The cascade effect

Perhaps the most dangerous IMF condition of them all is the raising of the power tariff, because it might finally unleash something which has been a nightmare for four decades in WAPDA, a cascade effect. That this is also coming at a time of transformation for the power sector means that WAPDA, which presently owns all of eight power distribution companies except K-Electric, may be rendered commercially unviable.

That tariff hike is set to begin this month, and even though the Rs 7.50 hike is massive, it is just the beginning. The tariff is expected to go up by Rs 50, which would lead to an average tariff of about Rs 75 per unit. It has already reached Rs 25, so what the IMF wants is a tripling of the tariff.

Even at lower tariffs, there have been power protests, with at least one incident of a distribution company office being attacked. There have also been cases of consumers driven to desperation and committing suicide. Of course, the attack was not because of bills, but because of a power breakdown in summer. As a sort of reminder that WAPDA is not just a power utility, but also deals with water, power breakdowns in the city also mean the water supply is cut, because Pakistan’s cities get their water from pumping groundwater by electricity-powered tubewells.

Actually, WAPDA is patterned on the Tennessee Valley Authority of the USA, a US New Deal project. It not only built nine hydroelectric dams on the Tennessee River, but also controlled the river’s flooding, navigation, and led to reclamation. WAPDA was established not just to build storage dams along the Indus, but also to help irrigate large tracts of land, and to generate electricity.

Like the TVA, WAPDA became a power utility company. Today, the TVA continues to flourish as a utility, with nuclear, coal-fired, natural gas-fired, hydroelectric, and renewable and though still wholly owned by the US government, is essentially what in Pakistan is called a GENCO, or generation company. Its customers are mostly distribution companies.

However, WAPDA has not only been unbundled, but marked for privatization. WAPDA has only gone in for hydel projects, and for the last four decades, thermal projects have been in the private sector, the Independent Power Producers. One of the main issues with the power sector in Pakistan is that of capacity payments, which is related to the guaranteed rate of return for the IPPs, which was something they demanded before coming into Pakistan. It should not be forgotten that the guarantee has been made by the government, and thus is a charge on the revenues of the government. This makes the IMF very concerned whether or not the government can pay, and that too in foreign exchange.

Loadshedding has been as big a headache for Pakistani governments as it has been a tribulation for Pakistani consumers ever since the 1980s. With ever expanding demand, electricity generation in Pakistan has been unable to keep up. Governments build IPPs in a panic, and turn to such solutions as Thar coal generation (which would be a major pollutant, at a time when the world is trying to go green).

At present, furnace-oil generation places a heavy burden on the import bill. This was once balanced by exports from power-consuming industries and agriculture, but with the fall in exports, that argument does not work as well. Even if projections of increased software exports come true, though large numbers of computers will consume large amounts of power, they still have a long way to go before equaling the demand by the textile industry at full blast.

Furnace oil imports have also led to the development of circular debt. That debt is huge, about Rs 2.6 trillion in April, and keeps rising. The capacity payments have played their part. This is why the IMF wants the circular debt paid, and is making the consumer do so.

The idea of a tariff increase was thought of back when loadshedding started. The idea was that a higher tariff would lead to lower demand. However, the fear developed that if WAPDA put this into practice, a cascade effect might develop. The cascade effect is reasonably familiar in aeronautics, medicine and ecology, and postulates that an inevitable and sometimes unforeseen chain of events would occur due to an act affecting a system.

Then as now, electricity was an essential, and thus it is price-inelastic, in that fluctuations in the tariff do not affect demand. If the tariff goes down, consumption will not go up. Conversely, if it goes up, consumption will not go down. However, there is a limit. At some point, consumers will simply refuse to pay. If enough do for long enough, consumers will be disconnected en masse. And at a certain point, WAPDA will no longer have enough consumers to be viable.

Unfortunately mass disconnections will be accompanied by a modicum of suicide. So far, there have not been any farmer’s suicides resembling those that are taking place across the border, but it is worth noting that some of those suicides were committed when farmers were unable to pay tubewell bills. There is a strong cultural and religious predisposition against suicide in both rural and urban areas, but would WAPDA like to rely on that? More to the point, would any government?

Already, there has appeared the first sign of a cascade effect, in the 9.5 percent decline in generation in the fiscal year just ended. This has not yet translated into disconnections, but is a severe anomaly in a developing country. It should not be forgotten that there are still rural areas which have not been electrified.

Another development, which will change the way things are done in the power sector, is still to be accommodated, the development of solar power, wind power and other renewables. This is apart from the hydel potential which remains immense. Not many domestic consumers have gone off-grid, for the few who have installed solar power, have retained a WAPDA connection, for their installations produce more electricity than they consume. And WAPDA is the default customer. WAPDA deducts the sum payable from the electricity (net metering), which means that night-time electricity does not cost the consumer.

One problem with this is that if consumers pay WAPDA less cash than they used to, it will not be able to make the capacity payments it had agreed to. Thus, we have the sight of WAPDA discouraging domestic consumers from making the switch. As electricity is also set to replace fossil fuels for transport, both of people and goods, as vehicles go electric, it should have been WAPDA encouraging all its consumers to go solar. WAPDA does not have any firm plans for solar power generation, even though it should probably be the lead organization on this. If it got into this, it would be able to lower its generation costs tremendously,

However, WAPDA has first to make the capacity payments, and thus it needs to make sure that the consumer pays some cash so that it can make capacity payments. If Pakistan wants to break out of the fossil fuel paradigm, and head towards a green economy, it will have to break free of the IMF’s demands. The present tariff hike, despite the pain it will cause, will not really solve anything.