ISLAMABAD: The USAID Power Sector Improvement Activity (PSIA) has proposed key recommendations to shift industrial energy consumption from captive power generation (CPPs) to the national grid. The recommendations come after a study by NUMARK Associates, Inc. and Energy & Security Group, LLC, which analyzes Pakistan’s energy pricing structure.
Pakistan’s natural gas pricing consists of two main categories: domestic extraction-based pricing for most consumers and imported Re-gasified Liquefied Natural Gas (RLNG)-based pricing linked to global crude oil prices, applied to specific industrial consumers and independent power producers (IPPs). In 2018, the government introduced Regionally Competitive Energy Tariffs (RCET) to reduce electricity costs for export-oriented industries, helping them compete globally. However, as of FY 2023, industrial grid electricity consumption is declining, largely due to tariff increases and the elimination of subsidies.
The PSIA argues that equitable tariff reforms are essential to optimize the use of Pakistan’s energy resources. By aligning gas prices with grid electricity tariffs, the country could reduce inefficiencies in gas usage, cut LNG imports, and save foreign currency. The reforms would also help utilize existing grid capacity, reducing reliance on underused IPPs and lowering electricity prices.
Energy pricing disparities, particularly low domestic gas prices, have contributed to high electricity tariffs, especially for power plants using imported gas. These discrepancies have also led to suboptimal industrial gas use, particularly in the textile sector, where many captive power plants have thermal efficiencies far below industry standards.
For general industry other than exporters, there have also been other grid electricity tariffs announced periodically through reallocated or additional subsidies from the federal budget.
During FY 2022, RCET-based industrial energy tariffs were generally comparable to those available to Pakistan’s main competitors in the global export market, except for industrial plants located in the south of the country, mainly in Sindh province, which were charged rates for locally produced domestic gas that were even lower than RCET-based prices. This enabled generation from industrial Captive Power Plants (CPPs) in the south at considerably lower costs compared with their RCET-based counterparts elsewhere in the country.
Declining demand for grid electricity Industrial consumption of grid electricity in Pakistan peaked at 33.96 gigawatt-hours (GWh) in FY 2022 but decreased by 8.5% in the following year and is expected to fall further during the first half of FY 2024. During FY 2021 and FY 2022. Grid electricity prices continued increasing, which further enhanced the viability of CPP-based electricity generation.
The current declining trend in industrial use of grid electricity started in FY 2023, when the GoP discontinued all rate-payer subsidies (including RCET rates), resulting in substantial electricity tariff increases and higher RLNG-based gas prices for industry, including exporters. This undermined the financial viability of many industrial plants, which forced reductions in production shifts, led to plant closures, reduced exports, and encouraged more conservative electricity use by all consumers.
Given these challenges, there is an urgent need to undertake equitable tariff reforms that encourage a more economical and efficient use of Pakistan’s energy supplies and infrastructure.
According to PSIA, tariff reforms can help optimize energy use industrial demand for grid power is influenced by differences in electricity and gas tariffs, and a balanced energy pricing approach can accordingly provide the right economic signals to convert industry from inefficient gas-fired CPP use to grid electricity. This would help conserve natural gas for more productive uses, while also reducing LNG imports and saving considerable foreign currency outflows. Increased demand for grid electricity will help utilize existing seasonal surpluses in grid-connected power generation capacity, reducing excessive capacity charges payable to underutilized IPPs and reducing overall per-unit power purchase prices in Pakistan.
In FY 2024, the GoP initiated tariff reforms and policy measures to improve utilization of grid electricity by shifting industry away from gas-fired CPPs.
