The impending 17% increase in gas prices for Captive Power Plants is set to benefit the overall energy sector, while posing significant challenges to industries such as textiles and chemicals.
Following approval by the Economic Coordination Committee (ECC), the Oil and Gas Regulatory Authority (OGRA) has announced a hike to gas tariffs for captive power plants, raising their rate from Rs. 3,000/mmbtu to Rs. 3,500/mmbtu. The move benefits gas utilities, generating additional cash flows.
The revision is in accordance with the International Monetary Fund (IMF)’s demands for tariff alignment, narrowing the price gap between captive power tariffs and RLNG prices, which have averaged around $6.5/mmbtu for the past three years. However, while the ECC approved the hike for industries, it deferred a proposal of the Petroleum Division to increase the tariff for unprotected residential consumers by Rs. 100/mmbtu.
Ultimately, the move hopes to encourage industries to transition from less efficient captive plants to the national grid.
According to an analyst from Inter Market Securities, the overall energy sector, especially gas utilities like Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines (SNGP), will be able to generate additional cash flows of Rs. 21 billion through the tariff increase. It would similarly benefit Exploration and Production and RLNG suppliers, including the Oil and Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL), and Pakistan State Oil (PSO).
However, it poses a significant challenge for industries such as textiles and chemicals, increasing their electricity costs by about 15% or Rs. 5-6/kWh, pushing the per-unit cost to around Rs. 40/kWh. Ahead of the tariff hike, various industry leaders arranged alternative fuel and power sources, including multi-fuel fired plants, increased solar power plant capacities, direct RLNG purchases from private companies, and power supply arrangements with respective power utilities. Yet, note analysts, the threat of a complete cessation of power for captive power persists, especially with concerns about the reliability of uninterrupted power supply from the grid.
Taking cognizance of the possibility, the cement sector has already made significant investments in low-cost energy sources to reduce reliance on expensive fuel oil and grid electricity.
In its last review, the IMF had urged the government to completely disconnect the gas supply to captive power, diverting it to efficient power producers. This would essentially shift the industry to the national power grid. The ECC supported this proposal in its September 2024 meeting. However, the Commerce and Petroleum ministries highlighted potential adverse effects on export-oriented sectors and the gas utilities sector.
Subsequently, the All Pakistan Textile Mills Association (APTMA) had urged the government to renegotiate with the IMF and consider a tariff hike instead of a complete disconnection. It had argued the latter would undermine the industry’s competitiveness and hinder export growth. After multiple discussions, the IMF agreed to realign gas tariffs for captive power with RLNG prices to meet revenue requirements, effective February 2025.