Power Tariffs in Pakistan Show Promising Adjustments

The issue of power tariffs in Pakistan has been a topic of significant concern for both consumers and policymakers alike. With the annual rebasing exercise conducted in July 2024, the expectation was that periodic tariff adjustments would be more moderate than in previous years. The first results are now in, and they present a promising outlook for consumers. The National Electric Power Regulatory Authority (Nepra) is set to hear the plea from power distributors for quarterly tariff adjustments for the period of July to September 2024, amounting to a modest Rs8.7 billion. This figure stands in stark contrast to the previous quarterly adjustment of Rs47 billion, highlighting a shift towards more manageable tariff changes.

Over the past five years, the average quarterly adjustment has hovered around Rs60 billion, with fluctuations ranging from a high of Rs136 billion to a low of Rs10 billion. The adjustment sought for the first quarter of FY25 is the lowest in at least seven years, underscoring the importance of aligning base tariffs with actual market conditions. In previous years, base tariffs were often based on overly optimistic projections, particularly regarding the contribution from Regasified Liquefied Natural Gas (RLNG). This time, however, the authorities have taken a more realistic approach, considering the current generation mix.

While the base tariff revision was on the higher side, it has paved the way for less volatile changes in future periodic adjustments for the remainder of FY25, barring any exceptions. The current periodic adjustment is set to expire in November 2024, providing the government with an opportunity to recover the Rs8.7 billion adjustment in just one month, rather than spreading it over the entire quarter. If the adjustment is applied solely to December bills, it is unlikely to exceed Re1 per unit, offering some relief from the current rate of Rs1.74 per unit in effect for the September to November period.

This anticipated relief coincides with a series of negative monthly fuel charge adjustments, with the September 2024 adjustment reflecting a negative Rs1.2 per unit—the lowest in nearly two years. The significant revisions in reference fuel tariffs, coupled with a resilient currency and stable international energy commodity prices, have contributed to keeping these adjustments on the lower side. Furthermore, the financial implications of terminating agreements with five Independent Power Producers (IPPs) are expected to be reflected in the upcoming quarterly adjustments, which should benefit consumers.

However, there are concerns regarding the drop in demand from the grid, which could potentially offset the savings achieved through IPP negotiations and contract terminations. Although segregated demand numbers for the first quarter of FY25 are not yet available, trends in hourly generation indicate that the widespread adoption of solar power has led to a decrease in overall demand compared to the previous year. Notably, while average demand during non-sunlight hours remains higher year-on-year, daytime consumption has significantly retreated, primarily due to the rise in rooftop solar power generation.

In Pakistan's single-buyer market model, where take-or-pay contracts are common, any reduction in grid consumption results in higher charges for those who remain connected. This creates a challenging cycle, and while load shedding in commercial sectors is not a sustainable solution, continuing this practice without a strategic plan could lead to even higher electricity costs, exacerbating demand destruction.

At present, tariff adjustments appear to be under control, but it is crucial for the government to consider revising the base tariff revision timeline, potentially shifting it from July to January. Such a change would minimize disruptions and soften the impact of any future bill increases, especially during periods of low consumption. Additionally, ongoing efforts to reform the transmission sector and address distribution bottlenecks are essential for ensuring a stable and affordable electricity supply for all consumers.

While the current situation regarding power tariffs shows signs of improvement, it is imperative for the government to remain vigilant and proactive. By adopting a more strategic approach to tariff adjustments and focusing on infrastructure reforms, Pakistan can work towards a more sustainable and equitable energy future for its citizens.