Rs55 Billion Windfall Expected from Gas Tariff Hike
Overcollection in FY25 Anticipated as CPPs Rate Rises to Rs3,500/MMBtu Under IMF Mandate
Introduction
The recent gas tariff hike for captive power plants (CPPs) is set to generate a substantial revenue windfall for the government. The move aligns with commitments to the International Monetary Fund (IMF) and is expected to yield over Rs55 billion in prior-year adjustments (PYA) during FY25. This article explores the impact of this policy shift on various sectors and stakeholders while discussing potential benefits and challenges.
Government’s Strategy and Projected Revenue
Gas Tariff Hike and Weighted Average Tariff
The government raised the gas tariff for CPPs from Rs3,000/MMBtu to Rs3,500/MMBtu, pushing the weighted average gas tariff to Rs1,722/MMBtu. Analyst Hamdan Ahmed from Optimus Capital Management estimates an annual average tariff of Rs1,689/MMBtu, leading to a significant revenue boost.
Furthermore, the Oil and Gas Regulatory Authority (OGRA) assumes an oil price of $81.8 per barrel for FY25, compared to the current year-to-date price of $76.5 per barrel. This discrepancy suggests further revenue upside potential.
Impact on the Power Sector
The power sector is expected to benefit considerably if CPPs transition to the national grid. According to Ahmed, a net tariff reduction of Rs0.2-0.5/KWh could be achieved across all consumer segments, easing financial burdens on households and industries.
“A net tariff reduction of Rs0.2-0.5/KWh for all consumers is achievable if CPPs shift to the grid,” stated Ahmed.
Additionally, capacity charges may decrease by Rs0.6/KWh, particularly as most CPPs—approximately 3,676 GWh—are concentrated in the southern regions. Increased reliance on low-cost nuclear and Thar coal plants will further aid in lowering electricity tariffs.
Challenges for the Gas Sector
Under-Collection Risk and Gas Tariff Adjustments
Although the gas sector faces limited immediate impact, a full transition of CPPs to the national grid could result in a Rs35 billion under-collection. To counter this, a modest 5% gas tariff hike might be required to ensure revenue targets are met.
Short-term challenges include:
- Excess RLNG supply in the system
- Potential disruptions in domestic gas supply
- Risks of exploration and production (E&P) curtailments
However, the weighted average cost of gas remains below imported RLNG, making reallocation of gas to productive industrial sectors a feasible strategy.
IMF Commitments and Policy Adjustments
Government’s Strategy for CPP Transition
As part of its commitment to the IMF, the government is expected to accelerate the grid transition of CPPs through targeted levies. This move could impact energy-intensive industries like textiles, cement, and chemicals, though electricity tariff reductions may offset some of the financial burden.
“Electricity tariff reductions will help cushion some of the financial strain on industries,” noted Ahmed.
Moreover, E&P companies and Pakistan State Oil (PSO) could benefit from a gradual recovery in circular debt stock, currently estimated at Rs2.8 trillion.
Implications for the Textile Sector and Other Industries
OGRA’s Role in Gas Tariff Adjustments
On February 1, 2025, OGRA implemented a Rs500/MMBtu increase in gas tariffs for CPPs, benefiting the textile sector the most. Notably, gas prices for all other consumer categories remained unchanged.
Despite proposals from the Petroleum Division for a Rs100/MMBtu hike in unprotected residential consumer tariffs, the government opted to maintain existing rates. The Economic Coordination Committee (ECC) emphasized its commitment to gradually aligning CPP tariffs with RLNG rates.
Market Reactions and Future Expectations
Industry’s Response to the Hike
Despite the increased tariff, CPP-dependent industries may continue utilizing CPPs due to reliability concerns with the national grid. The estimated transition period to the grid is around six months, with potential fluctuations in power supply proving costly for manufacturers.
“The supply, even at the increased price, is a relief for CPPs,” wrote Shagufta Irshad of JS Global.
A 17% (Rs500/MMBtu) hike in gas tariffs, though significant, is still preferable to a complete disconnection, especially for the textile sector. Many industries have secured alternative fuel and power sources, including:
- Multi-fuel-fired plants
- Increased solar power capacities
- Direct RLNG purchases from private companies
- Power supply agreements with utility providers
However, concerns persist about an uninterrupted power supply from the national grid.
Conclusion
The increase in gas tariffs for CPPs aligns with IMF directives and is expected to generate significant revenue for the government. While industries face short-term adjustments, the long-term outlook includes reduced electricity tariffs, enhanced power sector efficiency, and gradual alignment with RLNG pricing. However, transition challenges, potential power fluctuations, and industry concerns must be addressed to ensure a smooth implementation of the new pricing model.
FAQs
1. Why did the government increase gas tariffs for CPPs?
The increase was implemented to meet IMF-mandated revenue targets and gradually align CPP gas tariffs with RLNG pricing.
2. How will this tariff hike impact industries?
Industries, especially textiles, cement, and chemicals, may face higher energy costs but could benefit from lower electricity tariffs over time.
3. What is the expected impact on electricity consumers?
If CPPs transition to the grid, electricity tariffs could be reduced by Rs0.2-0.5/KWh, benefiting all consumer segments.
4. Will industries stop using CPPs due to the hike?
Not necessarily. Many industries may continue utilizing CPPs for reliability reasons, while others may gradually shift to the national grid.
5. How long will it take for CPPs to transition to the grid?
The transition period is estimated at six months, but concerns about power supply stability remain.
