Pakistan Bulletin

An up-to-date and informed analyses of key issues of Pakistan.

Inflated Electricity Bills in Pakistan: Understanding the Causes

March 2024

Pakistan’s current electricity cost crisis is an outcome of the inflated capacity charges obligations, pushed for by International Finance Institutions in the late ’90s.

Electricity consumers in Pakistan are currently grappling with, what has been described as, sky high tariffs. The high cost of power generation and its adverse impacts on the consumers have not only financial dimensions but also political implications for the government that faces consumers’ wrath every time the unpopular decision of raising electricity tariff is undertaken.
Similar to previous governments, the newly formed government in Pakistan has also pledged to provide relief to the masses in electricity bills. As the residential sector comprises 50% of total electricity consumption in Pakistan, rise in tariff affects all income levels. A recent report “Energy politics in Lahore, Pakistan” notes that middle-income individuals pay up to 18% of their monthly income in electricity bills. Low income groups on average, compromise their wellbeing including health, transport, recreation, education, housing, and fuel as a result of electricity tariff increase, as observed by another report “Crowding Out Effect Of Increased Electricity Tariff On Household Resource Allocation In Pakistan”
The actual cost of power generation comprises a small part of the power bills. The real cost is capacity payment and multiple taxes that have inflated the bills for the consumers, so much so that consumers are forced to take to streets to protest against the crippling weight of the inflated bills, while industry has been showing negative growth due to the crippling effect of the power prices.

High electricity prices push low income groups towards compromising their wellbeing and make downward adjustment to health, education, housing, and fuel.

In Pakistan, there are various slabs for power consumers with the two main categories i.e. protected and unprotected consumers. According to the National Electric Power Regulatory Authority (NEPRA), the electricity tariff starts from Rs.16.48 per unit for low consumption of power to over Rs.42.72 for consuming more than 700 units in a month. The aforementioned rates are the base tariff of the electricity in the country excluding the taxes and capacity payment charges, which consumers have to pay every month.

The base tariff was raised substantially in July 2023 on the conditions of the International Monetary Fund (IMF) to secure the bailout package to shore up the foreign exchange reserves of the country, which dropped to a historically low level in 2022 and 2023.

Power sector experts believe that base tariff hikes have increased the monthly power bill of the consumers. However, these are the capacity payments, which have mainly burdened the consumers.  Capacity payments are payments made to power plants for their ability to generate electricity, even if they are not generating electricity at a given time. These payments are designed to ensure that there is enough power generation capacity to meet the country’s needs, especially during peak demand periods.
“Capacity payments are the main cause of trouble in the power sector as consumers have to pay these payments even if they do not consume the electricity”, notes Rao Amir Ali, a power sector expert and Economic Research Executive at FRIM Ventures. He further notes that capacity payments have gone up massively in the last few years as these payments are paid in dollars. The rupee depreciated massively in recent years, which has increased the capacity payments to power plants.
Amir explains that consumers paid Rs.3.10 per unit in the capacity payment in 2016, which skyrocketed to Rs.22 per unit in 2023 when the dollar rates jumped to almost Rs.300 in the country.
Recently, a top official of a private power producer company Hub Power Company (Hubco) predicted a fall in power consumption in the country during the current year. Experts forecast a bleak scenario for the consumers if the electricity consumption falls as per the prediction of Hubco officials. “It means consumers will be paying more even for not consuming the electricity,” he says.
Afia Malik, Senior Researcher in Energy Economics at Pakistan Institute of Development Economics (PIDE) also identifies capacity payment as the main factor in the inflated electricity bills in Pakistan. “Pakistan’s electricity demand is low against the installed capacity and it is falling further, which doesn’t give any relief to the consumers,” she says.
The impact of capacity payment on Pakistan’s payables can be gauged from the fact, that in February 2024, the former caretaker Energy Minister Muhammad Ali, in his last presser stated that the capacity payment jumped to Rs.2 trillion while the total circular debt of the power sector surged to Rs.2,400 billion.
As the capacity payment continues to burden the end consumers, the energy mix for power generation has also been contributing to the inflated power bills.

According to the figures taken from the NEPRA website for energy mix, the share of hydel in the total energy mix dropped from 34% in 2016 to 28% in 2023. Whereas the shares of RLNG and coal (mainly imported) shot up to 17% and 16%  in 2023 from 0.7% and 1% in 2016 respectively.

Experts believe that the energy mix also played its part in inflating the power bills, however its contribution is low compared to that of capacity payment. As observed by FRIm Ventures’ Amir, the share of imported coal and RLNG went up in the energy mix, however at the same time, the share of furnace oil dropped massively. In addition, the share of renewable sources also rose up in recent years compared to the past.

The base tariff - mostly reflecting capacity payments - was substantially raised in July 2023 in response to IMF conditionalities to secure the bailout package following a foreign exchange reserves crisis.

Every month when consumers receive their electricity bills, they have to not only pay the cost of fuel for power generation and capacity payment, but the various taxes ballooned their bills.
Residential consumers have to pay 18pc GST, 2pc surcharge, to name a few whereas commercial and industrial consumers have to pay income tax for consuming electricity. Afia Malik observes that GST, surcharge and other taxes make forty per cent of the total bill of electricity of consumers. While experts contend that the rate of taxes has remained static over the years, the rise in capacity payments and higher fuel cost continue to push the net prices up.
Amid the perpetual crisis of high tariff and low incomes, the government of Pakistan has undertaken little planning to rid the consumers of the perpetual cycle of high energy tariff. Instead, it has been announcing an interest in increasing the intake of coal and LNG in power production, describing it as cheap means of energy, while disregarding the environmental and financial concerns related to stranded assets. It has also failed to produce a serious renewable energy policy. Pakistanis are paying the price of this lack of foresight through compromised wellbeing and slow economic growth leading to job losses and further economic instability.

Tanveer Malik


The writer is a journalist at The News.

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