Low domestic gas prices lead to high electricity rates It should be noted that disparities in gas pricing contribute to: (i) an inverse relationship between gas and electricity demand peaks during summer and winter periods in the residential consumer category: The maximum generation capacity of grid-connected thermal power plants, much of which is based on imported fuels, is used to meet high summer electricity demand for space cooling loads, which has increased overall power purchase costs due to recent increases in global oil, coal, and LNG prices and the Pakistani rupee’s (PKR) recent devaluation against the US dollar (USD). During winter, households prefer to use subsidized gas for space and water heating, depressing demand for electricity to its annual lows. Industrial reliance on CPPs as an alternative to grid electricity: Primarily, this is a result of low domestic gas-based prices for CPPs, which help decrease electricity self-supply costs compared to more expensive and less reliable grid electricity. As a result, industrial withdrawals from the grid are reduced, leading to redundant capacity in the grid-connected electricity generation pool. Consequently, because of mandatory ‘take-or-pay’ capacity charge obligations towards stranded IPPs on the grid, the average per-unit pool purchase price increases, further encouraging and entrenching the use of CPPs using low-cost domestic gas supplies.
High power purchase cost for K-Electric’s (KE) own power plants: Domestic gas use in the industrial and residential sectors is given preference by the gas transmission utility; accordingly, when gas demand from these sectors peaks, domestic gas supply to KE’s thermal power plants is curtailed. As a result, KE is forced to produce electricity using gas at much higher RLNG rates, which are passed through to its consumers, requiring either GoP subsidies to maintain consistent electricity tariffs across the country or increased electricity prices for all grid-connected consumers. Reduced dispatch of RLNG price-based IPPs as global LNG prices increase: Lower utilization of otherwise efficient grid-connected combined cycle thermal plants is a consequence of their corresponding fall in the economic merit order (EMO) which results in lower dispatch from these IPPs while still requiring their fixed capacity charges to be paid in full by the power purchaser. At the same time, low-cost domestic gas rates applied to older, less efficient thermal plants and CPPs enable them to continue operating, resulting in higher electricity tariffs and uneconomic use of natural gas.
Suboptimal use of gas in industry: thermal efficiency’ is a measure of how effectively a combustible fuel is used to produce useful energy. To optimize gas-based electricity generation, the waste heat produced by gas turbines or engines is recovered to generate steam, which is reused for further electricity generation in ‘combined cycle’ power plants or reused for other industrial processes, such as dyeing and printing textiles. If waste heat produced from electricity generation is vented and not used for productive purposes, the generator is referred to as a ‘simple’ or ‘open cycle’ power plant. Steam produced from waste heat and used directly in an industrial process is known as ‘cogeneration. Most gas-fired captive power generation in Pakistan takes place in the large textile industry. PSIA consulted with 23 textile units across the country, which accounted for a combined 266 megawatts (MW) of installed CPP capacity and represented a geographically and technologically diverse sample, to assess captive generation in the industrial sector.
The surveyed gas-fueled CPPs exhibited thermal efficiencies in the range of 33-37% (i.e., simple cycle operation). However, some industrial plants likely operate at significantly lower thermal efficiency. The research also determined that Pakistan’s textile industry had distinct preferences regarding waste heat and its industrial use: CPPs in the spinning sector do not reuse the heat produced during electricity generation, and no overall thermal efficiency enhancement is attempted. CPPs in the weaving/knitting sector reuse heat/steam from power generation to a limited extent, which raises the overall thermal efficiency of their gas use to 45-50%.
CPPs in integrated textile units producing finished textile products from raw materials (i.e., complete textile manufacturing value chain) produce heat, which is largely reused, resulting in overall thermal efficiency of over 60%, compared to mid-30% for electricity generation alone. It should be noted that domestic gas price-based industrial connections are of two types: 1) for captive power generation and 2) for industrial process use. The latter primarily utilize gas directly in boilers to generate steam, with a thermal efficiency of less than 33%. For industrial units having both types of connections, it was difficult to distinguish between the volumes of gas used in CPPs and that used purely for industrial processes.
To eliminate suboptimal industrial gas use, the thermal efficiency of grid-connected RLNG-priced IPPs should be used as an acceptable performance benchmark; this currently averages above 39% for simple cycle plants, while combined cycle plants exhibit thermal efficiencies exceeding 62%.
It is evident that average CPP thermal efficiency levels currently trail the corresponding IPP benchmark by 2-6%. Notably, however, a degree of inefficient fuel use by the typically older and much smaller CPPs is inevitable, especially compared to the larger scale and recent vintage of RLNG-priced IPPs, which allows for their best-of-class performance.
