Govt may consider more tariff incentives to increase capacity utilisation, cut circular debt.
ISLAMABAD: Pakistan is suffering from circular debt, mostly due to high capacity charges, which have been further aggravated due to excess capacity and its underutilisation.
One of the solutions that have been discussed and even partly implemented is tariff reforms. A logical argument is that electricity utilisation will increase if tariff is brought down.
The risk, however, is that the utilisation may not increase and thus the companies may suffer on two counts – reduced tariff and reduced sales. Hence, there has been reluctance to introduce tariff incentives on a wider scale.
There is an added advantage of reducing industrial or even commercial tariff because of its multiplier effect which includes economic growth, employment and even export competitiveness.
The government did introduce special tariff for export industries and a tariff scheme for consumers who show an increase in their consumption. Reportedly, there has been a positive impact of the tariff reforms.
The government is considering further incentive schemes. We will discuss some of the other tariff incentives that may have a salutary effect on consumption, profitability of producers and economic growth.
There are two parts of electricity tariff/cost – capacity/fixed cost and variable cost, which is mostly fuel cost. Fuel cost has been on the rise recently and possibly no reduction is possible on that count.
However, there is a kind of magic in reducing the fixed part of the tariff. Ideally, the seller should be able to recoup all costs including the fixed cost in order to be sustainable in the long run.
However, what to do when the market does not allow full capacity utilisation either due to economic conditions or consumer behaviour.
The magic of reducing the fixed part is that it may increase consumption and thus the capacity utilisation.
Although capacity/fixed charge is reduced on a unit/rate basis, the total annual income in the fixed category will increase due to the volume effect. This is the theory behind most tariff incentives.
Tariff incentives may be categorised in the following forms: First is small user tariff, which is essentially a subsidised social instrument. One does not expect any commercial benefit from it. However, it has other economic and social benefits.
Second is industrial tariff. One earns from lower industrial tariff on a volume basis. In most advanced countries, the industrial tariff is much lower than the residential tariff for industrial competitiveness reasons.
In poor countries, usually the residential tariff is lower except in the high-consumption, high-income group consuming more than 700-1,000 kilowatt-hours (kWh).
Third is Time of Use (TOU) tariff – peak and off-peak tariff, which can be further divided into peak hours, off-peak day hours, night time, weekend and holidays.
At present, Pakistan has only TOU tariff. This has been done away with for the industrial sector. For the residential sector, however, it still continues.
There is logic in charging more for peak hours. It usually costs more to provide electricity in peak hours as more expensive fuel consuming plants (oil, diesel, etc) are used.
On the other hand, non-peak hours are supplied by cheaper base load plants like coal, nuclear, etc.
We have detailed data available from Taiwan, which is relevant for several reasons. It lies in a hot climatic region and is a highly competitive country competing with Thailand, the Philippines, Malaysia and South Korea.
The tariff example of Taiwan is not unique. It is common in other countries of the East and the West.
In Pakistan, electricity consumption is very low in winters and it is being considered as to how to increase it to reasonable levels. It may be noted that cheaper hydropower and other renewables are also either not available in winter or their production is reduced very significantly.
Thus, there is an upper limit on how much we can profitably increase consumption in winters.
There is a difference of 13% to 27% between summer and winter tariffs in Taiwan and similar is the case in other countries of Southeast Asia.
There are six residential tariff categories in Taiwan starting from 120 kWh to more than 1,000 kWh and tariff starting from 5.868 US cents for the smallest category of 120 kWh to 23.076 US cents for the 1,000 kWh-plus category. There is a difference of 3.93 times between the highest and lowest tariff.
Similarly, it is amazing to note the concessionary residential categories in the case of relatively richer South Korea.
The International Monetary Fund (IMF) and international financial institutions’ (IFIs) pressure on Pakistan to restrict and remove residential tariff subsidies appears to be misplaced and such policies should be reconsidered by them.
There is an average difference of 2.34 times between peak and off-peak tariff. Night-time tariff is the lowest. There is usually very little utilisation between 00 hours to 0700 hours except for three-shift industries or the IT industry. And the scope of increasing the capacity utilisation may be the highest.
In Pakistan, the construction and steel industry may be able to benefit significantly from a special night-time tariff. Steel bar cost in Pakistan is the highest in the region possibly due to both high gas and electricity tariff.
Night-time tariff can also benefit the emerging electric vehicle (EV) sector wherein night-time EV charging at home may get popular.
The Cabinet Committee on Energy (CCOE) has approved a fixed rate of Rs12.66 per unit as winter tariff (Nov 1, 2021 to Feb 28, 2022) for all domestic and commercial consumers.
The reference for determining the increase would be the consumption in the same month of previous year. The flat rate on incremental consumption will be applicable to those consuming over 300 units per month. They are currently charged Rs20-23 per unit excluding taxes.
Similar incentives have been made available to the industrial sector as well. Lower winter tariff on increased consumption was initiated last year and reportedly resulted in 16% growth in electricity consumption.
It is risk free for the seller as it is applied to increased consumption, ensuring an increase in the recovery of fixed/capacity charge. This year, the scheme will encourage the shifting of gas consumption to electricity in space heating, as LNG is getting expensive and may not be available in required quantities at reasonable rates.
It is unlikely that consumers would shift to electricity in cooking uses due to culture, habits and equipment constraints.
The loss of revenue in supporting the subsidy in residential tariff can be partly balanced by bringing changes to the net metering solar tariff system.
Solar equipment prices have come down sharply. Solar PV is feasible on its own and does not require any support of subsidy.
Net metering is either being shunned or amended in many jurisdictions. Net metering did a good job of promoting rooftop solar panels. There is a need to review net metering by installing two meters and two tariff systems or some alternative tariff amendment.
Gas geysers consume a lot of gas. Water heating geysers can be replaced by solar water heaters. Perhaps, it is time to facilitate the introduction of solar water heaters by introducing some subsidies or credit and installment schemes.
Biogas promotion and subsidies appear to be in order as well due to rising LNG prices and the lack of availability in this respect. Perhaps, gas companies and the Petroleum Division may be able to take interest in this respect.
Concluding, the government may consider introducing other electricity tariff incentives in addition to the incentives announced already. This will help increase capacity utilisation and electricity revenue, resulting in a reduction in the circular debt.
The writer is former member energy of the Planning Commission and author of several books on the energy sector
Published in The Express Tribune, September 20th, 2021.
