ISLAMABAD: Pakistan’s energy sector has not shown any major improvement in the financial year 2014-15, but the government policies would continue to burden honest consumers for high theft and system losses.

This has been summed up by the State Bank of Pakistan in its assessment of the country’s energy sector. The report has been submitted to parliament this week. On the other hand, Pakistan went beyond many regional countries in passing on relief of declining international oil prices to consumers, it said.

The central bank said that power generation had improved only marginally during the last fiscal year despite the government’s overemphasis on capacity addition at the cost of dilapidated transmission and distribution system.

Also read: Power consumers to pay Rs117bn more due to govt’s mismanagement

The low oil prices, on the other hand, had increased investment in renewable energy sources and the country’s exploration and development sector.

“In the power sector, the local price of furnace oil — the key fuel used in power generation — declined by around 30 per cent during FY15. However, despite the resulting fall in the cost of generation, the power supply could improve only marginally (1.6pc) from last year; this was even less than the estimated increase in demand,” the SBP said in its annual report for 2014-15.

It said the load management continued, reflecting the below par performance of the power sector.

Interestingly, even if existing generating units are geared up to operate three-fourth of their capacity, the country simply does not have the infrastructure to distribute this power to end-users. “Unfortunately, the policy focus in energy sector is oriented towards enhancement of generation capacity, instead of the transmission and distribution capacity.”

The central bank noted that the government passed on the benefit of declining generation cost to consumers through frequent downward revisions in the fuel adjustment surcharge. As a result, the liquidity constraints stemming from circular debt continued to hamper the power generation, despite a considerable fall in the cost of furnace oil.

Specifically, the growing receivables from downstream firms in the energy supply chain affected the furnace oil imports, particularly in the first half of the financial year. At the same time, private power producers were also reluctant to increase generation because of financial constraints, despite a steep decline in their input cost i.e. furnace oil price.

Meanwhile, the government decided to reduce country’s dependence on furnace oil whose share in power generation fell from 38.5pc in 2014 to 33.2pc in 2015. Additional drag on power generation came from below normal water availability during the winter, particularly for the period March-April 2015. “Importantly, the hydel power, the cheapest source of power generation, could not get traction due to political complexity.”

However, better gas supplies to the power sector due to substitution of CNG with petrol in the transport sector provided some comfort. Later, hydel generation recovered strongly in May-June 2015 following improvement in river flows.

The steep decline in oil prices also allowed the government to bring down power sector subsidies from Rs309 billion in 2014 to Rs292.3bn in 2015. Furthermore, the lower cost of generation also slowed down the pace of build-up in circular debt — the most binding constraint faced by the power sector.

Interestingly, the government could have gained more in terms of reduced volume of circular debt, had the National Electric Power Regulatory Authority not reduced the fuel adjustment surcharge. The resulting ease in financial constraints would have even allowed the government to boost power generation and reduce load management.

Focusing on the circular debt, the volume at end-June 2015 was Rs648bn (this included Rs335bn of arrears and Rs313bn of fresh build-up between June 2013 and June 2015). Taking benefit from lower oil prices, and to address the circular debt issue, the government introduced a new tariff structure that included three different surcharges, tariff rationalisation surcharge of Rs1.54 per kwh, debt servicing surcharge of 43 paisa per unit and Neelum-Jhelum Surcharge of 10 paisa per unit.

Published in Dawn, December 25th, 2015