Buy Electricity Now, Use Later - Lessen the Circular Debt

Excess capacity needs to be sold at cheaper rates.

Among the few things that we have in abundance, electricity tops the list. Not that we would not need it in the future. However, for medium term, we have plenty of surplus electricity. We need to do something about it. A lot of things actually.

In developed world, consumers can pay for electricity via a top up. In essence, you have a pre-paid card that has electricity bought for future consumption. Implementing that in Pakistan would take eons, if not decades. Thus, a new model of “Buy Electricity Now, Use Later” can be introduced. The “evaporated” production - one that is paid for but not used - can be pre-sold under a commitment. What does it mean?

Salient Features:

• Extra capacity payments can be sold at marginal cost say, 7.5 cents or Rs 11-12/unit. If you are selling electricity in forward market, the total unit cost (capacity + fuel) declines as number of units consumed (denominator) increases.

• Domestic consumers to be incentivized with Present Value of electricity in the future. For example, if tariff were to be Rs 20 in 2023, you can buy it back at Rs 15 (Rs 20/discount factor for 2 years).

• Discount Factor should be higher than the amount domestic user can earn on Savings & Term Deposits. In other words, consumers are buying an asset (electricity units) that has a future value higher than the amount lying in the Banking account.

• Transferable Units: As absurd as it sounds, one should be able to transfer the units (assets) to anyone in the family, friends, customer & employees. Giving people units as a voucher is “helping in need”. These are “targeted gifts”.

• Charity: People often buy food ration bags, pay for medicines, school fees, pay off debts & give cash. A huge chunk of poorest people goes towards electricity, water & rent bills. Giving cash always raises skepticism if it is going to misused for drugs/gambling etc. Thus, “targeted charity” is a win-win for donor & donee.

• Businesses/SMES: Government has already given an “Industrial Support Package” whereby marginal electricity consumption is offered at a cheaper rate. It’s not a favor per se as this would have “evaporated”. However, that is based on “actual” consumption. If businesses can purchase future units at cheaper rates, it’s a reinvestment into the business. Essentially, buying an asset on your balance sheet.

• DISCOs liquidity: If consumers pre-pay for electricity at the present value of future marginal costs, this would drastically help the liquidity/cash position of the entire value chain from DISCOs to IPPs to OMCs to Refineries to EnP companies to Banks. Any breather for chain is a blessing.

• Bulk discounts: Leading business groups can buy electricity at cheaper rates for more units. For example, buy 1m units at 7.5c, 10m units at 7c, 100m units at 6.75c etc. The more you buy, the merrier for the buyers.

• Collateralization: These units could be collateralized as financial products to be used for borrowing/lending. Such an action would encourage more buyers for the electricity units and pave the way for eventual tradability of electricity.

• Price differentiation: The government must have future projections of supply of electricity during different seasons (hydro?), time of the day (solar?) etc. The electricity rates can be further broken down into different segmentation for consumers. For instance, a residential consumer would want to subsidize his summer electricity bills while an industry might be incentivized to utilize summer/weekend surplus.

• Currencification: Electricity units should essentially be treated as true assets & effectively be used to pay bills, credit cards, school fees, groceries, mobile top ups etc.

• Clean Energy: Electricity from clean renewable sources could be put to auction first. Environment-conscious investors would be happy to buy this source of electricity at a slight premium.

• Better business planning: Energy intensive businesses can lock in their future electricity costs & price their products/services accordingly to reduce earnings risk. This may very well give birth to new set of of businesses altogether if we have predictable electricity costs.

• Government Incentives: In a truly competitive world, Sindh would use their funds to purchase electricity & subsidize electricity in cities. Similarly, cities with higher earnings (in a truly democratic concept) can buy extra electricity credits to attract local & foreign investors to set up units.

Prime Minister’s energy team, led by Tabish Gauhar (TG), has several plans to fix the mess; buy out inefficient plans, close down government owned inefficient plans, move industries away from gas to electricity, reduce taxes, elongate the debt-repayment, increase cheaper Thar Coal electricity, cheaper domestic winter rates & handing DISCOs to private sector & provinces. This is on top of IPPs profits renegotiations & CPEC projects rescheduling.

Perhaps, selling future surplus electricity is not a bad proposition. It has its pros & cons. Nonetheless, we have a major problem at our hands of rising Circular Debt. That’s an example of our homegrown misgovernance & inefficiencies. TG has already indicated its future plan involves setting up of wholesale electricity market. Billions of dollars of electricity is consumed every year. Far bigger than other asset classes. No harm in laying the foundations of retail electricity markets as well. Let’s hope to buy cheaper electricity someday. And sell it as well.

P.S

https://www.dawn.com/news/1549322 (By Younus Dagha)

http://www3.weforum.org/docs/WEF_Future_of_Electricity_2017.pdf