Electricity Prices Likely to Go Up Again

November 19, 2024 Mahi Bukhari

Introduction

Electricity consumers across Pakistan are bracing for another potential increase in their electricity bills due to quarterly adjustments. The National Electric Power Regulatory Authority (NEPRA) has received a request for the first quarter adjustment of the current fiscal year, aiming to collect an additional Rs 8.72 billion from consumers. This development comes as part of the ongoing adjustments to cover various costs associated with electricity generation and distribution.

Quarterly Adjustments and Their Impact

Current Adjustment Charges

Currently, electricity consumers nationwide are paying Rs 1.74 per unit under the quarterly adjustment mechanism. This adjustment is designed to account for fluctuations in various costs, ensuring that the electricity providers can recover their expenses and continue operations smoothly.

Proposed Increase

The recent request submitted to NEPRA includes:

Rs 8.06 billion for capacity charges: These are costs associated with maintaining the electricity generation capacity to meet the demand.
Rs 1.25 billion for operations and maintenance: These funds are necessary to ensure the infrastructure is maintained and operational.
Rs 1.65 billion for system charges and market operation fees: These cover the costs related to the electricity market operations and the system’s overall functionality.

NEPRA is set to hear this plea, which, if approved, will result in an increase in the electricity bills for consumers across Pakistan, including those in Karachi.

Ongoing Adjustments

The collection for the last quarter adjustment of the previous fiscal year is still ongoing and is expected to be completed by the end of this month. This process is crucial for the financial health of the power sector, ensuring that the necessary funds are available to cover the costs incurred.

Transfer of DISCOs in the Name of the President: World Bank’s Proposal

Background

The World Bank has proposed a significant structural change in the ownership of Pakistan’s power distribution companies (DISCOs). The recommendation is to transfer the ownership of these companies to the president of Pakistan before their auction. This proposal is part of the government’s strategy to privatize the sector, which has been a persistent burden on the national exchequer.

Senate Committee Briefing

During a briefing to the Senate Standing Committee on Privatization, headed by PML-N Senator Tallal Badar Chaudhry, it was revealed that the privatization of DISCOs is a complex process, more challenging than the privatization of Pakistan International Airlines (PIA). The World Bank has laid out at least nine prior actions necessary for the successful privatization of the DISCOs.

World Bank’s Recommendations

The World Bank’s recommendations include:

Transfer of Ownership: The shares of DISCOs should be transferred to the president of Pakistan as a precursor to their auction.
Notification of License Eligibility Criteria Rules: Establishing clear rules for eligibility.
Modification of Tariff Rules: Ensuring uniform tariffs across the country, despite the privatization.
Clarification of Subsidies: The government needs to clarify subsidy guidelines for Nepra (National Electric Power Regulatory Authority).
Balance Sheet Cleanup: Erasing doubtful entries from the DISCOs’ balance sheets.
Issuance of Shares: Completing the issuance and developing processes for future share issuance.
New Electricity Policy: Defining roles and responsibilities to reduce technical and commercial losses.
Recognition of Off-Balance Sheet Liabilities: Ensuring these are acknowledged as per financial and corporate reporting requirements.

Challenges and Progress

As of now, only two of the nine conditions have been fully met. The government aims to meet the remaining conditions by January next year. Without the complete report from the World Bank, the privatization process cannot effectively commence.

Government’s Privatization Strategy

Uniform Tariff Policy

Despite the privatization, the government has committed to maintaining uniform electricity prices across the country. This policy means that consumers in areas with high line losses, such as Hyderabad, will pay the same tariffs as those in more efficient regions like Faisalabad or Islamabad. Consequently, consumers in Punjab will continue subsidizing those in Balochistan and Sindh.

Continuation of Subsidies

Subsidies will continue for consumers of privatized companies, indicating an ongoing burden on the national budget. The government must provide clear guidelines on how DISCOs can request and recover these subsidies.

Hiring Financial Advisers

By the end of November, financial advisers for the first three DISCOs will be hired. These advisers will evaluate whether to privatize the profitable companies in one go or gradually. The cabinet has already approved the outright sale of Islamabad Electric Supply Company, Faisalabad Electric Supply Company, and Gujranwala Electric Power Company in the first phase.

Phased Privatization

The privatization will occur in two phases:

First Phase: Involves the sale of three profitable companies.
Second Phase: Includes three loss-making entities—Lahore Electric Supply Company, Multan Electric Power Company, and Hazara Electric Supply Company. The highest loss-making companies—Hyderabad Electric Supply Company, Sukkur Electric Power Company, and Peshawar Electric Supply Company—will follow a concession model through long-term agreements.

Strategic Approach

Senator Nadeem Ahmad Bhutto suggested a strategic approach, recommending the sale of a combination of one profitable and one loss-making company. This strategy aims to balance the interests of potential investors and the financial viability of the sector.

Conclusion

The proposed increase in electricity prices due to quarterly adjustments and the World Bank’s recommendation to transfer DISCO ownership to the president of Pakistan highlight the ongoing challenges in the power sector. While these measures are aimed at stabilizing the sector and ensuring its financial viability, they also underscore the complexities involved in privatization and the need for a strategic and balanced approach.

FAQs

1. Why are electricity prices likely to go up again?

The prices are expected to rise due to quarterly adjustments aimed at covering various costs, including capacity charges, operations, and maintenance.

2. What is the quarterly adjustment mechanism?

It is a mechanism that adjusts electricity prices quarterly to account for fluctuations in various costs, ensuring the financial stability of electricity providers.

3. What are the World Bank’s recommendations for DISCO privatization?

The World Bank has recommended transferring DISCO ownership to the president of Pakistan, cleaning up balance sheets, clarifying subsidies, and modifying tariff rules, among other conditions.

4. Will subsidies continue after the privatization of DISCOs?

Yes, subsidies will continue for consumers of privatized companies, indicating an ongoing financial burden on the national budget.

5. What is the government’s strategy for privatizing DISCOs?

The government plans a phased approach, starting with the sale of profitable companies, followed by loss-making entities, and implementing a uniform tariff policy to ensure balanced pricing across the country.