To help stabilise the economy, the federal cabinet resolved on Tuesday to take drastic steps, such as closing markets at 8:30 p.m. and wedding halls at 10.00 p.m. This is part of the government’s greater plan to cut back on energy consumption in order to save precious foreign exchange reserves.
According to Defence Minister Khawaja Asif, “with this initiative, which has been taken in consultation with trade bodies, there will be a saving of around Rs 62 billion (annually).”
During a press conference, Asif also stated that, “the approval to the conservation plan has been accorded in line with the advice of the power division. It will come into force at once across the country.”
Previously, on May 10, 2022, the cabinet conducted a comprehensive assessment of the situation and directed the cabinet division to organise a Ministerial Committee on Energy, Water, and Food Conservation.
According to the cabinet’s decision, the ministerial committee was established on June 14, 2022, under the chairmanship of the federal minister of defence, with the objective of evaluating and recommending energy, water, and food conservation measures.
Finally, in October last year, the power division provided the cabinet with the “Efficiency and Conservation Measures Implementation Roadmap,” at a meeting convened by Prime Minister Shehbaz Sharif.
The cabinet was informed on major worldwide developments that have interrupted the global energy supply chain. As a result, the price of crude oil and imported coal has grown considerably in the last nine months.
Will shutting down markets really save Rs 62 billion ?
The concept is based primarily on saving electricity and, as a result, foreign exchange currency. Pakistan’s energy generation is mainly reliant on fossil fuels such as oil and gas. The strategy focuses on lowering electricity demand, which reduces the need to import these expensive fossil fuels.
Although the plan is a step in the right direction, the practicality of the policy needs to be assessed more deeply. Consider the fact that during winter months the demand for energy naturally dips since fewer fans and air conditioners are being used.
The data published by the National Electricity Power Regulatory Authority (Nepra), shows that traditionally demand for electricity dips by up to 30% on average during the winter months as compared to the summer months. And consequently, the reliance on imported fuels for energy also dips.
The latest data published by Nepra shows that in November last year, nearly 60% of the electricity demand was met through hydel and nuclear energy. This means that the need to import fossil fuels for energy is lower in winter months; this can be particularly attributed to the higher contribution of nuclear energy.
While talking to Profit on the condition of anonymity, a senior analyst said the plan to close markets and wedding halls early is wholly “counterproductive”. This is due to the fact that a majority of the electricity tariff is made up of capacity payments.
Capacity payments?
Capacity charges comprise bank loan repayments and other financial costs, fixed operational costs, and Independent Power Producer profits or the internal rate of return as specified in Nepra’s power policy tariff.
A senior government official, on the condition of anonymity while talking to Profit explained that the decision about power purchase is made considering the peak demand during summer. Naturally, it isn’t the same in winter and therefore, capacity charges have to be paid independent from the demand factor.
He further elaborated that considering there’s a single purchaser of the electricity produced, it has to pay for the peak demand, that is the excess capacity of electricity which can be availed but isn’t due to decreased demand in winter.
Payments for this have to be made either way, therefore, demand destruction would not bring down bills as much as the government would want.
Knowing this, does it make sense to force early market closure to save energy and save foreign exchange reserves?
What would be practical?
According to the same government official, the solution lies in the decentralisation of the electricity market along with concentrating on improving efficiency in the existing grid by lowering line losses and theft. Additionally, according to the Pakistan Economic Survey the commercial sector only accounted for 7% of the overall consumption during the financial year of 2022.
Introduction of the Competitive Trading Bilateral Contract Market (CTBCM) by Nepra is considered to be a step in the right direction. In Pakistan, the market structure has been a single-buyer model, in which the Central Power Purchase Authority purchases power on behalf of the distribution companies (Discos).
In November 2020, Nepra approved the CTBCM model, which offered a plan for opening Pakistan’s wholesale electricity market, with the goal of allowing bulk power consumers (with 1MW or higher demand) to purchase electric power from Discos or a competitive supplier of their choosing.
In June of last year, Nepra authorised its licensees to launch the market on a trial basis for six months. According to the Nepra website, “this transition towards CTBCM will help achieve benefits of de-bundling the power sector.”
This would effectively allow bulk power users to have a choice in electric power supply at negotiated rates, resulting in lower costs and more reliable power for all consumers.
However, last month, Nepra alleged that CTBCM implementation was stalled for without naming individuals or organisations. The Discos’ opposition stems from the fact that this model would end their monopoly in the sector.
