The cost of irrational energy levies

Business Recorder

10 hours ago

The federal government's decision to impose a petroleum levy of Rs 77 per litre on furnace oil (HFO), supplemented by a carbon tax of Rs 2.50 per litre, adds Rs 84,742 per ton in taxes to a fuel that otherwise costs approximately Rs 130,000 per ton. For export-oriented textile manufacturers, many of whom depend on HFO-based captive power for uninterrupted production, this will severely undermine their viability.
Under current market conditions, HFO-fired captive generation costs roughly Rs 33 per kWh, broadly equivalent to prevailing grid tariffs. Once the new levies are applied, generation costs surge to nearly Rs 51 per kWh, by over 50%. At this level, HFO-based power generation ceases to be economically viable, forcing textile firms into an untenable dilemma: continue operating at a severe loss or switch to an unreliable and, ultimately, more expensive grid supply.
For most mills, switching to grid-supplied power is not a viable alternative, as HFO-fired captive generation is principally used by units lacking reliable DISCO connections. Across Pakistan—and particularly in urban industrial hubs such as Lahore and Karachi—DISCOs routinely decline new industrial hookups due to constrained infrastructure and transformer capacity.
Where connections are technically offered, firms are presented with demand notices running into the tens of billions of rupees merely to secure a feeder line, with no guarantee of timely service: lead times for actual energization often extend to two or three years.
Under these conditions, pursuing a formal grid connection is neither commercially nor operationally feasible, aside from enduring the frequent voltage sags and load-shedding that characterize grid supply.
This punitive taxation of HFO follows the so-called 'grid transition levy' on gas consumption by captive-power users—a tax that the government itself concedes is incorrectly calculated yet refuses to rectify. Officially, the transition levy is intended to align the cost of captive power with grid tariffs. In practice, however, the levy calculation is based on peak-hour grid rates that apply for only four hours each day, it relies on an eight-year-old Nepra determination of captive O&M costs, a figure that has since doubled or tripled due to inflation and currency depreciation, and incorporates a series of arbitrary errors that artificially inflate the final rate, coercing efficient captive generators onto an unprepared grid.
Over the past month alone, two major textile production units served by HESCO reported repeated outages, voltage fluctuations, and sudden trippings. These disturbances burned out feeders and control panels, inflicted heavy machinery damage, and disrupted tightly scheduled production lines. Similar incidents are occurring across multiple DISCOs, underscoring that Pakistan's electricity grid lacks both the capacity and reliability to absorb additional industrial loads.
Rather than addressing these structural weaknesses through targeted grid investments, modernization of aging infrastructure, and expansion of generation capacity, the government has opted for a shortcut: tax all alternative energy sources until the grid becomes the sole available option. First gas, now HFO and even solar panels. On one hand, political rhetoric extols market-driven strategy and competitive pricing; on the other, regressive taxes are being wielded to coerce industrial users onto a system that is demonstrably incapable of meeting their needs.
The economic repercussions extend far beyond individual factory bills. Pakistan's textile industry accounts for over 50% of export revenues, sustains millions of direct and indirect jobs, and underpins rural livelihoods through cotton cultivation. A unilateral surge in energy costs will erode global competitiveness, and potentially trigger plant closures or relocation of production to more stable energy markets.
Already, the poorly designed levy on gas-fired captive generation has slashed captive gas demand by 90%, creating a 400 MMCFD RLNG surplus that the government cannot absorb and which worsens circular debt. The same error is now being applied to furnace oil—despite domestic oversupply, demand will collapse once the levy is imposed, forcing HFO to be exported at under Rs 100,000 per ton rather than sold locally at Rs 130,000. As a result, industry will rely on a grid powered largely by imported coal and RLNG, while domestic HFO is sold abroad at a loss. With demand destroyed, the levy will generate no revenue, import costs will rise, and domestic value addition in exports—through the use of local fuels—will decline.
To reverse this trajectory, the government must take three immediate steps. First, suspend the new petroleum and carbon levies on HFO until a comprehensive impact assessment is completed, involving industry stakeholders, DISCO representatives, and energy experts. Such an assessment should quantify the cost differential between captive and grid power under current conditions, and model the long-term effects on export revenue, employment, and foreign exchange earnings.
And even then, any levy should be imposed gradually to allow sufficient time for consumers to adjust. Second, the calculation of the grid transition levy must be corrected to reflect actual grid power tariffs and captive generation costs and eliminate arbitrary inflation. Finally, commit to a multi-year grid-modernization plan that addresses transmission bottlenecks, reduces line losses, and provides reliable power at a regionally competitive rate of 9 cents per kWh or below.
Without these corrective actions, the government risks imposing a de facto production tax on Pakistan's most vital export sector—one that it can ill afford. Coercive levies may fill the treasury in the short term, but they undermine industrial resilience, drive up unemployment, and weaken foreign-exchange reserves through the hollowing-out of export capacity. In effect, policy is being used not to bolster markets, but to strangle them—and in the process, torpedo the very growth narrative that it purports to champion.
A reversal of these levies, accompanied by a clear roadmap for grid improvement, will restore confidence among exporters, stabilize power costs, and ensure that Pakistan's textile sector remains a global competitor rather than a declining casualty of misguided energy policy.
Copyright Business Recorder, 2025