Our government is all set to raise electricity rates once again, this time by Rs2.94 per unit. We will have to swallow this bitter pill to save the country from an impending financial default. However, it's evident that the new government does not have any new solution to deal with the power sector's mess other than taking the path of least resistance—further squeezing consumers who are already drowning under the heavy burden of an endless streak of electricity rate hikes.
High electricity rates are troublesome for many reasons, the most critical of which is their "affordability." When these rates rise beyond a few percent of the households' income, they start to have a punishing effect on their lives because they are compelled to cut corners on their other basic needs like food, health, and education. Such hikes also adversely affect the competitiveness of industrial, agricultural, and commercial consumers, leading to their losing market share and even driving some of them out of business.
Pakistan's power sector is already in dire straits. The rampant and pervasive inefficiencies of this sector are causing financial losses to the country that exceeded Rs530 billion last year and led to the circular debt soaring past the Rs2.7 trillion mark. By securing a bailout package from the International Monetary Fund (IMF), the government may have averted the imminent disaster for a few months, but it can't avoid it for long unless it realises the danger and acts to control this sector's further drift towards financial disaster.
The main causes behind these losses (almost 75%) were excessive losses in the systems controlled by DISCOs and lack of full revenue recovery. Out of merit-order generation due to system constraints and penalties paid to IPPs for contractual violations made up the remaining 25%. The National Electric Power Regulatory Authority (NEPRA) considers these losses to be "controllable" and attributes them to "poor governance" from top to bottom in this sector.
These issues were not hidden from our political leaders, who have been in and out of power in the past three decades. We expected the new government to take some critical steps quickly to plug the bleeding and implement a plan that would remove such inefficiencies and restore this sector back to health. Sadly, it seems content with actions that are short-sighted and devoid of insight, strategic vision, or an action plan.
A logical approach for the government in the short run will be to address and remove the glaring inefficiencies on the supply side and secure the existing revenue base on the demand side. This can provide it some space to devise and implement a proper plan to deal with the power sector issues and challenges in the medium to long-run.
We recently saw the new minister in charge of the Power Division boasting on television channels about the warning he had given to DISCOs' staff to either control theft and losses in their systems or face strict action. The use of brute authority can't be termed good management, let alone good leadership. It would be much better if he holds periodic meetings with the junior managers who directly interact with consumers to understand their genuine problems and help them deal with delinquent consumers or staff.
On the supply side, the government should focus on improving current operating practices to squeeze additional capacity and energy from the existing generation and transmission and distribution (T&D) systems and to relieve any existing constraints.
State-of-the-art sensing, communication, and energy management systems are critical for the efficient and economical operation of the grid. Lack of real-time data restrains system operators from using the existing assets to their full limits. This access will enhance their knowledge about the power transfer capability of the T&D systems and use generation to its true potential.
Electricity demand in various consumer categories is currently on the decline. The actual reasons for this can only be determined through proper research but it could be due to consumers tightening their belts due to exorbitant rates or due to their switching to alternatives such as rooftop solar to reduce or eliminate their dependence on the grid.
The government should temporarily pause "Net Metering" as its aggressive promotion would deepen the power sector's mess further
The alternatives may still be inefficient and more expensive. Many consumers may not have deserted the grid or reduced their consumption for high rates alone. Poor reliability of the grid supply might have forced them to do so. Grid supply must be made attractive in terms of reliability and price to keep consumers tied with the grid. Frequent rate hikes will further narrow the shrinking gap between the cost of grid supply and its alternatives, pushing consumers even closer to alternative options.
NEPRA estimates that 26% of our population still lacks access to the grid. National Transmission and Distribution Company's (NTDC) Power System Statistics 2023 report states that DISCOs currently have 348,541 applications for new connections pending with the grid. NTDC's above report also reveals that over 6,500 MWs of demand could not be served during peak hours due to system constraints. So, the demand is already there unserved; it is for the government to use it or lose it.
Power sector planners and managers need to understand electricity demand and its patterns within the industries, especially their use of captive power facilities and other fuels for processes that can be converted to electricity. They should start a campaign to win back the consumption that has switched to captive plants. They should also seek new demands that can be served within these industries from the grid.
The government also needs some introspection into its own policies and initiatives, especially its Fast-track Solarization and Net-Metering schemes, to ensure their mutual consistency. For a grid that is often accused of excess generation capacity, any significant chunk of demand taken away by the new photovoltaic (PV) systems will exacerbate the existing mess.
The government should temporarily pause "Net Metering" as its aggressive promotion would deepen the power sector's mess further. If it is to be continued, the government should revise the applicable tariff and other TORs for new "Net Metering" customers to recover fixed costs of the legacy grid assets from them. It should also consider imposing a reasonable "Grid Exit Fee" and "Advance Notice" for new applicants for this scheme.
The remedies suggested above will provide only some short-term relief, but it will buy the government some time to gear up for the major surgery that has become inevitable. The power sector requires comprehensive revamping—its system, its regulation, its institutions, its business model, and its investment and pricing frameworks—that can only be accomplished over the long-run (three to five years and beyond), gradually, and with patience.