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Why lower energy costs don’t trickle down in Pakistan

A Senior Power System Analyst working with Lahore Electric Supply Company (LESCO) says, the benefit of lower energy prices in the international markets will not trickle down to the end consumer in Pakistan because of the political economy surrounding the power sector in Pakistan. Capacity payments and in-house power generation by a majority of SMEs combine to squeeze the state's fiscal space.

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As energy prices hit new lows in international markets – due to plummeting global demand owing to the Coronavirus – business dynamics in Pakistan have already started shifting. The current crude oil price of USD $21.04 was last seen 10 years ago, in April 2010. The price stood at USD $32.20 last month, with its peak of US$ 86.29 last seen in October 2018.

This is a change of -34.65% from last month and -75.61% from the peak of October 2018. If the oil prices in the international markets remain around $ 30-40 per barrel, Pakistan will approximately save around $ 4-5 billion precious foreign exchange per annum, providing much-needed breathing space to the Current Account Deficit (CAD). Whether Pakistan, being a net energy importing economy, will attain any benefit from this or not is a question that remains unanswered.

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The Oil and Gas Regulatory Authority (OGRA) has also reduced the price on RLNG for May 2020 by 21.63% for Sui Northern Gas Pipelines Limited (SNGPL) and 18.9% for Sui Southern Gas Company (SSGC) as the local prices are pegged to international prices. The new RLNG prices notified by OGRA are at $7.5105/mmbtu for the consumers of SNGPL and $7.7521/mmbtu for SSGC. Similarly, in April 2020, OGRA had slashed RLNG prices by 15.67% for SNGPL and 15.9% for SSGC.

How consumers will not benefit from low energy prices

Energy-intensive businesses in Pakistan cannot benefit much from dwindling energy prices in global markets as a majority of them rely on the national grid for the supply of electricity. Due to massive capacity payment obligations to power companies, electricity prices will not go down for the average Pakistani consumer.

Read more: Decline in oil prices: Can Pakistan reduce power tariff to help its industries?

On the other hand, medium-sized industries, that have installed captive power generation projects during the era of huge demand and supply deficit (2008-2014), will be happy to grab this opportunity to reduce their input costs, as most of them are running on RLNG and furnace oil. The installed capacity of captive power generators in Pakistan is around 4000 MW, which equals 12.12% of total installed capacity at the national level. 

This could prove to be a death spiral for the power sector as electricity demand will plunge from the national grid; they will not buy electricity from the national grid, and instead, will utilize cheap self-generated electricity. This phenomenon could dent demand from the national grid up to a tune of 2000 MW – a significant number as our average demand hovers around 14000 MW only. This is because the cost of generating electricity from captive generators is approximately 30% cheaper than the grid at current international crude oil and LNG prices.

IPP payment structure will worsen the fiscal deficit

Our power system now has 33,000 MW of firm dependable generation capacity available against a peak demand of 27,000 MW in the summers of 2019. This whole process will ultimately result in more and more installed capacity lying idle in the system, as we already have surplus installed capacity. The obligation to pay these newly set up power projects/ independent power producers (IPPs) would further rise without proper utilization.

Average capacity charges to be paid to the IPPs are around 2.3 million rupees per MW per month; hence for 2000 MW, the additional burden on the power sector will be to the tune of 4.6 billion rupees per month. This will make it difficult for the power sector to run commercially and will cause the power sector circular debt to rise exponentially.

 

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In the absence of the coronavirus, the government had projected the fiscal deficit to be around 7.6% of the GDP in the year ending June 2020, but now as the coronavirus has adversely affected economic activity in Pakistan the fiscal deficit will rise to 9%.

The government is expecting tax collection to be around 3.9 trillion rupees against the downwardly revised target of 4.8 trillion rupees. With the power sector circular debt rising beyond comprehension, it will further burden the weak revenue collection mechanism, which will ultimately result in more fiscal widening.

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Economic Coordination Committee (ECC) of the cabinet has also approved the shifting of expensive loans from the books of Power Holding Company (PHL) to the government. The government has agreed to shift the entire Rs807bn PHL debt to public debt in three years.

On one side the falling energy prices in the international markets will help Pakistan save around $ 3-4 billion in import bill which will ease the pressure on the current account, however, at the same time, it will further escalate our fiscal deficit to go beyond 9% of the GDP. This will have an adverse effect on the already bleeding economy of Pakistan. Only time will tell whether the benefit of falling energy prices in the international markets will be passed on to end consumers of electricity or not.

The author is a certified Electricity Market Professional (EMP). He has more than 10 years of experience in power systems and is currently working as a Senior Power System Analyst with Lahore Electric Supply Company (LESCO). He can be reached at arqamilyas@live.com. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.