NEPRA (National Electric Power Authority) has increased electricity base tariff by Rs 4.96 per unit from Rs 24.82 per unit to Rs 29.78 per unit. It is a 20% increase .Consumer tariff has yet to be announced, but it would increase substantially, especially, as there is commitment to IMGF on full cost recovery in the energy sector.
Gas sector consumer tariff would also increase as similar base tariff has been recently increased by OGRA as well.
As is usual, 20% increase in wholesale tariff may not be proportionately passed on to all consumer category. Poor domestic consumers up to 300 units may get a lower brunt and higher end consumers may get proportionally higher (more than 20%) increase.
Textile sector has asked for a reduced tariff due to its export competitiveness issues. It is a zero-sum game. Concession to one category of consumers is passed on to the other category. Earlier, government used to absorb the deficit in the form of circular debt which has increased to Rs. 3 trillion.
One of the major problems is the rising capacity charges (increase from Rs.11.0 in 2022-23 to Rs.17.1 in 2023-2024) due to lesser utilization of capacity and others. This can be increased with economic recovery resulting in lower capacity charges.
Increasing capacity utilization may increase imported fuel consumption which increases foreign exchange requirements. We are stuck in foreign exchange area also. So easier said than done? But something has to be done.
There are some financial restructuring options of the IPPs (Independent Power Producers) that may have to be examined. This is our main objective in this space. The main issue is that most of energy sources in Pakistan are dollar denominated. Even if it is a local resource, its production facility has been created with foreign investment or debt which has to be serviced.
The recent example is of Thar coal, which is local but its production requires fixed and variable costs, which are in foreign currency. Not to talk of imported fuel power plants wherein all costs are in foreign currency; investment or debt servicing and fuel cost and other variable costs, all of it.
Most of the power plants were constructed when USD was around 100 Rs and interest rate on foreign currency were at 5-6% and local interest rates were under 10%.Imported fuels were cheaper as well; coal at 80 USD/ton and LNG at 8 USD/MMBtu, Brent crude 120 USD/barrel or lesser, etc.
Oil increases transport cost of fuels. LNG prices until recently went 3-4 times high; coal at 350 USD/ton and LNG at 30-35 USD/MMBtu. Fortunately, these prices have come down to slightly above the earlier averages. Average fuel charge has come down from Rs.10.20 per kWh in 2022-2023 to Rs.7.63 in FY 2023-24. Average fuel cost and unit capacity charge typically used to be 50-50 earlier.
Now capacity charge has a share of 66% versus fuel cost of 36%. Hydro having a large share with fuel cost being zero has been contributing to lower average fuel cost and continues to do so. However, the recent reduction appears to emanate from reduction in imported fuel prices.
A recent calamity is of hike in foreign currency interest rates; Libor has increased to 5.5% from 0.5 % level when most of the power plants were contracted. Effective borrowing rates to finance the capex of the power plants has become around 10% (LIBOR + 4.5%).
Thus capacity payments have increased from 5% to 10%, almost or precisely doubled. Combine it with currency depreciation, Rs 100-110 to 1 USD having gone to Rs 280-284.2.7 times increase. In some cases, RoE is also Libor based.
Thus capacity payment should have quadrupled or even more. Older solar power plants are selling electricity at Rs 30 per kWh, while new solar tariff was USc 4.0 per kWh, which should have increased to 8 USc due to Libor increase which should translate to Rs.25 per kWh.
All of this has increased producer and consumer power tariff. Under IMF conditions, Circular debt has to be reduced, although in such circumstances, circular debt cannot be attempted or decreased from financial tricks or tariff increase. DISCOs’ efficiency increase under or without privatization is the solution. Privatization has not happened. It will take 5 years to privatize; more on this later.
Financial restructuring
We have indicated earlier the rising share of capacity charge in the overall electricity cost. We would deal here with some of the possible solutions dealing with the capacity charge; debt restructuring and swap of some type or a mix of the two.
Debt restructuring means reduction of interest rates or increase in repayment period. There is a case for some adjustment with respect to interest rates as Libor has increased phenomenally and Nepra awarded Libor margin is rather excessively high. It used to be 3%, which was increased to 4.5% due to lower prevailing Libor.
(To be continued on Wednesday)
Copyright Business Recorder, 2023
