By Mushtaq Ghumman
ISLAMABAD: Electricity consumption of the textile sector in the jurisdictions of Lahore Electric Supply Company (Lesco) and Multan Electric Power Company (Mepco) has declined massively due to higher tariffs and the withdrawal of concessional tariffs.
In a letter to Minister for Power, Muhammad Ali, All Pakistan Textile Mills Association (Aptma), has stated that following the withdrawal of regionally competitive energy tariffs and power tariff rebasing earlier this year, power tariff for export-oriented industrial consumers increased from cents 9/kWh to almost twice the average prevalent for export sectors in regional economies.
According to the textile sector, it has repeatedly indicated throughout the year that high tariffs have caused firms to be priced out of international markets and lose export orders to competing firms in regional economies with significantly lower power tariffs.
“Our analysis suggests that above a threshold of 12.5 cents/kWh, export-oriented firms are increasingly forced towards closure and the export sector is crowded out in due course,” said, Shahid Sattar, Executive Director Aptma in his letter.
He said that at the same time domestic industries also face weak demand as rampant inflation has eroded consumers’ purchasing power and this has, in turn, lowered manufacturing activities and therefore industrial power consumption across the board.
In October 2023, for instance, power consumption of APTMA member firms declined by 49 percent on the Lesco network and 36 percent on the Mepco network, year-on-year.
The negative impact of higher power tariffs on volumetric consumption has more than offset any revenue gains from the price effect such that the absolute impact of higher power tariffs on power sector revenues has been negative.
Just on the Lesco network, power sector revenue from Aptma member firms was over Rs 1.1 billion less in October 2023, compared to the same month last year. Actual losses are likely to be much higher because had the power tariff remained at cents 9 per unit, power consumption would have increased as overall economic conditions showed an improvement starting FY24.
Moreover, this is not a one-off phenomenon as power consumption of textiles and apparel firms has been on a downward trajectory since the withdrawal of RCET earlier this year and is expected to decline even further in the coming weeks and months.
As it stands, declining consumption, increasing capacity charges, and declining revenue are causing power tariffs to increase continuously, as also evidenced by the Quarterly Tariff Adjustment for FY24Q1, which will cause consumption to decline even further.
These short-sighted policies have given rise to a vicious and never-ending cycle of decreasing consumption and increasing power tariffs that the country is forever stuck in. The increase in power tariffs is having the opposite impact from what was intended and a fast-track policy review on this issue is urgently required.
In addition to direct implications on power sector revenue, there are also significant implications for the entire economy. Exports for November 2023 were down 15% compared to the same period last year. If energy prices remain regionally uncompetitive, any recovery to pre-crisis levels of exports can be ruled out.
As such the economy will continue to face balance of payments and exchange rate pressures, which will further add to debt servicing costs and other fiscal challenges, fuel inflation and rule out a decrease in interest rates for the foreseeable future, and continue to weigh down on industrial and economic growth.
As the slowdown in industrial activity worsens, direct and indirect employment in upstream and downstream sectors will reduce even further, affecting the livelihoods of millions of households.
In turn, these effects will again increase various power sector costs such as capacity charges and fuel prices, further decrease power consumption, and necessarily increase power tariffs for all consumers based on how the current process is designed.
“The only way to avert this crisis is by providing the export sector with power tariffs that exclude cross-subsidies, stranded costs, and other economic inefficiencies.
This will allow the industry to become competitive again, resume manufacturing activities, significantly increase industrial power consumption, and provide gainful employment opportunities for millions across the country,“ said Shahid Sattar.
The increase in volumetric consumption will greatly offset any price effect from removing the cross-subsidy, resulting in a net increase in power sector revenue.