Government can conditionally restore gas supply to captive power plants

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Part of a captive power station in Pakistan. Photo: Reuters
  • The government and the textile industry are currently in talks on a tariff and priority dispute.
  • Two parties are likely to find an ideal point in their negotiations.
  • Sources say the industry will withdraw all pending court cases in exchange for the government’s restoration of gas supply.

The government could restore gas supplies to some of the country’s captive power plants, as it is likely to reach consensus with the textile industry in their negotiations over the tariff and priority dispute, The news reported Sunday, citing officials.

The Ministry of Energy (Petroleum Division) is currently in talks with representatives of the All Pakistan Textile Mills Association (APTMA) in contact with Sui Northern Gas Pipelines Ltd (SNGPL), to determine the best course of action.

Sources familiar with the matter said the textile industry would withdraw all relevant cases pending in the courts in exchange for the government’s restoration of natural gas supplies.

The publication quoted a senior Energy Ministry official: “These units will ultimately need to be supplied from the grid in due course. In addition, $ 9 / mmBtu will be charged. “

Gas will be supplied to them where possible, in accordance with the Cabinet priority order, which lists process gas above the captive power plants.

More than 90% of factories have emergency electrical connections. They have already changed and are using a rate of 9 cents / unit. The very few who do not have an electrical connection will be supplied with gas in priority over the others until they switch to the electrical network, which will be supplied to them in about a month.

However, members of his office informed participants at an APTMA meeting that around 75mmcfd of gas would be available for the export-oriented sector from over 180mmcfd in a month, while 40% of the gas charge could be used by export oriented units. The category will be finalized later for which gas will be restored. In addition, the pending case of $ 9 / mmBtu will be withdrawn by APTMA.

Earlier, an APTMA delegation had met Abdul Razak Dawood, the Trade, Textiles, Industry and Production and Investment Advisor, twice in the past two days and claimed to have been able to secure commitments on energy supply.

According to the association’s claim, the government will return the gas to the industry at the earliest, while $ 9 / mmBtu will be billed until March 31, 2022, and the textile industry will withdraw all suspension orders.

It has been learned that the Ministry of Energy has prepared a plan to rationalize the energy supply of the industry with a view to reducing the burden of subsidies given the realities on the ground on the supply side. According to the assessment by the government of the day, gas and electricity are supplied at subsidized tariffs to five export-oriented sectors for three years; 9 cents / unit for electricity and $ 6.5 / mmBtu for gasoline. Subsidies, in their current form, have led to rent-seeking and misuse of energy in the textile sector.

The gas subsidy costs the government Rs62 billion / year. The electricity subsidy costs an additional 20 billion rupees per year. It is also unfunded, which means it is on top of the circular debt. Moreover, it is an aggregate subsidy, which means that there is no distinction between exporter and non-exporter of textile products.

A significant share of textile products is now supplied to local markets. The subsidy is also used to operate inefficient captive power plants in the textile sector. On the one hand, the government is sitting on a surplus of electricity, while on the other it is forced to supply valuable and subsidized imported gas to run captive power plants. Therefore, the government has no choice but to reform energy subsidies.

It is a question of fact that the grant was never meant to be for an indefinite period. It was an incentive to restart the industry hard hit by the overvalued exchange rate regime of the previous government.

Additionally, in fact, APTMA agreed in February 2020 with the government to end the gas subsidy by June 2020 in exchange for waiving any additional charges on their bills. The government held its end of the bargain, but the industry extended the grant for a year under the pretext of the COVID-19 pandemic.

A study by the Petroleum Division found no causal link between this subsidy and an increase in exports. The devaluation of the currency was the biggest boost for exporting units, helping them to achieve the highest profits and margins on record.

Therefore, the direction of reform should be to target the subsidy on exporters only on the basis of export earnings.

It also needs to focus only on the gas used for the fabric-making process, as opposed to captive power plants, as both have separate power supplies and meters.

The electricity rate of 9 cents / unit is a regionally competitive rate (Bangladesh has 8.5 cents). Denial of gas to captive power plants will automatically shift the units towards energy use, thus increasing the necessary energy absorption in a surplus system.


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