High Electricity Prices is Mostly Harming Poor People in Pakistan: World Bank

The World Bank revealed that high energy prices in Pakistan disproportionately impact the poor, as only 55 percent of electricity consumption in the poorest households is eligible for below-average tariffs from “lifeline” or “protected” meters, while 46–49 percent of middle-class and rich households also access low tariffs from these protected meters. The Bank in its latest report “Pakistan Development Update the Dynamics of Power Sector Distribution Reforms”, stated that at the end of June 2024, the total accumulated circular debt (CD) stock stood at around Rs. 2.4 trillion, equivalent to 2.3 percent of GDP. The energy sector poses major risks to fiscal sustainability and the revival of growth in Pakistan. The scale of the financial burden and costs for the economy arising out of the energy sector necessitate urgent reforms. Furthermore, consumers paying high tariffs have either exited the grid system entirely (as demonstrated by the increase in deployment of solar photovoltaics), evaded higher tariffs by appearing as low-volume consumers or adapted by reducing demand and qualifying for lower tariffs. In 2020, 10 percent of domestic consumers demanded more than 400 kilowatt hours (kWh) per month. By FY24, however, and after a precipitous rise in tariffs beyond 300 kWh monthly consumption, less than 1 percent of domestic consumers demanded more than 400 kWh per month. This implies even higher tariffs are required at ever-lower consumption levels for the sector’s financial sustainability, which impedes the objective of affordability. Consumption-based tariff subsidies create fiscal costs with a limited positive impact on poor, vulnerable, and aspiring middle-class consumers. Approximately 18 percent of the poorest households have no electricity connection while only half of poor, vulnerable, and aspiring middle-class households that are connected benefit from below-average-cost tariffs. Subsidies to residential consumers increased by 88 percent from FY20 to FY24, and power sector CD has grown by 48 percent from FY19 through FY24, even as domestic tariffs for non-protected meters rose by an average of 225 percent and the electricity share of the household budget has tripled for the average poor, vulnerable, or aspiring middle-class consumers over the same period. Analysis of household consumption patterns confirms that the indirect effects of higher energy prices are larger (relative to household income) for poor, vulnerable, and aspiring middle-class consumers than for middle-class and rich households. Recent fiscal incidence analysis demonstrates that the current power subsidy system spends 90 percent more than is necessary to reach the poorest households with a targeted electricity bill rebate. These challenges, combined with overall macroeconomic vulnerability and limited fiscal space, suggest a need to reconfigure essential social and economic service delivery for poor, vulnerable, and aspiring middle-class consumers. Systems for determining eligibility, for identifying and verifying beneficiaries, and payment and reconciliation systems for schemes such as BISP already exist and could be readily repurposed for a targeted electricity bill rebate. In addition, because costs persistently exceed the electricity revenues being collected, the financial losses or deficits of the power sector have been increasing. Sector deficits are large, averaging 2.8 percent of GDP over FY14–FY24. Because power sector debt is typically government-guaranteed, any portion of the deficit that is not covered by government subsidies accumulates as power sector CD and adds to the Government’s stock of liabilities. At the end of June 2024, the total accumulated CD stock stood at around Rs. 2.4 trillion, equivalent to 2.3 percent of GDP. Amid the tight national fiscal space, the continuous power sector deficits and CD debt servicing costs severely constrain government spending on other priority areas, while posing substantial risks to Pakistan’s overall fiscal and debt sustainability. The report also revealed that most DISCOs in Pakistan are running substantial deficits. In FY23, nearly all of them reported losses, except GEPCO. The consolidated total cost of electricity (including operations and maintenance, depreciation, and financial cost and tax) for the sector was recorded at Rs. 2,900 billion whereas the total revenue, inclusive of Rs. 376 billion subsidies, reached Rs. 2,622 billion, leading to a shortfall of Rs. 278 billion (0.3 percent of GDP) in the distribution sector. Moreover, most DISCOs are in negative equity, with liabilities far exceeding assets, particularly for PESCO, QESCO, SEPCO, and HESCO. The current financial state of the DISCOs is a result of several challenges, including high T&D losses and poor recovery rates against supplied electricity. In addition to the high cost of power generation, the distribution sector also faces aging infrastructure and weak governance, leading to significant financial losses that are ultimately reflected in the growing CD. In FY23, DISCOs reported a combined T&D loss of 16.5 percent compared to 3.4 percent in South Korea, 5.0 percent in the United States, and 4.5 percent in China. These losses resulted in Rs. 160.4 billion (0.2 percent of GDP; 73 percent of the CD flow) being added to the CD during FY23, with the biggest share coming from PESCO, LESCO, QESCO, and SEPCO (Figure 4.5). Mounting financial pressures and operational inefficiencies are contributing to CD and collectively undermining the financial viability of the energy sector. Despite improvements in generation capacity, DISCOs continue to struggle with high losses and poor financial performance, contributing to high electricity costs. Private sector participation in the distribution sector offers the potential for improved management, increased efficiency, and new investment, but—as discussed in the Special Focus section of this report—good outcomes are contingent on the establishment of a conducive broader policy and regulatory environment. Pakistan’s power sector is inefficient and financially unsustainable, necessitating comprehensive reforms. Challenges include persistent financial losses, operational inefficiencies, a lack of investment, outdated infrastructure, and inadequate management practices. Frequent power outages and load shedding discourage investment and economic activity, while electricity costs have tripled to among the highest in the region, negatively impacting both investors and households. The struggle to fully recover costs due to high distribution losses and low revenue collection rates presents risks to the sector’s fiscal sustainability. While much has been done to increase the country’s power generation capacity over past decades, operational inefficiencies of DISCOs remain largely unaddressed. Cash-strapped DISCOs are unable to invest in the infrastructure necessary to support the transmission and distribution of an increased supply of power to achieve desired benefits for the economy. This Special Topic section discusses structural distribution sector constraints and presents a roadmap for addressing these constraints through private sector participation (PSP). International experience shows that PSP can be a highly effective mechanism for improving distribution sector efficiency and financial performance. However, positive outcomes from PSP depend on the creation of a broader conducive institutional environment for private participation. As Pakistan pursues opportunities for PSP in the distribution sector, it will be important to ensure: The reform process should involve Despite providing a critical service, Pakistan’s power sector has hindered economic growth. Inadequate and outdated infrastructure, poor governance, inadequate longer-term planning, fuel supply shortages, and limited access to financing have led to frequent and prolonged power outages and load shedding in the country. The unreliable electricity supply causes costly disruptions to economic and social activities: it is one of the main sources of high economic costs caused by the distribution sector and is eroding the country’s economic competitiveness. Additionally, the lack of diverse power generation technologies, poor long-term planning, and inefficiencies in transmission and distribution (T&D) have driven up electricity costs further.