Pakistan proposes Winter Demand Management Initiative to encourage power consumption

The Pakistani government has proposed a Winter Demand Management Initiative that aims to encourage households and industries to consume more electricity this winter than in recent years.

According to a document from the Power Division shared exclusively with Nukta, the government will offer a reduced tariff for additional units consumed by households and industries from December to February compared to their consumption during the same period in previous years.

This will be done through an average weighted consumption mechanism on a rolling basis, where consumption during fiscal year 2023-24 (FY24) will hold 50% weightage, FY23 30% weightage, and FY22 20% weightage.

"Industries that consume additional electricity, beyond a set benchmark based on their historical consumption, will benefit from a 35-45% discount on the prevailing tariff rate," according to the document.

How will this benefit consumers? Let's say an industry usually consumes 100,000 units of electricity in December. But this December, it consumes an additional 25,000 units instead of using gas. It will pay PKR 40 per unit for those 100,000 units but only PKR 26.07 per unit for the 25,000 additional ones, taking the average per unit price to PKR 37 and reducing expenses by 7%.

The same calculations will also apply to household consumers — albeit on a much smaller scale.

Why is the govt doing this?

The primary reason is to reduce capacity charges, and in turn, the circular debt in the power sector. According to estimates, Pakistanis consume around 50% less electricity in winters than they do in summers. Thus, the government purchases less electricity in line with the falling demand.

However, according to the government's agreements with Independent Power Producers (IPPs), it has to pay for the producers' full generation capacity irrespective of whether it purchases the full capacity or not. These are called capacity charges and they are expected to be around PKR 24.6 per unit in FY25.

There is yet another factor — if the government purchases less electricity from a plant than it has the capacity to produce, the per unit cost of electricity also rises.

This is what the government is trying to avoid by incentivizing households and industries to increase their electricity consumption.

Another reason is the gas shortages that Pakistanis have to struggle with every winter. The country's gas reserves are depleting and production is inadequate for meeting demand. By encouraging consumers to switch to appliances that use electricity instead of gas, the government can reduce demand for gas and alleviate the crisis to an extent.

However, while the government's proposal aims to encourage economic growth, an increase in production capacity, and households to switch to appliances that use electricity instead of gas, it will remain just a proposal unless Pakistan receives approval from the International Monetary Fund (IMF) to implement it.

Under the new $7 billion loan program with the IMF that was approved by its Executive Board in September, Pakistan cannot offer subsidies and must take measures to rationalize tariffs and reduce circular debt.