Computable General Equilibrium Analysis of Electricity Subsidies: The

Perspective of Pakistan Haroon S. Awan Assistant Chief,

Planning Commission of Pakistan

Ghulam Samad Research Economist

Pakistan Institute of Development Economics (PIDE)

Naseem Akhtar Research Economist

Pakistan Institute of Development Economics (PIDE)

2

Introduction

• Pakistan’s electricity sector is in crisis and we are witnessing long spells of blackouts

• Depleting generation capacity, huge subsidies & piling burden of circular debt are adding to the worries.

• Siddiqui (2011) reveals that due to power outages the total industrial output losses vary from 12% to 37% in Punjab

• Pasha (2008) estimated that the load shedding is costing the industrial sector Rs. 210 billion or over 2 % of GDP annually

Introduction

• Abbasi (2011) estimated the power shortfall annually cause loss of 2 percent of GDP approximately

• ADB (2010) and Bhutta (2011) explained that the non-availability of fuel supply potentially reduced the capacity of power generation companies by 2000 MW to 2500 MW that increased with the passage of time.

Introduction

• The crisis has resulted in potential exports earning losses of over US$ 1 billion and 400,000 displacements of potential workers

• Large scale manufacturing industries that have their own alternative arrangements for electricity generation are comparatively performing well as compared to the small scale industries

• the situation in Pakistan is worsening rapidly for the lower segment of the society

Reasons for Electricity Shortages

a) Efficiency Crisis; b) Fuel Mix Crisis; c) Financial Crisis; d) Financial Discipline crisis; e) Governance Crisis;

Demand - Supply Gap

7

6 KMW (peak)

12.6 12.6

13.3 12.4

13.6

13.4

13.2 12.8

13.9

15.8

17.4

17.9

18.9 19.2

12

13

14

15

16

17

18

19

20

05 06 07 08 09 10 11

KMW

Electricity Demand & Supply Forecast

Source: National Electric Power Regulatory Authority (NEPRA)

• No sizeable capacity was added in the last 10 years, except the 3000 MW added in the last few months.

• Massive theft & losses (25% PEPCO, 34% KESC)

• Erosion in generation efficiency of GENCOs • Decisions like RPPs, corruption and huge

kickbacks in fuel supplies show governance failure

Fuel Mix of Electricity Generation

Oil, 35.10%

Gas, 27.30%

Hydro, 33.60%

Coal/Others, 0.10%

Nuclear & Imported, 3.90%

Source: Energy Year Book, 2011

Coal Based Electricity Generation: 78% in China, 68% in India, 40% in Germany and 50% in USA

Electricity Tariff Structure for Residential Users

KWh/month Notified Consumer Tariffd (Rs/KWh) % increase March-08 March-11

Up to 50 1.4 1.87 34 50 -100 3.08 4.45 44

101 -300 4.08 6.73 65 301 - 700 6.53 10.65 66

Above 700 7.79 13.29 74

Source: Pakistan Electric Power Company (PEPCO)

46.1% of the electricity is consumed by the residential users who pay an average rate of Rs.7/Kwh

75 % of residential users use less than 300 units.

Tariff Differential subsidy

• Due to inefficient energy mix and huge T&D losses, the notified tariffs are below cost recovery so the govt. provides Tariff Differential subsidy (TDS)

• GoP has paid more than one trillion rupees as TDS in last four years to safeguard the masses against the increasing generation cost of electricity.

• TDS being an untargeted subsidy is on one side piling financial burdens and on the other hand is resulting in welfare losses.

Framework for Economic Growth Pakistan, Planning Commission of Pakistan

Electricity Related Subsidies

2007-08 2008-09 2009-10 2010-11 2011-12 WAPDA Budget 52,893 74,612 62,903 84,000 122,700

Revised 113,658 92,840 147,005 295,827 -

KESC Budget 19,596 13,800 3,800 20,447 28,588

Revised 19,596 18,800 32,521 64,447 -

Oil Refineries/OMCs

Budget 15,000 140,000 15,000 10,807 7,921

Revised 175,000 70,000 11,224 10,807

Fertilizer Manufacturers

Budget 10,360 12,860 210 185 162

Revised 6,360 21,268 439 985 -

Total Budget 97,849 241,272 81,913 115,439 159,371

Revised

314,614 202,908 191,189 372,066

Source: Government of Pakistan various budget/economic survey documents

Two Basic Questions?

• This study aims at developing the scenarios like if TDS is paid through direct transfer mechanism only to the poor household what will be the impact on household welfare as compared with the base scenario?

• Similarly, what will be the impact on circular debt issue after targeting the subsidies, and the overall fiscal deficit situation of the country?

To quantify these impacts we would be using the Social Accounting Matrix (SAM) 2010-11 and IFPRI developed Computable General Equilibrium (CGE) Model.

