ISLAMABAD: The government has assured the International Monetary Fund (IMF) that it will continue electricity tariff adjustments for domestic consumers without protected slabs and will also streamline the tube well subsidy scheme for large agricultural users in by November 2022.

This commitment was given to the Fund under the seventh and eighth reviews of the expanded arrangement under the expanded financial mechanism.

According to the Fund, the authorities have reaffirmed that it is the only spending authority in the country to provide electricity subsidies, which it will limit to Rs 570 billion through: (i) electricity tariff adjustments reducing the Differential Tariff Subsidy (TDS) at Rs 225 billion; and (ii) lower remaining IPP/GPP payments (Rs 130 billion).

CD stock stood at 2,253 billion rupees (3.4% of GDP) at the end of June 2022 and a decrease of 27 billion rupees in FY22, of which 800 billion rupees held by PHPL , as budget CD stock payments (564 billion rupees) overcompensated a record high. CD flow of Rs 536 billion.

This made it possible to: (i) service the PHPL debt (Rs 130 billion); (ii) repayment of arrears to independent and government power producers (IPP and GPP) in exchange for revised purchasing power agreements (Rs 384 billion); and (iii) repay arrears to other IPPs (Rs 50 billion).

The CD flow was therefore much higher than projected in the updated IFI-backed Circular Debt Management Plan (CDMP) adopted by the Cabinet in March 2022, more than tripling the corresponding IT at end June 2022 as part of the EFF program.

The Fund has acknowledged that acute cash flow stress has led to significant power outages (load shedding) in recent months. The government has given the Fund its word that it will reduce consumption of public services by 10%.

Despite the efforts of recent years, financial conditions in the energy sector have deteriorated – with arrears mounting, cash flow constraints weighing down and load shedding increasing – and thus the implicit cost to the budget , and more generally for the economy, is unsustainable.

The IMF argues that restructuring the energy sector requires accelerating reform efforts. This is particularly important as recovery costs are set to continue to rise in the near term, due to the commissioning of new production capacity, high international commodity prices and the recent depreciation of the rupee. While some recent measures (including the renegotiation of IPP contracts) will go some way to containing the rise in arrears, making a dent requires the determined implementation of a comprehensive and socially balanced reform strategy.

The authorities are in the process of updating the FY23 CDMP regarding its underlying assumptions and reform progress (supported by the World Bank, Asian Development Bank, and IMF staff). This will help guide an ambitious and sustained decline in CD accumulation. Persisting with monthly monitoring reports and efforts to build CD projection capacity will further help.

Quarterly power adjustment: record

After finally receiving all necessary inputs, the independent regulator, NEPRA, recently determined the delays: (i) quarterly tariff adjustments (QTA) for FY22 Q1 and Q2 (together Rs 2.12/kWh for three months); (ii) Annual Rebases (AR) for FY22 & FY23 Rs 7.91/kWh); and (iii) the tariff structure for the second stage of the reform of subsidies for residential consumers (removal of the old slab advantage and addition of a mark-up of Rs 0.54/kWh to unprotected slabs).

While the QTAs – in accordance with the 2021 NEPRA law amendments – were automatically notified by Nepra, the government notified the other adjustments in several stages in July 2022: (a) the increase in subsidies from July 5 and two AR series (of PR 3.50/kWh each) from July 25 to August 1 (PA); and (b) the remaining AR of Rs 0.91/kWh from October 1 (new SBs at the end of September 2022).

Cumulatively, these RA steps are likely to increase the weighted average electricity price in October 2022 by only around 10% compared to its level at the end of December 2021, as they reduce the need for an ex post corrective recovery thanks to Monthly fuel price (FPA) and QTA adjustments. , which have reached record levels in recent months. Also, not applying AR to slabs for small consumers will further cushion the impact on vulnerable people.

Staff stressed that regular tariff adjustments in accordance with established formulas are essential to implement the CDMP and limit budgetary pressures, stop the accumulation of arrears, give credibility to Nepra, limit load shedding, restore the viability of the generators and guarantee their ability to operate. .

The authorities agree that subsidy reform must continue to effectively protect the vulnerable, introduce more equity and reduce fiscal costs. Staff commended the authorities for their commitment to: (i) enter the third phase of their multi-year subsidy reform plan, supported by the World Bank, and submit to the cabinet a reform plan for the rationalization of subsidies for tubewells for large agricultural users by November 2022; and (ii) continue regular rate adjustments while sparing protected slabs, which will increase the escalation of the rate structure for residential consumers and improve equity.

The authorities have earmarked 180 billion rupees to settle IPP/GPP arrears with the aim of unlocking lower capacity charges, including through renegotiated PPPs, and 30 billion rupees to continue to service PHPL debt over the course of the year. FY23. Work is also continuing with the World Bank and AfDB to: (i) reduce commercial and technical losses (including introducing smart meters, cutting off delinquent consumers, and developing transmission and distribution to match production capacity); (ii) improve the governance and accountability of DISCOs, introduce private participation and progress in their progressive privatization; (iii) introduce competition; (iv) actively seek renegotiations of similar PPAs with other power producer groups; and (v) implement the recently approved National Electricity Policy, 2021.

The authorities also agreed to only gradually absorb maturing publicly guaranteed PHPL debt into cheaper central government debt if fiscal space permits and to use the proceeds to reduce the stock. CDs (including proceeds from privatization of power sector assets and collection of outstanding debts). The authorities have informed the Fund that they have resumed the process of aligning electricity tariffs with recovery levels in accordance with established formulas.

The authorities have also assured that in FY23 they will continue to renegotiate the terms of the PPA in exchange for clearing CPPA-G unsecured arrears and settling up to Rs 180 billion for IPPs. and to GPPs with revised PPA terms, using the established contractual structure.

The government has also committed to increasing private participation in DISCOs to improve their governance and efficiency, to seek Nepra’s approval of a Transmission System Expansion Plan (TSEP) that meets the requirements of an increased share of variable and cheaper renewable energy in the generation mix and to be sought Approval by Nepra of the Grid Code and the updated Commercial Code to set out the objectives, principles, rules, procedures, rights and obligations that govern the trading in the new wholesale market, and thus improve the efficiency of distribution.

Copyright Business Recorder, 2022