Strategic Tariff Rationalization, Shift Towards RE Essential To Overcome Pakistan’s Power Sector Challenges

The speakers during a policy dialogue on financial strategies for energy sector on Friday said strategic tariff rationalization and a shift towards renewable energy is essential to overcoming the challenges of Pakistan’s power sector

ISLAMABAD, (UrduPoint / Pakistan Point News - 26th Jul, 2024) The speakers during a policy dialogue on financial strategies for energy sector on Friday said strategic tariff rationalization and a shift towards renewable energy is essential to overcoming the challenges of Pakistan’s power sector.

The policy dialogue titled “Fiscal Strategies for Energy Sector FY25: Budgetary Allocations and the Tariff Dynamics” was hosted by the Pakistan Renewable Energy Coalition in collaboration with the Sustainable Development Policy Institute (SDPI) highlighting the urgent need for reforms in Pakistan’s energy sector.

Executive Director, Unit at Sustainable Development Policy Institute, discussed the multifaceted problems with the current tariff system, including faulty agreements with Independent Power Producers (IPPs), energy circular debt and inefficiencies in the Federal Board of Revenue (FBR).

He proposed several approaches to address these issues, including tariff rationalization to increase electricity utilization, transitioning to clean energy sources and diplomatic negotiations for international arbitration and commercial dispute resolution.

Dr. Suleri emphasized that the cost of transitioning to green energy should not fall solely on lower and middle-class consumers, but rather through targeted subsidies for green energy solutions.

Executive Officer at PRIED, Muhammad Badar Alam criticized the government's contradictory actions in managing the energy sector and the economy. He called for a reconsideration of supply-side economics and a more transparent and inclusive policymaking process.

Moreover, he emphasized the need to address political issues alongside economic and energy problems and highlighted the importance of engaging with international development partners, including the IMF and World Bank, from a position of strength, not submission.

Research Fellow at the Sustainable Development Policy Institute, Dr Khalid Waleed delivered a comprehensive review of the federal budget, noting mixed reactions from various stakeholders. He highlighted the need for a homegrown agenda to reduce government intervention and shift towards a market-driven economy.

Dr. Khalid stressed the importance of targeted subsidies and energy governance, particularly in addressing rising tariffs and stagnant industrial growth. He proposed increasing electricity consumption through tariff rationalization and shifting towards indigenous energy sources like Thar coal and renewable energy.

He also pointed out the necessity of early retirement of thermal power plants to address capacity charges and reduce tariffs.

Head of the Energy Unit at Sustainable Development Policy Institute, Ubaid Ur Rehman Zia moderated the session. He emphasized the importance of understanding diverse perspectives on the recently announced budget, electricity tariff increases and the way forward for both residential and industrial consumers.

Ubaid provided an overview of the budget, which allocates a substantial PKR 253 billion for the energy sector, with a strong emphasis on enhancing asset performance and management systems.

Of this allocation, PKR 65 billion is dedicated to improving management systems for distribution transformers, while PKR 5 billion is aimed at increasing the efficiency of electricity distribution.

The budget also emphasized promoting indigenous manufacturing of solar panels and PKR 4 billion was allocated for the electric vehicle sector.

Energy Finance Associate at Renewables First, Ahtasam Ahmad addressed the inefficiencies of Pakistan's current subsidy allocation, emphasizing that subsidies constitute around 8% of overall current expenditure, with approximately 87% directed to the power sector, predominantly for tariff differential subsidies.

He argued that in a fiscally constrained environment, these blanket subsidies are counterproductive and fail to achieve their intended purpose effectively. For instance, despite improvements due to multiple tariff hikes, a World Bank analysis revealed that only 40% of the lowest-income households received 28% of the subsidies, indicating inefficiency.

He advocated for targeted subsidy programs like the Benazir Income Support Program (BISP) over blanket subsidies, as targeted programs are more effective in utilizing funds. He also stressed the need to redirect inefficient subsidy spending towards productive avenues such as renewable energy financing, noting that renewable utility-scale financing has stalled due to the absence of subsidized financing, resulting in no financial closures in the last fiscal year.

He called for a rational approach to budgeting, highlighting that many of the subsidies outlined in the budget are unlikely to materialize and that the ambitious nature of the budget could lead to cuts in the Public Sector Development Program (PSDP).

Program Director at Renewables First, Muhammad Mustafa Amjad emphasized the need to address inefficiencies in the energy sector, arguing against short-term solutions. He advocated for utility-scale renewable energy projects and early retirement of thermal power plants.

Mustafa also highlighted the challenges faced by Distribution Companies (DISCOs) and the importance of providing incentives for renewable energy to reduce operational costs and improve sustainability. He stressed that the government should support citizens in accessing cheaper electricity through rooftop solar and other renewable sources.

Program Associate at Renewables First, Muhammad Basit Ghauri raised concerns about the minimal commitments towards climate change in the budget, despite the emphasis on hydro projects over renewables. He pointed out the contradiction in policy directions, with the government aiming for cheaper electricity but providing insufficient incentives for renewable energy projects.

Basit called for a broader enabling environment for renewable energy projects and more rationalized subsidies. He stressed the importance of integrating renewables into the national grid to reduce operational costs and improve sustainability.