The Economic Coordination Committee (ECC) of Pakistan recently approved a significant hike in gas prices for captive power plants (CPPs), aligning with directives from the International Monetary Fund (IMF). This decision, made under the chairmanship of Finance Minister Muhammad Aurangzeb, underscores Pakistan’s commitment to fulfilling IMF conditions in exchange for financial support amounting to $6-8 billion under the Fund’s next staff-level program.
Effective July 1, 2024, the ECC endorsed an increase of Rs250 per mmBtu in gas prices for CPPs, setting the new tariff at Rs3,000 per mmBtu. This adjustment was deemed necessary by the Petroleum Division, rejecting an earlier recommendation by the Oil and Gas Regulatory Authority (Ogra) to reduce gas prices by 10% for all consumers. The existing rate for CPPs was Rs2,750 per mmBtu prior to this increase.
The rationale behind this decision lies in the IMF’s insistence that Pakistan brings gas tariffs for CPPs in line with the ring-fenced cost of Re-Gasified Liquefied Natural Gas (RLNG), which currently stands at Rs3,700 per mmBtu. This adjustment is part of broader efforts to enhance revenue collection and address the country’s mounting circular debt issues, which have ballooned to Rs2,900 billion, exacerbated by annual losses of Rs1,500 billion.
The surplus revenue generated from this tariff hike, estimated at Rs110-115 billion, will be crucial in tackling the circular debt through a phased approach. The Petroleum Division has been tasked with ensuring that Sui Gas companies utilize this surplus to mitigate their outstanding debts effectively.
Captive power plants, which typically operate at lower efficiency rates of 30-35%, are primarily concentrated within the Sui Southern network. These plants use natural gas to generate electricity for industrial consumption, and some even supply excess power to electric power distribution companies (Discos). The IMF’s proposal to connect CPPs to the national grid aims to optimize energy use efficiency and reduce wastage of natural gas resources.
In addition to the immediate tariff adjustment, the ECC also approved a phased increase in gas prices, with an additional hike of Rs700 per mmBtu scheduled to take effect from January 1, 2025. This incremental approach is designed to meet the IMF’s deadline while ensuring minimal disruption to industrial operations and economic stability.
The IMF’s stipulation for biannual adjustments in gas tariffs, effective from July 1 and January 1 each year, aims to prevent the accumulation of new circular debt and maintain financial discipline within Pakistan’s energy sector. These adjustments are seen as crucial steps in aligning energy prices with market realities and reducing reliance on subsidy-driven policies that strain public finances.
Critics and stakeholders have voiced concerns over the potential impact of these tariff hikes on industrial competitiveness and consumer prices. They argue that increased energy costs could lead to higher production costs for industries reliant on CPPs, potentially affecting job creation and economic growth. However, proponents of the tariff adjustments assert that these measures are necessary to ensure long-term fiscal sustainability and attract foreign investment in Pakistan’s energy sector.
Looking forward, the government faces the dual challenge of balancing economic growth with inflation control while meeting IMF conditions for financial assistance. Continued dialogue with stakeholders, including industry leaders and consumer advocacy groups, will be essential in navigating these complexities and mitigating any adverse effects on the broader economy.
Pakistan’s decision to increase gas prices for captive power plants reflects its commitment to fiscal discipline and meeting IMF requirements. While these measures are expected to generate much-needed revenue and address circular debt issues, their implementation will require careful monitoring to minimize socio-economic impacts and foster sustainable economic development.
