The coalition government led by the PML-N is in the process of finalising an agreement with the International Monetary Fund (IMF) for a fiscal adjustment of well over Rs 1.4 trillion in the upcoming budget. It would be looking at additional tax measures of no less than Rs300 billion besides expenditure cuts, primarily the development programme — the traditional victim. This is set to compromise the country’s growth prospects to yet another stabilisation-cum-inflationary cycle — and prolonged stagflation.

The precursor has already come out — a record Rs30 per litre increase in prices of all petroleum products in one go — albeit with a long hiatus. Its subsidy has to be phased out by June 30 to start the new fiscal year with a clean slate. No political government loves such compulsions and yet it will soon be following up with an electricity price shock. The cumulative surgery (of the current year’s and next year’s budget) would thus get close to Rs2tr — almost 3 per cent of GDP.

However, the bigger elephant, yet to come into the room, is the translation of record-high global fuel prices to power tariffs. And this may turn out to be the ‘mother of economic challenges’ when it creeps into the country’s production cost across all sectors.

The then PML-N government may not have anticipated its top gear quest to overcome power shortages through the vast majority of plants on imported fuel and what it would entail in years to come. Nor the subsequent PTI government would have imagined what its entire focus on devaluation to tame the current account deficit would mean to the dollar-indexed electricity generation costs.

It is poetic justice that those who built imported fuel-based generation capacity have to now deal with the monster they created but at a heavy cost to every Pakistani

Journalists generally tend to look into challenges in hindsight. So in hindsight, it is now on our face that no consideration was given to annual currency devaluation or increase in international commodity prices over the past seven to eight years. The rising electricity tariff and its upward journey in the coming months may not only be painful, but it will also painfully expose the grave injustice that may have happened to the economy and the people over the decades.

While the shortfall a decade ago was too large to be ignored, it is equally amazing that almost all capacity addition was based on imported coal and RLNG while indigenous alternate options struggled. For example, the tariff determination of the 1,180MW Re-Gasified Liquefied Natural Gas (RLNG) power project in April 2016 came in at a 30-year levelised cost of Rs6.36 per unit. In reality, this did not remain so for 30 years given its quarterly indexation under the sovereign contracts.

The RLNG based fuel cost of electricity alone initially remained between Rs8-10 per unit but has since moved between Rs15-17 per unit over the last few months as the LNG import price ranged from $10-12 per million British thermal unit (mmBtu).

Conservative estimates suggest this per unit power generation cost would go beyond Rs25 as RLNG prices determined by the Oil & Gas Regulatory Authority (Ogra) for May 2022 have averaged $22-24 since the new government procured four additional cargos at $22-30 per mmBtu, increasing LNG-based electricity costs by more than three times. Add to this the capacity payments and the overall expenses of LNG-based electricity, the cost goes well above Rs30 per unit.

How the common man, or for that matter the industry, survives the sky-high electricity tariffs remains to be seen.

On the other hand, the average variable generation cost of hydropower is about 62-65 paisa per unit, and the variable cost of solar and wind is even lower. On top of that, all three renewables provide energy security and shelter against cost volatility.

And not to forget, both the previous PML-N and PTI governments not only tactically delayed solar and wind but practically banned them through written orders and disrespecting tariffs approved by the National Electric Power Regulatory Authority (Nepra).

The result is a big hit on foreign exchange reserves. Almost 90pc of the power generation capacity added during the last 20 years is thermal and that too is mostly imported. Under the mega China-Pakistan Economic Corridor umbrella, PML-N inducted nine major power plants, all reliant on imported fuel with a total capacity of 11,49 MW (five imported coal plants of 6,600MW and four imported LNG plants of 4,897MW).

LNG imports have already cost more than $4bn in 10 months and based on the latest cargos at high rates, the LNG import bill will not settle below $5bn by end of the current fiscal year. The import bill of coal for power plants is separately costing $2.5bn this annum.

The Nepra’s determined tariff for coal-based generation was Rs8 per unit in July 2021 and has already gone beyond Rs14.3 per unit in April — close to double as global coal prices surge. Furnace oil generation is yet another burden, although gradually tapering off.

The bottom line is that the nation will be paying an enormous cost of about $9.5bn annually from its precious foreign exchange reserves. The circular debt is already north of Rs2.5tr, increasing by Rs300bn a year just because of higher than Nepra-allowed system losses and lower recoveries. The whimsical price cuts like the one currently in place take it to about Rs500bn. This adjustment will become part of the IMF deal.

Worse still, Power Policy 2015 and Policy Guidelines were grossly violated to induct RLNG based plants. The Power Purchase Agreements (PPA) of all thermal plants have a standard clause that allows power dispatch strictly on a “merit order” basis, ie, the plant supplying the cheapest power to run first and the most expensive at the last. To facilitate RLNG plants, this standard clause is sidestepped and the RLNG plant has to be operated on a “Must Run” basis, even when cheaper options in the national grid are available.

The PML-N had justified inducting thermal plants at lower capital costs. Indeed, the capital cost of thermal combined cycle generation turbines is low but operating costs are expensive. One of these plants, for example, completed at about $850 million currently burns about $280m of RLNG a year — a third of the project cost each year.

But this is reality — expensive tariffs, high foreign exchange outflow and compromised energy security. It may not be less than poetic justice that those who built imported fuel-based generation capacity have to now deal with the monster they created but at a heavy cost to every Pakistani.

Published in Dawn, The Business and Finance Weekly, May 30th, 2022