Rationalized gas pricing: Given that Pakistan’s domestic gas reserves and production levels are continuously declining, and the country is forced to import LNG to meet the widening gap between demand and supply, it becomes economically imperative to utilize gas supplies as cost-efficiently as possible. The ad hoc ‘dual gas pricing’ mechanism, instituted when LNG imports were first initiated in FY 2015, has created a significant price disparity between domestic and imported natural gas, despite both supplies consisting of virtually identical methane molecules. This has led to suboptimal gas use by industrial units that receive fuel at the lower domestic gas rates, placing those subjected to RLNG-based pricing at a distinct competitive disadvantage.
Removing such price disparities will result in gas savings from inefficient CPPs and shift the industry toward more efficient grid based power plants. This will help preserve overall gas demand at levels aligned with GoP’s long-term LNG import contracts, while grid electricity tariffs would also decrease due to a reduction in excess capacity payments to IPPs.
Removing energy price disparities: To successfully transition from inefficient CPP use to grid electricity, PSIA recommends implementing one of two options to rationalize gas pricing in Pakistan ;(i) option I: Full (or uniform) weighted average cost of gas (WACOG) based pricing, or ;(ii) Option- II: Incremental (or category-based) WACOG pricing.
Both scenarios aim to eliminate gas price disparities through different methods of applying a ‘blended’ gas tariff. The primary difference between the two options is the delayed application of the blended gas price on residential and commercial categories proposed under Option II to help buffer the cost impact on consumers, especially lower-income households. Because application to residential and commercial consumers is delayed under this option, gas prices for industry and IPPs would need to be kept relatively higher in the interim to compensate for the required cross subsidy.
Overall, PSIA recommends two key steps for removing energy price disparities: (i) implementing uniform gas prices across industry for all types of connections, including grid-connected gas-fired power plants, through WACOG-based tariffs: This is expected to increase gas tariffs for existing domestic gas-priced connections and decrease them for RLNG-priced connections within industry. For gas-based IPPs, the cost of gas supply will decline, except for those fueled by dedicated gas fields. Since RLNG prices are determined on a monthly basis, the new WACOG-based tariffs will require monthly revisions by the Oil and Gas Regulatory Authority (OGRA) ; and (ii) an innovative monthly tariff adjustment mechanism: wherein the expected generation costs of gas-fired CPPs are periodically compared with the prevailing grid tariff for industry, based on which gas tariffs for industry are then adjusted. This self-sustaining adjustment mechanism is labeled as an ‘Energy Price Equalization Levy’ (EPEL).
Energy Price Equalization Levy: EPEL implementation will further increase CPP gas tariffs beyond the WACOG level to expedite a significant industrial switchover to grid electricity. The cash inflows resulting from EPEL imposition shall be used to reduce industrial electricity prices, thereby preserving its cost completeness and providing a level playing field for all industrial consumers.
Once EPEL is applied to industrial gas use, industrial electricity tariffs could reduce by PKR 1.9-2.6 per kilowatt-hour (kWh), equivalent to a 5-7% reduction in per-unit rates. depending on relevant macroeconomic factors. Since electricity tariffs change monthly due to the fuel price adjustment (FPA) and quarterly reconciliation by the regulator, it is proposed that EPEL also be revised every month to maintain parity between WACOG-based gas tariffs and industrial grid electricity prices.
EPEL implementation will require one-time funding from the GoP amounting to Rs 133-178 billion ($ 465-623 million) depending on the gas pricing scenario and economic parameters assumed, as first-year working capital to manage cash flows under the mechanism.
However, this upfront funding requirement could be managed or substantially reduced if disbursed on a quarterly basis. PSIA has prepared a detailed EPEL implementation framework for further GoP and stakeholder consideration.
Recent GoP initiatives in pricing reforms: in 2024, the GoP undertook several energy price revisions to help remove disparities and cost inefficiencies. For domestically extracted natural gas, the adjustments shown in Fig. I brought tariffs closer to WACOG rates for domestic gas-priced CPPs. However, reducing the RLNG price to bring it closer to WACOG rates for consumers has seen no progress to date.
