Agreement with the IMF: No more hike in the basic electricity tariff on the cards
ISLAMABAD: Government ready to raise base electricity tariff under International Monetary Fund (IMF) deal in name of Annual Rebasing (AR) and power sector subsidy reforms , the Fund having warned that the existing increases in the electricity tariff are insufficient to stem the accumulation of quasi-fiscal losses.
The RA of about Rs 0.66 per unit will be based on tariff applications from power distribution companies (discotheques) and for all categories of consumers, while an increase of Rs 0.95 per unit under the covered by the subsidy reform plan will only weigh on unprotected consumers. Both tariffs are with the National Electric Power Regulatory Authority (NEPRA), which will announce them at a possible time. Lifeline consumers using up to 200 units per month will be eligible for a subsidy.
According to the IMF’s sixth review under the extended arrangement under the Extended Financing Facility released on Saturday, the energy sector is in a precarious state due to long-standing deficiencies. Over the past decade, they have resulted in an unsustainable stock of arrears, namely Circular Debt (CD) which affects the entire electricity-gas/oil chain and weighs on the financial sector, the budget and the real economy. Sectoral viability further eroded in FY2021, despite the collection of deferrals granted in FY2020, as authorities continued to delay regular price adjustments and provide temporary subsidies.
The Fund reports that the flow of DCs into the power sector reached 0.6% of GDP in fiscal year 2021, rising to 4.8% of GDP at the end of fiscal year 2021.
More generally, the CD flow has remained well above expected levels since the start of the program, mainly due to the delay in tariff adjustments, the high cost of debt and the operating losses of the Distribution Companies (DISCO). This includes 1.9% of GDP held by PHPL. Each month of delay of an adjustment of Re. 1 per kWh adds about Rs 8.5 billion to the stock of arrears.
Increase in electricity tariffs
The authorities remain guided by the CDMP to achieve an ambitious and sustained decline in the accumulation of electricity sector arrears.
They have followed their monthly monitoring program since spring 2021 and have also updated the CDMP regarding its underlying assumptions and reform progress (in close consultation with the staffs of the World Bank, Asian Development Bank and the IMF).
Staff stressed that the regular implementation of tariff adjustments in accordance with established formulas is essential to lend credibility to the newly independent energy regulator, end the accumulation of arrears and implement the CDMP.
Authorities noted that the delays were aimed at mitigating the cost of the COVID-19 pandemic to the people, supporting economic recovery and mitigating persistent inflation.
As the economy grew, they implemented all pending tariff adjustments in two stages: (i) Quarterly Tariff Adjustment (QTA) for FY2020 in Q4 October 1 (end-September 2021 structural benchmark), alongside NEPRA forecast QTAs covering FY 2021-Q1/2 in October and FY 2021-Q3 in November; and (ii) the remaining annual rebasing (AR) for fiscal 2021 on November 5 (June 1, 2021 RS).
The FY2022 Annual Rebasing (AR) is on track to be notified by February 2022 in accordance with the updated CDMP, which will help contain monthly Fuel Price Adjustments (FPA).
The authorities agree that subsidy reform is necessary to effectively protect the vulnerable, introduce more equity and reduce fiscal costs. The key elements are a smaller group of subsidized consumers and a more progressive tariff structure.
To this end, Pakistan completed some reforms in September, which however failed to reduce total net subsidies (as previously envisaged in the end-June 2021 structural benchmark).
Supported by the World Bank, the authorities will; therefore, seek cabinet approval by end-January 2022 (end-January 2022 new structural benchmark) to: (i) remove the slab benefit; and (ii) increase the effective tariff for unprotected slabs by at least 0.5 PRs per kwh.
The next step would be for NEPRA to approve the new tariff structure by the end of February 2022.
The authorities remain committed to working with the World Bank and AfDB to: (i) reduce commercial and technical losses (including by introducing smart meters, cutting off delinquent consumers, and developing transmission and distribution infrastructure to that it corresponds to the production capacity); (ii) improve the governance and accountability of DISCOs, introduce private participation and progress in their progressive privatization; (iii) introduce competition; (iv) actively seek renegotiations of similar PPAs with other power producer groups, including state-owned companies; and (v) implement the recently approved National Electricity Policy 2021.
Basic electricity tariff: Power Div proposes a new increase
The authorities have also agreed that the gradual absorption of maturing publicly guaranteed PHPL debt into cheaper central government debt (such as 0.1% of GDP through FY2021) will be strictly dependent on adequate fiscal space in fiscal year 2022 and beyond.
They also intend to use several proceeds to reduce the CD stock, including proceeds from the privatization of power sector assets and recoveries of outstanding receivables.
The next step would be for NEPRA to approve the new tariff structure to be approved by Nepra by the end of February 2022, which includes: (i) a stricter eligibility criterion for protected consumption tiles (based on the maximum household use from the previous 6-month consumption rather than the average of the last 12 months); (ii) a lower threshold for protected consumption tiles (from 200 instead of 300 units per month, reducing the share of protected consumers from 93 to 46%); (iii) a distribution of unprotected tranches of 301 to 700 units (in tranches of 100); and (iv) an expanded definition of vital consumers (also covering residential consumers with 50 to 100 units per month).
This will not only contribute to restoring the financial viability of the sector, but also to combat its negative impact on the budget, the financial sector and the real economy. In this regard, the steadfast implementation of the IFI-supported Circular Debt Management Plan (CDMP) will help guide planned management improvements, cost reductions, timely alignment of tariffs with cost recovery and better targeting of subsidies to the most vulnerable.
However, a substantial reduction in supply costs will require a modern electricity policy that: (i) ensures that PPAs do not impose a heavy burden on end consumers; (ii) addresses the poor and costly generation mix, including wider use of renewable energy; and (iii) introduces more competition in the medium term.
The Pakistani authorities have acknowledged that they have implemented the completion of the annual rebasing (AR) of fiscal year 2021 by November 5, 2021 (June 1, 2021 structural benchmark). The GoP estimates that this delay involves a loss of revenue of around Rs 60 billion.
Parliament passed key amendments to the NEPRA Act in August 2021, making permanent what had been temporarily enacted by Presidential Order in March 2021.
More importantly, it establishes two crucial powers: (i) the power of the regulator to determine and notify quarterly rate adjustments (QTAs) for capacity payments; and (ii) the power of the government to levy surcharges in addition to the revenue requirements of the system under the NEPRA Act.
The government agrees to pass on the retained electricity tariff increase to consumers
Based on this, NEPRA implemented the first two QTAs under this new regulation for (PRs 0.90 and -0.07 per kwh for Q1 and Q2 FY 2021, respectively) in October 2021, as well as the last QTA under the old regulations (PRs 0.83 per kwh for Q4 FY 2020 (RS end of September 2021).
The Pakistani authorities have recognized that the regular implementation of tariff adjustments in accordance with established formulas for QTAs and monthly Fuel Price Adjustments (FPA) is essential for the credibility of our revised CDMP. In this context, the authorities expect NEPRA to notify the next QTA (covering the first quarter of fiscal 2021) in December 2021.
Pakistani authorities have also expressed their aim to replicate the success of PPA renegotiations with other power producer groups, including government-owned ones, to achieve a significant reduction in capacity payments.
“We plan to follow a similar approach by first signing a memorandum of understanding and then converting it into binding contractual agreements,” the IMF report said citing Pakistani officials.
The authorities said they are advancing plans to privatize two RLNG power plants and plan to complete the process by the end of June 2022, with proceeds to be earmarked for debt and poverty reduction programs.
Copyright Business Recorder, 2022