Model Simulation Scenarios

In order to assess the impact of electricity subsidy cut and its alternative policy, we run three different simulations. • First, we examine solely the impact of subsidy cut

by 50% of the ongoing spending. • Second, Impact of direct transfers to the affected

poor households as a compensation of income loss based on the findings in the first simulation.

• Lastly, Impact of productivity improvement in electricity sector by 20%.

Results and Discussion, Macro-Level Behavior

The TDS cut by 50% do not have any significant impact on GDP and overall demand, but it has negatively affected private and public consumption. As the government expenditures on subsidy has been slashed by 50%, so reduction in government spending is an obvious outcome, but private consumption is affected due to the high cost of electricity-which elevates prices of almost all the commodities. The reduction of TDS has augmented the investment levels in the economy. Higher investment (3.8%) comes mainly from higher public savings or less deficit.

Results and Discussion, Macro-Level Behavior

Price of electricity goes up by 5.4% with TDS cut and electricity output goes down by 1.5%. Third simulation, increase in productivity has substantial impact on both output (16.6% increase) and price of electricity (37.4% decrease). This may become the rationale for improving productivity of electricity sector in a more competitive way

Impact on Electricity Consumptions

• The analysis of electricity consumption under these three cases is very revealing and indicates that with reduction of subsidy, the electricity usage of all types of households has gone down.

• However, the segment of society, which is affected the most (in terms of magnitude) is the ‘Urban Rich’ household

• Tariff differential subsidy is to safeguard poor households against high-energy prices, while this analysis depicts that this untargeted subsidy is benefiting Urban Rich households the most.

Welfare Impact of Policy Intervention

• When subsidy is cut, total welfare decreased by 69.6 billion, where the rich urban are the most affected. However, we also find mild welfare reduction on all farm households who are relatively poorer than urban rich

• After the transfer the welfare changes are close to zero percent which means that the transfer may compensate the loss incurred by farm households.

• Total welfare also shows better results but with worsening situation of rich urban households

Conclusion

• Tariff Differential Subsidy is an untargeted subsidy and urban rich segment of society are the largest beneficiaries of this subsidy

• Removal of TDS results in high electricity prices and poor household especially rural poor are hit hard

• The analysis provides the insight that this TDS - which is meant for providing relief to the poor is benefiting rich class the most and thus may be phased out or be made more targeted. Iran has recently done this successfully.

Conclusion

• Another important outcome of the analysis is that the amount paid to the poor household in lieu of TDS is not fully spent for purchasing electricity, rather it is directed towards other needs as well and thus unnecessary use of electricity is limited.

• Improvement in productivity of electricity sector has tremendous implications for the economy and the welfare of poor households

THANKS

Structure of the 2011Pakistan SAM Activities(52) Agriculture(12): Wheat irrigated, Wheat non-irrigated, Rice-IRRI (irrigated), Rice-basmati (irrigated), Cotton (irrigated), Sugarcane (irrigated), Other field crops, Fruits/vegetables, Livestock (cattle, milk), Livestock (poultry), Forestry, Fishing. Industry(23): Mining, Vegetable oils, Wheat milling, Rice milling (irri), Rice milling (basmati), Sugar, Other food, Cotton gin (lint), Cotton spin (yarn), Cotton weave (cloth), Knitwear, Garments, Other textile, Leather, Wood, Chemicals, Fertilizers, Cement and bricks, Petroleum refining, Other manufacturing, Energy, Construction Services(17):Trade-wholesale, Trade-retail, Trade-other, Transport-rail, Transport-road, Transport-water, Transport-air, Transport-other, Housing, Imputed rent, Business services, Health care, Education, Personal services, Other private services, Public services, Finance and insurance Commodities (51) Same as activities except Wheat irrigated and Wheat non-irrigated activities aggregated as one commodity (Wheat). Factors (27) Labor (10): Own-farm (Large farm, Medium farm Sindh, Medium farm Punjab, Medium farm Other Pakistan, Small farm Sindh, Small farm Punjab, Small farm Other Pakistan), Agricultural waged, Non-agricultural unskilled, Non-agricultural skilled Land (12): Large farm (Sindh, Punjab, Other Pakistan), Irrigated medium farm (Sindh, Punjab, Other Pakistan), Irrigated small farm (Sindh, Punjab, Other Pakistan), Non-irrigated small farm (Sindh, Punjab, Other Pakistan) Other factors (5): Water, Capital livestock, Capital other-agriculture, Capital formal, Capital informal Households (18) Rural (15): Large/medium farm (Sindh, Punjab, Other Pakistan), Small farm (Sindh, Punjab, Other Pakistan), Landless unwaged farmer (Sindh, Punjab, Other Pakistan), Landless waged farmer (Sindh, Punjab, Other Pakistan), Rural non-farm per capita expenditure quintile 1, quintile 2, and rest Urban (3): per capita expenditurequintile 1, quintile 2 and rest. Other Institutional Accounts (4) Government, Rest of world, Saving-Investment, Change in stocks. The government includes separate taxes for import taxes, direct taxes and sales taxes.