As for grid electricity prices, the GoP has absorbed a large portion of the cross-subsidy impact by undertaking tariff rebasing in FY 2025, as per the National Electric Power Regulatory Authority (NEPRA) determination of July 11, 2024. Currently, the applicable average grid tariff for industrial consumers (B.3 category) is Rs 38.64/kWh, while the off-peak rate is Rs 37.22/kWh. including FPA, quarterly adjustments, and other surcharges and taxes but excluding sales tax.
However, FPA is expected to decrease later in FY 2025. The average grid tariff for the same category may reduce to Rs 35.27/kWh, with off-peak tariff at Rs 33.85/kWh. Additionally, monthly ‘fixed charges’ in industrial tariffs have increased to Rs 1.250 per kilowatt (kW) from PKR 500/kW and these shall now be applicable at 25% of the sanctioned load or actual maximum demand indicator (MDI), whichever is higher. This will represent an additional cost for industrial units that rely on the grid as a backup to their CPPs. RLNG price trends: OGRA announces RLNG distribution prices each month for the two gas transmission and distribution utilities, Sui Northern Gas Pipelines (SNGPL) and Sui Southern Gas Company (SSGC). The average RLNG price from February 2023 through June 2024 was Rs 3,799 per million British thermal units (MMBtu), while the average rate for July 2024 was 3.733/MMBtu, which is Rs 733/MMBtu higher than the current CPP domestic gas rate.
To determine if recent GoP gas tariff revisions have sufficiently reduced existing energy price disparities, the current industrial grid- based tariff of Rs 38.64/kWh can be compared with the operations and maintenance (O&M) and fuel costs of gas-fired CPP generation. It can be argued that since the current grid tariff was rebased in July 2024, the associated FPA might not have an immediate impact and the average grid price will actually reduce to Rs 35.27/kWh in September, 2024. However, thereafter. quarterly adjustments will cause the grid tariff to start increasing again unless the current declining trend in Brent price, inflation, and cost of debt can overcome such an increase. To assess future CPP viability. Note that SNGPL’s RLNG distribution price of Rs 3.795/MMBtu has been used here, given the higher proportion of RLNG use in the utility.
Based on this comparison, the current domestic gas price of Rs 3,000/MMBtu for CPPs is not sufficient to push industrial self- generation to the grid, since the electricity cost for industry using domestic gas-priced self-generation is Rs 31.61/kWh (even for CPPs with thermal efficiencies below 33%), while more efficient plants have generation costs as low as Rs 28.25/kWh compared to the grid tariff range of PKR 35.27-38.62/kWh.
Grid electricity at PKR 38.64/kWh is also not viable for industry using RLNG-priced connections (at PKR 3,795/MMBtu) to operate CPPs based on single-cycle efficiency levels of 35-37% at a cost of Rs 35.59/kWh. However, if grid tariffs fall below this level and RLNG prices remain level or increase, grid electricity will become attractive for RLNG-priced CPP users.
