods and releasing the stored energy back to the system during peak hours or seasons. “Pumped-hydro”, “compressed-air”, and similar other large-scale and long-duration energy storage options can be used to further relieve the crunch.
Even though some existing hydro plants can be modified into pumped-hydro storage schemes, their true benefit to the country will come if some natural terrains in Balochistan can be developed for this purpose. Similarly with some investment, the empty oil and gas fields in that province can also be converted into compressed-air energy storage facilities. These facilities can also store excess electricity from renewable power generation not only in Balochistan but can also be used to channel excess generation from other renewable resource-rich areas of the country.
One hopes that Mr. Tarin maintains his resolve and succeeds in convincing the IMF managers to soften their conditionality for rate hikes. On its part, our government will be well-advised to confront the real issues of the power sector head-on, instead of relying exclusively on increasing consumer tariffs. By correcting the fundamentals of the power sector, the government can set into rolling a virtuous cycle that will not only save it from having to increase electricity rates every few months but will also provide a much-deserved sigh of relief to electricity consumers in the country.
Our new finance minister, ShaukatTarin, is rightly trying to persuake the IMF to reconsider its demand for electricity rates hike as it would unleash a new wave of inflation in the country that would further hurt the government’s effort to revive its economy badly hit by Covid-19 pandemic. Rate hikes without systemic reforms would only mask the chronic ills of the power sector. Some fundamental corrections including improvement of system load factor and relaxing the constraints in serving demand can ease the cash crunch. Energy storage options such as pumped-hydro and compressed-air can also help in flattening the country’s “peaky” load curve, and arresting and leveling the runaway capacity costs—a major cause of circular-debt.