The crises of electricity price in Pakistan

 The electricity pricing process in Pakistan is top-down, with a reference price set once a year, followed by quarterly adjustments and multiple adjustments rather than fuel adjustments. This leads to confusion about what it is Original tariff being charged to the customer, as a number of adjustments are made during the year.

The crises of electricity price in Pakistan

The primary variables affecting the price of electricity include the cost of source fuel used for power generation, interest rates, rupee-dollar parity, level of potential demand, and inflation, among other factors. As these market-based variables change, so do adjustments in electricity prices – above the reference price that is calculated once a year.

Such a complex structure is largely a function of cost-plus and single-buyer systems, where the government is the primary purchaser of electricity and sets prices based on cost rather than supply and demand.

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This creates a second-order effect, in which a price increase caused by a cost increase leads to a decrease in demand - which further increases the price increase, as the same cost base is now replaced by fewer units of electricity. Need to expand in numbers. It is important to note here that almost three-fourths of the electricity generation cost is fixed in nature. This means that as the number of units of electricity shipped decreases, the same fixed cost per unit increases. This results in a double whammy: a price plus price increase results in lower demand, which further increases the cost per unit due to higher fixed costs of the system.

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The cost of generation, transmission and distribution of electricity in the country is around Rs 35.5 per unit, with an average energy cost of Rs 10.9 per unit, while the capacity cost is around Rs 18.4 per unit. Apart from this, the transmission cost is Rs 1.54 per unit and the distribution cost is Rs 4.6 per kilowatt.

All extra costs for example, theft, taxes and other losses are added on the electricity bill.

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This amount is attributable to theft and other losses. More than 500 billion rupees, spread to regular paying customers. Reducing losses and theft will reduce the prices for regular customers across.

In the latest reference tariff, electricity prices have increased significantly as compared to the previous reference tariff. However, the previous year's reference tariff has already been increased several times due to quarterly and fuel adjustments.

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In such a case, it makes more sense to compare electricity tariffs on a month-to-month basis, rather than twelve months back. On a month-on-month basis, the tariff for protected customers, who are about 58 percent of the total customers, and are over 17 million, will see a tariff increase of only 2 percent.

However, the monthly tariff hike for consumers consuming more than 200 units of electricity per month is between 7 to 9 percent. The main reason for this is the introduction of fixed charges in electricity bills. Tariff hikes will continue to squeeze disposable income and may further reduce consumption. For high-consumption households, the shift to solar has been further strengthened.

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On the other hand, as interest rates decline, rupee-dollar parity stabilizes, and inflation begins to decline, quarterly tariff adjustments are likely to be negative in nature, resulting in real increases in tariffs. Decrease occurs.

Although the number is nominal, correcting prices in a high-inflation environment effectively means a reduction in prices in real terms.

A major change in the latest reference tariff is the reduction of the variable component of the industrial tariff and the introduction of a fixed charge linked to the maximum demand of a particular industrial customer.

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Introducing a fixed charge should potentially encourage higher consumption, resulting in higher production, allowing industries to reduce their electricity costs on average. According to an estimate, industrial units may see their electricity prices fall by 10 percent to 15 percent, depending on their consumption levels, over the next few months.

This may not bode well for industries that operate at low utilization levels, as higher fixed costs may further increase their costs. This could potentially lead to either closure of low-to-zero consumption units or possible mergers to achieve economies of scale. The updated industrial tariff structure clearly encourages greater efficiency and economies of scale.

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The electricity tariff is a maze, and there is no easy way out. A centralized pricing mechanism that validates uniform tariffs across the board has led to all sorts of unintended consequences. Doubling nationwide tariffs, along with associated subsidies and losses, while simultaneously encouraging the development of a competitive market is the only way forward.

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Immediate relief in power prices is definitely not possible. However, reforms that move the market towards a competitive system and make electricity prices a function of supply and demand rather than a cost-plus mechanism are the only way forward. Even flat-lining prices at these levels over the next few quarters or years should serve consumers well, as their impact will diminish in real terms.