The textile industry recently has warned that it will lose its biggest markets in the United States and Europe if the government imposes high wheeling charges for electricity under a new market system.
Wheeling charges, also known as use of system charges, are fees paid by power producers or consumers to use the transmission and distribution network of the national grid.
The government is planning to introduce a competitive trading bilateral contract market (CTBCM) system, which will allow power producers and consumers to enter into direct contracts and bypass the state-owned central power purchase agency (CPPA).
The CPPA and the power distribution companies (DISCOs) have petitioned the National Electric Power Regulatory Authority (NEPRA) to set the wheeling charges at Rs 27 rupee per unit, which the textile industry says will make the CTBCM system unviable.
In a letter to the caretaker Finance Minister Dr Shamshad Akhtar, who heads a special panel to deliberate the issue of wheeling charges, the All Pakistan Textile Mills Association (APTMA) said that the proposed charges were unrealistic and absurd.
The APTMA argued that BtB electric power contracts at wheeling charges of 1-1.5 cents per unit excluding cross-subsidies and stranded costs are imperative to continue exports to the USA and EU countries, and if the wheeling charges are set more than that, then exports of the country to the said established market will not be able to be continued as the input cost would further surge making the country’s products in the international market uncompetitive.
“The unrealistic and absurd wheeling charges of around 9.6 cents per unit sought by CPPA and Discos will serve nothing but will defeat the purpose of market liberalization and it also underscores the intention of the power division bureaucracy installing any meaningful reforms,” the latter said.
“The absurdity of the proposed wheeling charges is further emphasized by the fact that it is significantly higher than the full tariff for export-oriented consumers in regional economies like Bangladesh (8.6 cents per unit) India (8 cents per unit) and Vietnam (7.2 cents per unit).”
APTMA also mentioned that when the export sector was provided regionally competitive energy tariff of 9 cents per unit during 2020-22, Pakistan’s textile and apparel exports increased by 54 percent in only two years. However, following the withdrawal of RECT amid a larger macroeconomic crisis and power tariff rebasing earlier this year, power tariffs for the export sector increased from 9 cents per unit to 14 cents per unit including economic inefficiencies like stranded cost and cross-subsidies to the non-productive sectors of the economy.
“The current B3 and B4 industrial tariff of approximately 14 cents per unit is almost twice the average faced by competing firms in the regional economies and renders the textile and apparel sector’s exports uncompetitive in global markets. At 9 cents per unit, energy costs account for 12-18 percent of total input costs across the textile and apparel value chain.”
Finance Minister has also been sensitized through the letter that because of 14 cents tariff for the export industry, the power consumption of textile and apparel firms had declined by 49 percent on the Lahore Electric Supply Company (LESCO) network and 36 percent on the Multan Electric Power Company (MEPCO) network in October 2023, compared to the same month last year.
The power sector revenue from these industrial units was over Rs1.1 billion less on the LESCO network alone in October 2023, the letter said, adding that the actual losses were likely to be much higher.
This has nullified the argument that any substantial increase in power tariffs will increase the power sector’s revenue collection and reduce capacity payments for all consumers. If the status quo is maintained, industrial production and electricity consumption will continue to decrease, which will further worsen the economic situation.
High tariffs have caused export firms to be priced out of international markets and lose export orders to competitors with significantly lower power tariffs in regional economies. APTMA’s analysis suggests that above a threshold of 12.5 cents per unit, export-oriented firms are increasingly forced towards closure and the export sector is crowded out in due course.
“At the same time, domestic industries also face weak demand as rampant inflation has eroded consumers’ purchasing power and this has in turn lowered manufacturing activities and therefore industrial power consumption across the board.”
