Report

Power Tariffs: Full cost recovery is not too far away

Power Tariffs: Full cost recovery is not too far away

The recently approved IMF program has energy sector reforms as one of its key elements, with a focus on depoliticizing gas and power tariffs and gradually bringing the sector to full cost recovery over the program period. This is in contrast to the general perception that IMF may warrant energy sector full cost recovery as a precondition. We thought it would thus be useful to map the future path of electricity tariffs by compiling the planned capacity additions, their respective additional capacity payments and fuel cost savings. We present our findings in this piece:  

10% short of full cost recovery
  • In its tariff determination dated 14th June 2019, NEPRA determined total system cost net of subsidy at PKR15.4/unit, effective July 1, 2019. Power tariff stands at PKR 13.87/unit after an increase of PKR 0.87/unit from 1st July. Hence, current power tariff is PKR 1.53/unit or 10% below full cost recovery.
The recent tariff increase / remaining shortfall is primarily due to Prior Year Adjustments for past delays in tariff increases
  • The estimated net (of subsidy) system cost of PKR15.4/unit includes an amount of PKR 378bn (PKR 3.65/unit or 24%) as prior years adjustment for shortfalls in power tariff recovery during prior years. NEPRA has allowed recovery of these prior year dues between Jan-19 to Sep-20.
  • Excluding prior year adjustments, current system cost (net of subsidy) would reduce to PKR 11.8/unit, much lower than the current power tariff of PKR13.87/kwh.
Upcoming capacity additions would increase capacity payments but wont raise power tariffs by much
  • The system cost estimated by NEPRA on 14th June, 2019 is based on FY19E capacity payments and electricity sales. Adjusting for additional new capacities and higher expected electricity sales, would likely add PKR 0.75/unit to system cost.
  • As such FY20 effective system cost would likely be PKR16.1/unit including prior years adjustment and PKR 12.6/unit excluding prior year adjustments. Furthermore, capacity payments will likely rise by another PKR1.1/unit between FY20-22.
Expect staggered increases in power tariffs
  • With the current inflated system cost (due to prior year adjustments) likely to be a transitionary phenomenon, and IMF targeting full cost recovery over the program period (rather than as a pre condition) the government is likely to stagger the increases in power tariffs, as has reportedly been said by the government sources on various occasions.
  • The same was evident in the recent price increase effective from Jul-19 where the government raised power tariff by PKR0.87/unit as opposed to PKR1.49/unit proposed by NEPRA, in order to protect the vulnerable segments by reducing their share of power tariff increase.
Another 6% increase in power tariffs likely in FY20
  • We believe the government would need to increase power tariff by another 6.0% or PKR0.83/unit in FY20, with the increase most likely going in effect from Jan-20. This is lower than the increase of ~PKR2.2/unit required for full cost recovery. 
  • As a result of this staggering, the government will effectively be delaying full cost recovery till 4QFY21, slightly ahead of government’s quoted timeline for elimination of circular debt by Dec-20.
Pakistan may not need any further increases in power tariff in FY21-22
  • Assuming PKR/USD at PKR155, our estimates indicate that the total system cost net of subsidy will likely fall to an average of PKR13.7/unit in FY22 and increase to PKR 14.0/unit in FY23. This increase will primarily be driven by new capacities coming online. Even after incorporating a 5.0% annual devaluation in PKR, our models indicate that the required power tariff in FY22 will likely be PKR14.7/unit. With Power tariffs likely to go up to PKR 14.7/unit by Jan-20, we believe the government will not need to raise power tariffs any further between FY21-22.
Provider
Akseer Research (Pvt) Limited
Akseer Research (Pvt) Limited

Akseer is a Research & Analytics firm based out of Pakistan that specializes in Equity Research and Corporate Finance. Our team has exposure to a wide range of sectors including Economy, Banking, Telecommunications, Retail, Real Estate, Construction and Materials, Pharmaceuticals, Food, Energy, Chemicals and Petrochemicals. We have experience of covering companies in Middle East, Americas, Far East and South Asia.

Analysts
Saad Nandia

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