An energy policy is effectively an industrial policy. To unlock growth, it remains essential that an export-oriented industrial policy is formed that is adequately supported by an efficient and market-oriented power regime.
Over the next 12 months, to stimulate sustainable growth, current electricity infrastructure must be operated efficiently and with market-oriented pricing rather than arbitrary cost-plus mechanisms. It is important that competition provides an opportunity for buyers and sellers rather than creating walled gardens and advocating greater inefficiency in the process.
The current electricity pricing structure has stifled industrial expansion, with high tariffs pushing companies toward on- and off-grid solar energy. However, the impact is limited at best, with approximately 300 MW of industrial use transitioning from the grid to behind-the-meter solar.
Industrial growth cannot be sustained by solar energy alone and an efficient grid is needed to power it. This requires that the tariff be rationalized by cutting the excessive costs that have been charged to it and pricing it at the margin rather than through arbitrary cost-plus mechanisms.
Simply adjusting existing pricing frameworks to a dynamic, market-oriented pricing mechanism can enable greater utilization of existing capacity.
Capacity costs represent approximately 51 percent of the base price. However, half of the cost of capacity is long-term debt raised to finance energy projects. The debt is mainly denominated in foreign currency, which is settled by the sovereign. In practice, this debt is already considered part of the country’s total external debt. However, the consumer pays the same through tariffs and any depreciation of the rupee results in a significant increase.
There is a case where such debt payments are exchanged with the government, which already has the responsibility to pay them in foreign currency. Furthermore, extending their maturities while moving the benchmark rate from the secured overnight funding rate to the Shanghai interbank offered rate through a sovereign-level refinancing move may provide the necessary breathing room.
Shifting the debt to the sovereign can free up more than Rs 5.1 per kWh of space in the electricity tariff, which can then be passed on to consumers. However, it remains essential that any transferred benefits take into account the added economic value that can be generated through the use of an incremental electron.
Similarly, another Rs 3.23 per kWh is charged on electricity bills as markup on circular debt, which increases to Rs 3.78 per kWh, after tax. There is a possibility that it could be refinanced, benefiting from the excess liquidity in the system. The stock of circular debt can be refinanced and the reduced burden transferred to the sovereign. Although this is a sovereign risk, the margin charged for that risk is still higher than what the sovereign actually pays; reducing the differential can generate well-being for the consumer in the process.
More than 4,000 MW of power plants fueled by imported coal remain underutilized in the South
There is surplus electrical capacity in the country, which some say is a big problem, but it is good to have. It is estimated that more than 4,000 MW of imported coal-fired power plants remain underutilized in the southern part of the country. To take advantage of underutilized capacity, a reverse Dutch auction model is proposed, so that any unused capacity over a five-year period can be auctioned to potential wholesale energy consumers.
Effectively, these consumers can set their prices for the next five years, which is linked to a fuel index, and can plan future expansion accordingly. To stimulate industrial growth, such auctions can only allow consumers to add new or abandoned capacity so that incremental consumption can be realized. Since eligibility is limited to new consumption, this initiative can potentially drive incremental GDP growth.
The predominant time-of-use (TOU) rate structure is designed for peak hours between 7:00 pm and 10:00 pm, and has not been updated for more than a decade. The actual peak usage is now between 11 pm and 2 am. We suggest a movement of the peak TOU so that consumption behavior can be adjusted through price.
Similarly, the increase in solar installations has led to a scenario where grid electricity demand drops significantly during peak daylight hours (between 7 a.m. and 2 p.m.), so the drop in demand in relation to the peak during the same day is of the order of 1,500 -3,000MW.
Indeed, the capacity that already exists is used during the day, but because it is not properly priced, its utilization remains low. There are strong arguments for creating an incremental daylight TOU rate, proposed for 7am to 2pm, so that electricity during this time period can be priced at the margin.
Incentivizing incremental consumption at marginal cost during peak daylight hours would lead to efficient utilization of all on-grid and off-grid solar capacity, while allowing industries to reduce their average cost.
Such prices can be announced in advance and can only be initially restricted to industries, given a 99 percent recovery rate. It is estimated that if industries begin operating at near-optimal levels, an additional 600 MW of industrial demand (excluding any captive power) could enter the system without additional investment in infrastructure and would reduce average costs for all users.
The author is the CEO of National Credit Guarantee Company Ltd and Assistant Professor of Practice at IBA, Karachi.
Published in Dawn, The Business and Finance Weekly, December 30, 2024
