Electricity Costs Ease Due To Energy Reforms And Subsidies

The first quarter of the current fiscal year has been notably eventful for Pakistan’s electricity sector. From a significant rise in base power tariffs to hastily arranged subsidies by the federal government, and from independent power producers (IPPs) facing widespread criticism to a contentious subsidy by the Punjab government, the sector has seen a series of impactful developments.

The fiscal year began with hefty June power bills as the government implemented a quarterly adjustment in June to cushion the impact of the base tariff increase that took effect in July. This move triggered nationwide protests over electricity bills, prompting the Prime Minister to announce a relief package for consumers using up to 200 units, cutting Rs50 billion from the Public Sector Development Program (PSDP).

The subsidy will remain in place until September, after which increased prices will apply from October 1, 2024, for all consumer categories except lifeline consumers. Additionally, Punjab’s Rs14/unit subsidy, which benefits households consuming between 201–500 units, will also end in September.

As cooler temperatures set in, household electricity consumption in October typically drops by 30-40% compared to the peak summer months of July and August. This trend continues into the second quarter, where consumption is typically half of the first quarter. Consequently, the impact of the base tariff increase will be less pronounced, as consumer bills will decrease in line with lower consumption.

This seasonal lull in electricity usage often leads to a decline in public outcry over high bills, with authorities becoming complacent and long-term solutions delayed. This pattern is recurrent, particularly when tariff revisions coincide with peak consumption in the fourth or first fiscal quarters.

While the affordability of electricity remains a pressing issue, especially following the price hikes of the past three years, the sector also faces a cashflow challenge that exacerbates the situation. A base tariff hike in July inevitably causes more public uproar than one introduced in October or January, even though the impact on inflation remains the same.

Tariff adjustments in the second or third quarters are more manageable for consumers, reducing the month-on-month increase in bills and potentially diminishing the need for unplanned subsidies.

One proposal being considered is the even distribution of tariffs throughout the year, based on capacity charges rather than actual consumption. This approach could result in higher tariffs during winter and lower tariffs in summer, helping to alleviate the cashflow challenges that arise during peak consumption periods, which often lead to lower recovery rates and an increase in circular debt.

Several countries offer consumers the option of paying in advance to address these cashflow issues, allowing them to ease their summer burden by making advance payments during winter, while the effective tariff remains unchanged.

While this strategy addresses only a small aspect of the broader issue, it is a step worth exploring. To truly resolve the crisis, unnecessary taxes must be eliminated, investment in transmission networks should increase, distribution losses must be reduced, and higher electricity usage should be incentivized during off-peak months.

Additionally, the privatization of distribution companies should be pursued. What the sector cannot afford is another period of inaction, as public and political pressure subsides during the cooler months, only to resurface with the return of rising temperatures.