Power sector: Base tariff relief likely
The Central Power Purchasing Agency (CPPA) has set the ground for the power base tariff adjustment for FY26, submitting the Power Purchase Price (PPP) projection in consultation with multiple agencies including the Power Division. The CPPA's PPP projection envisions seven different scenarios, with varying assumptions for demand, rupee dollar parity, fuel prices, and hydrology. The PPP deviation between the best case and worst-case scenario is Rs1.95/unit.
The lowest PPP is set at Rs24.75/unit for FY26 – which is Rs0.29/unit lower than the lowest PPP envisioned in the previous rebasing exercise of FY25. The PPP allowed for FY25 was Rs27/unit, with an absolute amount of Rs3.5 trillion. What looks increasingly likely is that the final PPP for FY26 will be lower year-on-year – regardless of which scenario is used as best case. The year-on-year savings in case of most likely adoption of Scenario 2 – which envisions are close to Rs0.96/unit – which may not sound massive but is a relief, especially considering this will be the first time in many years when year-on-year change in PPP is negative. For context, Pakistan's electricity PPP had doubled in last five years, despite significant improvement in fuel generation mix.
A large part of it is due to savings to the tune of Rs100 billion resulting from renegotiated IPP contracts. The bar for demand has been set low – and understandably so, given the rather dismal rate of demand revival in the past two years. Even the 'high' demand scenario envisions power sales going up only 5 percent, that too, from a multiyear low 12-month demand from January to December 2024. The 'normal' demand growth scenario sees it growing 3 percent – which sounds just about right, given the ground reality, on both domestic and industrial fronts, and with the solar boom in full swing.
What is concerning is the rather steep fall in power demand, which for FY26 is likely to be set at the lowest in five years. It remains to be seen what room does the government have in lieu of subsidies, once the final revenue requirement is approved – after induction of prior year adjustment and distribution margin. The fate of Rs1.71/unit subsidy that is scheduled to expire in June 2025, will determine the extent of base tariff relief for FY26.
While the exchange rate and international commodity fuel prices have stayed stable, the biggest concern for upcoming fiscal year could be a sharp drop in electricity generation from hydel sources. Low hydrology could take the PPP close to Rs27/unit – wiping out any potential gains from the IPP negotiations. It remains to be seen, how the authorities treat hydel generation assumptions – especially in light of recent geopolitical events. Even without the one-sided abeyance of Indus Water Treaty, experts had been raising concerns over low hydrology going forward. In all likelihood, low hydrology will lead to higher periodic and monthly adjustments, even if base tariff does not account for the same.
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