Competitive regional energy for industry – Opinion
Competitive energy availability is imperative for the expansion of industrialization. There are no two ways about it. However, there are many who believe that the demand from industry for the supply of energy at competitive prices is unwarranted. The impression is that the business community is pushing for excessive discounts and relaxations, which allows them to seek undue advantages. Yes, some are lobbying and getting as much rent as possible. But it is unfair to insist that it still is.
Many industries have shifted to captive power generation over the past decade. The decisions were commercial and in line with regional trends. Electricity was either unavailable or too expensive. Later, new capacities were added to the national grid that were fuel efficient than the majority of captive producers. However, industrial consumers would only budge if the cost of grid power is lower than that of captivity.
Pakistan is not the only country where industrial consumers depend on their own generation. History across the region is similar. India has a Captive Power Capacity (PPC), which is 75 GW – one sixth of India’s total installed capacity. The number for Pakistan is around 10 percent. Bangladesh is also moving up the industrialization ladder by relying on the captive as its main source of energy. About a sixth of the total electricity produced is captive since 60 to 70% of the industry depends on captive production.
Captive was installed during a time when there were power shortages. Household consumers and farmers prefer affordable energy. Industrial consumers on the network subsidize others. To make the industry competitive, countries have provided a cheap source of energy for captive production. India’s captive production relies mainly on coal, while industrial sectors in Pakistan and Bangladesh depend on natural gas. Fuel prices have been kept low to remain competitive and this has lowered the cost of power generation relative to the grid.
Over the past decade (all three countries) have increased production on the network. The latter now have excess capacity. New installations on the grid are more energy efficient and of low marginal cost. Natural resources (gas and coal) are running out. The challenge for decision-makers is to know how to move industrial players from captivity to the network.
The policy prescription here is not to regulate the use of captives. A better solution is to incentivize industry, that is, by providing power over the grid at rates similar to what costs them in captivity. No other way could work. If the industries gas is cut and forced to move to the grid, slowly the industry will die or give bribes to get gas / coal. The best way to do this is to reduce cross-subsidies on the network. Many industries will switch to the network. Captive is an inefficient energy solution. The sooner it is done, the better.
The case in Pakistan is worse. The cost of grid power is relatively higher than that of India and Bangladesh because the cost of producing PPIs is higher due to the higher return on equity and anticipated tariffs. Then the transmission and distribution losses are higher and the recovery is around 90%. The effective industrial unit price in Pakistan varies between 12.28 ¢ / kwh -16.14 ¢ / kwh. The range in India varies between 5.46 ¢ / kwh and 12.82 ¢ / kwh. Obviously, India is much cheaper; but the industry still prefers captive. The same goes for Bangladesh.
Recently, an PIDE report pointed out that industrial tariffs in Pakistan are higher than those in other countries in the region and even beyond. The export industry in Pakistan gets electricity at a rate of 9 ¢ / kwh, which is higher than in Vietnam (7.3 ¢ / kwh), India (7.1 ¢ / kwh and 7.8 ¢ / kwh in Maharashtra and Punjab, respectively) and 6.1 ¢ / kwh in Xinjiang, China. The gas tariff in Bangladesh for captive generators is $ 4.05 / mmbtu against $ 6.5 / mmbtu for general and $ 5.9 / mmbtu for Sindh.
Supplying energy at competitive regional prices is imperative for industrial exports to develop. The heat is on. The growth dynamic is developing in Pakistan. Textiles and other exporting sectors are in expansion mode. Exports this year are said to be at an all time high. Sick units are reborn and new expansions are in preparation. New orders are coming in and margins are tightening due to soaring input costs (such as cotton). It is imperative to reduce the cost of energy conversion.
The problem is more important for the upstream textile industry (spinning and weaving). These are energy intensive. The downstream industry (clothing) has become labor intensive. Have both
A country’s upstream and downstream industries are important, as buyers allow 45-60 days for orders. This is why Bangladesh is rapidly developing an upstream textile industry.
The expansion in Pakistan is taking place as production becomes competitive under the current regime. The cost of interest is low and the exchange rate is based on the market. Credit goes to the State Bank of Pakistan (SBP) for providing low rates for the expansion. Working capital is also at competitive rates. The other factor is the wages which are well within the range of India and Bangladesh.
These are good for boosting the downstream industry. Competitive energy is a bottleneck for upstream expansion. In the first year, the PTI government committed to solving it by providing energy at competitive regional rates (gas at $ 6 / mmbtu and electricity at 7.5 ¢ / kWh). Based on this, low interest rates and a market based exchange rate, an expansion is underway. Textile exports have grown from $ 12 billion in 2018 to $ 16 billion forecast in 2021. Another capacity expansion of $ 3-4 billion is underway. Textile exports can reach $ 20 billion in 2022.
The message for policymakers is not to reverse the trend that is working well. There is talk of giving a direct rebate to exporters – that might not work. Under the last regime, then Finance Minister Ishaq Dar gave exporters a rebate (4-8%), but there was no growth as other factors were not competitive. The energy cost subsidy provided by the PTI government in the first year was around Rs 45 billion – 2% of textile exports (at $ 16 billion). This implies that a targeted subsidy is better than blanket coverage.
The problem with the discount is that its advantage is downstream, but upstream becomes uncompetitive. This is why the thread becomes short. The government should continue to provide energy at competitive regional rates. And to become energy efficient, encourage industry to switch to the grid by using the right pricing signal, not by showing sticks.
Copyright recorder, 2021