With the federal government eyeing to subsidise the power tariff up to Rs74 billion during the fiscal year 2011-12, analysts deem the achievement of the target as “unlikely”.
Further, analysts believe that in order to achieve the fresh subsidy target, the PPP-led coalition government would have to swallow bitter political pills, including an increase in the mostly constant electricity tariffs by 25 to 30 per cent in an attempt to bridge the current gap of around Rs2.5/kwh between the generation cost and the selling rate.
According to analysts the hike in power rates should primarily focus on residential consumers as 75 per cent of them are paying Rs5.5 kilowatt per hour that is 26.6 per cent or Rs2 less than the average approximate selling rate of Rs7.5/kwh.
According to a post-budget research, rising international oil prices would keep testing the nerves of the resource-constrained federal government that, the analysts believe, would witness its actual power subsidy during FY12 climbing up by 103 percent or Rs76 billion at least to Rs150 billion.
“We believe that the actual subsidy in FY12 would remain higher at Rs150 billion unless international oil prices decline sharply,” said Head of Research Topline Securities Farhan Mahmood.
It may be mentioned here that in the outgoing FY11 the federal government’s subsidy to the power sector is aggregating to Rs285 billion.
Having positive vibes about the government’s ‘serious’ intentions to keep the burgeoning, and therefore, backbreaking subsidies, particularly that of power sector, in check during the forthcoming financial year, the analysts, however, are critical of the economic managers for not taking any major steps to get hold of the worsening electricity shortage in the new fiscal plan.
“Though no major steps were announced to arrest electricity shortage in the new budget, the government looks serious to curtail its burgeoning subsidies on electricity next year in line with IMF directives,” Mahmood said.
In the new budget, the recovery-conscious government has envisaged Rs74 billion, amounting to Rs0.6/kwh, as electricity subsidy that would be sans interest payments on the Term Finance Certificates (TFCs) and other small payments. In FY11, the government had to subsidise power by Rs285 billion to ensure stability in electricity charges through bridging the Rs3/khr average gap between the selling rate and cost of production.
This difference was primarily due to, what analysts said, a 27 percent increase in international oil prices and the power producers’ growing reliance on expensive oil-based generation due to scarcity of gas, a relatively cheaper fuel. “This clearly shows that the government would gradually increase power tariffs in FY12 as the government is currently bearing around Rs2.5/kwh as a subsidy on electricity because the cost of generation is higher than its selling rate,” said the analyst.
For FY12 the resource-restrained federal government, which is attempting all efforts to get the two stalled IMF tranches under $11.3 billion for the SBA loan to be released at the earliest, has budgeted the power subsidy at Rs74 billion, of which Rs50 and Rs24 billion would go to Wapda and KESC, respectively. “Considering the current gap of around Rs2.5/kwh between generation cost and selling rate, the government needs to increase power tariff rates by 25-30 percent to reach its target of Rs74 billion,” Mahmood said.
Analysts also foresee a rationalisation of power rates in the wake of the rising power shortage. According to the research analyst, against the average selling rate of approximately Rs7.5/kwh, the residential users, consuming 45 per cent of the country’s electricity, were on average paying Rs7/kwh. However, 75 per cent of the residential users, utilising 1 to 300 units, were using electricity at a rate of Rs5.5/kwh, implying a 28 per cent discount to general tariff rates while a 45 per cent discount to generation cost.
On the other hand, the analyst observed, commercial, industrial and agricultural users throughout the country were consuming electricity at an average rate of Rs11/kwh, Rs7.2/kwh and Rs6/kwh, respectively. “Thus, we believe that this time the government might increase power tariff rates higher for the domestic sector,” Farhan said.
