First things first, the ability to generate power was not a problem when the government took office. The previous government had added close to 12000 MW in the system, most of which were under CPEC. The demand was not growing exponentially, and with the economic slowdown kicking in almost as soon as the PTI came in, pumping in power was always going to be easy.
The electricity generation in FY19 grew barely 1 percent year-on-year to 122 billion units, which translates into 103 billion units of actual consumption, after factoring in the system losses. The losses have continued to be high, close to 20 percent, and in cases of some discos, even higher than easier thresholds. The regulator's inability to have a tighter control and instead allowing far more than threshold losses as part of final tariffs, has been a massive problem, and there was no progress on this front.
The government claims credit for a much improved power generation fuel mix. Only that it should not. If the previous government can claim any credit on the power front, it was the ability to add more capacity in the system aimed at improved fuel mix. Nonetheless, the improvement did come in FY19 as the share of furnace oil based generation was reduced to single digits, while that of imported LNG and coal based generation reached new highs.
It would have been much nicer, had the benefit of a much improved generation mix been transferred to the consumers. But in fact the tariffs kept on increasing as Pakistan entered yet another IMF programme. The tariff increase was made a structural benchmark, in order to reduce the cost differential and put a lid on the ballooning circular debt, which had crossed Rs 1 trillion.
The tariffs have been increased across user categories, barring domestic consumers using up to 300 units a month. This in itself is more of a problem, as nearly 80 percent of domestic power consumption is exempt from tariff increase, and the allocated subsidy of nearly Rs150 billion in the budget, does not cover up for the same.
The rise of unfunded subsidy has been a major problem, and the issue exacerbated with the government's relief scheme for industrial users in general and export industries in particular. That takes out another 25 percent of total power consumption out of the tariff hike, instead this requires room for more subsidies, which have not been allocated. Either the government will have to roll back some of it, or will end up running higher subsidies, or in case of delayed payments, another round of circular debt may well be in the offing.
And we have not even talked out the biggest issue yet, and that is the elephant in the room, the capacity payments. Not that the government is not looking to recover the difference between price and cost, but there is little debate on the elephant in the room, that is the capacity payment component. The amount of upwards adjustment that may be required for FY19 determinations for respective discos, could be too hot to handle. The IMF is not the worry as far as the power prices are concerned, capacity payments are.
The capacity payments in FY16 were Rs280 billion or Rs3.4 per unit sold. This increased to Rs644 billion or Rs6.2 per unit in FY18, constituting almost 60 percent of the power purchase price. Much of it has to do with CPEC related power projects, as lopsided take-or-pay contracts were always going to cause trouble.
The dependable generation capacity in FY19 went up by almost 20 percent year-on-year to 31000 MW. The demand did not grow. The RLNG plants are fully available, among many others from the CPEC projects. No demand growth and higher generation availability, with contracts based on take-or-pay, it is estimated that the capacity payments component for FY19 would be north of Rs900 billion. The currency devaluation has also played its role.
Now with almost Rs9 per unit as capacity payment, it is obvious that the benefit of lower fuel price and improved generation mix was never going to materialize. And there is more to come in lieu of tariff adjustments. The latest IMF programme, like any other IMF programme, is overly focused on price as the key to reforms. Yes, price is an integral part of the power sector reforms, but it is surely not the only one. It did not work back then, it will not work now. The government is due to announce the revised tariffs for FY19 by September end, as per the IMF's structural benchmark. And the budgeted subsidy may not be enough to cater for the increase.
The governance reform, the focus on transmission, privatization of DISCOs and commercially opening up the market are all key component of the reform, which have sadly taken a backseat, as price becomes the focus. The first year was a missed opportunity; the second could be a disaster, if they don't look beyond pricing as means of reforms.