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Saturday, June 15, 2024

Nepra Approves Significant Electricity Rate Hike

NEPRA has approved a 20% increase in electricity tariff to ensure funding for Discos, aiming to raise Rs3.8 trillion for fiscal year 2024-25, while providing industrial incentives.

In a substantial move, the National Electric Power Regulatory Authority (NEPRA) announced a nearly 20% increase in the uniform national tariff, aiming to generate about Rs3.8 trillion for the 10 ex-WAPDA electricity distribution companies (Discos) during the fiscal year 2024-25. The Rs5.72 per unit hike, effective from July 1, will provide Rs485 billion in additional revenue to Discos, aiding the government’s efforts to secure an IMF bailout in July. The average national base tariff will rise to Rs35.50 per kilowatt-hour (kWh), up from Rs27.78 in the current year, projecting revenue of Rs3.763 trillion for the next fiscal year.

Economic Implications and Government Measures

This tariff hike, inclusive of an 18% general sales tax, will elevate the average base tariff to Rs42 per unit, imposing an additional Rs580 billion burden on Discos’ consumers. Notably, the impact on K-Electric and adjustments related to monthly fuel and quarterly tariff adjustments are excluded from this figure. In contrast, Prime Minister Shehbaz Sharif announced a Rs10.69 per unit reduction for the industrial sector, potentially transferring a negative revenue impact of Rs200 billion to domestic, commercial, and bulk power consumers.

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NEPRA’s decision emphasizes the necessity to balance the increased tariff, driven by the rupee’s devaluation, high inflation, and low sales growth, with economic incentives for industries. The federal cabinet’s approval will finalize the implementation of this tariff adjustment.

Breakdown of Revenue Requirements

According to NEPRA, the power purchase price (PPP) for Discos in 2024-25, excluding K-Electric, amounts to Rs3,277.506 billion. This includes Rs1,161.257 billion for fuel and variable operation and maintenance costs and Rs2,116.25 billion as capacity charges. Capacity charges constitute approximately 65% of the total PPP, while energy costs account for the remaining 35%. On a unit-purchased basis, capacity charges and energy charges combine to Rs27.35 per unit for the next fiscal year.

With transmission and distribution (T&D) losses and distribution margins factored in, the average tariff rises to Rs35.50 per unit. An official highlighted that the real applicable average national tariff, after including surcharges, taxes, duties, and levies, is expected to stand between Rs65 and Rs72 per unit.

Industrial Incentives and Structural Reforms

While NEPRA’s approval indicates a sharp rise in electricity costs for consumers, the government’s decision to reduce rates for industries is poised to stimulate economic growth. The industrial sector will benefit from a reduced rate of Rs34.99 per unit, down by Rs10.69, potentially removing a burden of over Rs200 billion from industries. This strategic move aims to bolster industrial development, foster employment opportunities, and enhance economic growth.

The tariff adjustments are part of broader structural reforms required for the upcoming IMF bailout, focusing on the viability and governance of the energy sector and state-owned enterprises. Despite the considerable hike, NEPRA and the government’s efforts reflect a balancing act between necessary fiscal measures and supporting economic incentives.

While the tariff hike will generate essential revenue and support the government’s fiscal strategies, particularly with the IMF, it also places a heavier financial burden on consumers. Concurrently, the reduction in industrial electricity rates aims to drive economic growth, illustrating the government’s multifaceted approach to navigating the country’s economic landscape.