Implementing a rationalized energy pricing strategy: PSIA has recommended the following strategy for implementing energy pricing reforms necessary to discourage inefficient use of natural gas supplies and improve utilization of the existing grid-connected generation infrastructure, along with factors that need to be kept in mind to ensure a successful outcome: (i) due to legal and constitutional restrictions, the GoP is unable to implement uniform WACOG-based consumer gas tariffs across Pakistan. However, despite these constraints, the GoP can establish a WACOG plus EPEL-based regime (in consultation with relevant stakeholders) to raise gas prices for industrial self-generation and transfer the benefit to electricity consumers in the form of a gasto-electricity cross subsidy and improved system utilization that helps bring down power tariffs. Price and subsidy notifications for EPEL-based tariffs can be made as per applicable procedures and precedents. In this regard, it is worth mentioning that there have been instances in the past where the domestic gas price for industry has been raised above the revenue requirements set by OGRA, while there is also the successful example of the RCET regime to spur industrial growth and exports by subsidizing RLNG and grid electricity rates;(ii) the price of gas for grid-connected power plants (excluding those with dedicated gas fields or low-Btu gas supplies) can be based on WACOG (i.e., a blended price of gas supplied to industry and power plants), established as described previously. This will ensure that more efficient power plants are ranked higher in the EMO and dispatched first, thus reducing average capacity charges payable per unit and lowering the overall pool power purchase price. To implement this scheme, domestic gas prices for power generation would need to be raised to the WACOG level, with the additional revenue flows resulting from this increase working as a rate subsidy for electricity supply from efficient RLNG-priced combined cycle plants;(iii) there are currently different gas prices allowed to industry: 1) domestic gas price for CPPs, 2) RLNG price for CPPs and industrial uses, and 3) domestic gas price for industrial uses. PSIA recommends applying a single gas price across all industrial users, which ensures that the cost of generation for users employing simple cycle power plants is higher than grid electricity tariffs, thereby penalizing wasteful gas use. This will require implementing an EPEL charge above the WACOG level. A uniform industrial gas price of PKR 4,190/MMBtu would be required to make captive generation more expensive than the current grid tariff of PKR 38.64/kWh, ensuring that CPPs either maintain better than 37% efficiency levels or the corresponding industrial units switch over to grid electricity. However, if grid electricity price falls below PKR 35.27/kWh, the gas tariff may also be lowered to PKR 3,825/MMBtu to achieve the same result;(iv) gas savings obtained by the gas utilities may be reallocated to grid connected power plants, including IPPs, which would require a change in GoP’s current gas allocation policy. Similarly, additional revenue inflows from the increased gas price could be diverted to subsidize RLNG prices and industrial electricity supply from the grid ; and (v) GoP should form a committee with representatives from relevant agencies to oversee the monthly realignment of gas and electricity prices for the industrial sector, following the stepwise price adjustment mechanism proposed in the PSIA report. The committee could also coordinate and expedite responses to industrial applications for new grid electricity connections, sanctioned load enhancements, and power quality complaints.
Benefits of energy pricing reforms: Mandatory capacity cost payments to grid-connected power plants and declining electricity consumption due to an economic downturn are adversely impacting the financial viability of Pakistan’s power sector. The energy pricing reforms proposed in this PSIA Policy Brief are designed to incentivize industrial use of grid electricity in a way that will help reduce overall electricity prices for all consumers while reducing the need for expensive gas (LNG) imports for captive power generation.
Differentiated classification and pricing of domestic gas and RLNG industrial connections is distorting manufacturing input costs, particularly putting industrial plants in the northern half of the country at a competitive disadvantage in regional and global export markets. A single blended gas price for industry across Pakistan, based on parity with electricity rates, will promote increased competitiveness and cost efficiencies within the industrial sector and help grow the country’s exports.
Electricity dispatch from efficient grid-connected thermal power plants in the north, which were previously supplied gas at RLNG rates, will increase due to the lower new blended gas price, resulting in reduced power purchase costs and consumer tariffs.
Similarly, the cost of electricity generation from gas-based generation in south will decrease while overall grid dispatch will increase; this will reduce the GoP’s subsidy requirement to maintain the uniform tariff.
The GoP’s existing long-term LNG import commitments will remain unaffected, or may increase, as increased demand from grid connected power plants is expected to be more than the gas savings that will accrue from shifting industrial CPPs and residential heating consumption to grid electricity.
The decreased capacity cost payments per unit of electricity generated on the grid will support bilateral power trades under the new Competitive Trading Bilateral Contracts Market (CTBCM) framework, as the proposed use of system charge for wheeling power over the utility T&D network includes ‘stranded costs,’ which are essentially capacity charges for idled generation on the grid.
The PSIA assessment has observed that whenever the GoP has offered subsidized electricity to the industrial sector, there has been a corresponding uptick in grid utilization and economic growth in the country. However, this subsidy has historically been financed by the exchequer, which is an unsustainable arrangement resulting in short-lived policies, which in turn exacerbate investor risk perceptions and undermine robust industrial growth. PSIA’s proposed pricing reforms, such as the EPEL, are designed to be self-sustaining measures that reallocate uneconomical and distorting subsidies from gas supplies to the productive industrial sector, while at the same time helping reduce overall subsidy requirements by lowering the proportion of capacity charges in the overall pool power purchase price. Ends
