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June 14, 2020

Covid-19 — long-term ramification for power sector

Lahore

June 14, 2020

Covid-19 is the defining global health crisis of our time, but its implications go beyond health to affect social, economic, and political patterns, leaving behind deep scars. Industrial contraction, joblessness, and lower incomes are the early economic symptoms of this disease. The International Labour Organization predicts that nearly half the global workforce could see their livelihoods destroyed, and in Karachi alone, nearly two million jobs have been lost according to some estimates.

On March 21, 2020, Pakistan began an unprecedented lockdown to fight the spread of Covid-19. Availability of electricity was a critical ingredient behind the success of this lockdown and all DISCO’s, including K-Electric, ensured that reliable power was supplied 24/7 even in places plagued by over 80% power theft and at a tremendous cost to financial sustainability. Covid-19’s toll on the power sector is undeniable. Electricity demand has shrunk due to industrial slowdown and according to estimations recovery may not be visible before 2022. In just 3 months Pakistan’s electricity demand has reduced by almost 7% and may reach a 15% reduction which has affected the overall revenues of the power utility sector. Concurrently there is a shift in energy demand from profitable customers, such as industries, towards less profitable segments including agricultural and residential.

On one hand the pandemic is squeezing profitable categories and on the other side it is enhancing the loss-making categories and the Rupee impact of this shift is close to PKR 40 billion. This situation is further exacerbated by lower recoveries as vulnerable residential customers, in the absence of real relief measures like refunds, resort to power theft due to their inability to pay their bills thus creating a liquidity crunch. The outcome of both is burgeoning Transmission and Distribution losses, severe dents in utility cash flows, and expanding circular debt. The ramifications for the power sector, which is an essential service, are stark. A severe shortage of working capital to finance regular operations is likely in the short-term. In the long-term, viability and timelines of future projects, critical to meet growing consumer demand will also be affected. In both cases, service delivery to customers will be impacted with implications for GDP growth.

If we take the example of K-Electric, the company has seen a 75% dip in demand from the commercial segment, a 55% dip from the industrial segment while residential demand has risen by 25%. As a result, over the course of the lockdown since March 21st, 2020, KE’s recoveries have seen a severe dip with potential losses of 55-65% in the commercial and residential segment, and a significant dent of 80-90% in the industrial segment. The total impact of the dent in recoveries from various segments as well as the impact from relaxations such as deferred bill payments for certain categories of consumers and the deferral of ISPA and FCA coupled with pending receivables from Federal and Provincial government and related entities has had a total impact of PKR 240 billion on KE so far.

Until the financial gap is bridged by injection from the Government of Pakistan, there will be a financial crunch for the power sector, as no amount of resilience or robustness can ensure the security of supply, if the financial constraints are not addressed timely and properly. Government and regulatory interventions, which ensure working capital and other adjustments to address financial and operational challenges for power utilities, are necessary along with demand stimulation for worst affected sectors. Announcement of relief measures such as subsidies and refunds which consider the long-term effects of joblessness and depleted income levels are more impactful than deferred payments which affect the liquidity of utility companies without providing real relief to the worst affected. The government also needs to treat and respond to pandemics like a natural disaster.

To provide relief to the consumers w.r.t electricity bills, countries have taken unique approaches. Looking at the South Asian market - Malaysia, residential consumers were provided a progressive discount on electricity bills till September 2020 and six worst-affected business sectors including hotel operators, travel and tourism agencies, shopping complexes, theme parks, and airline offices. Indonesia, 24 million customers received free electricity for 3 months (April, May & June 2020) and 7 million customers received a 50% discount on electricity tariff, both financed by a USD 24.9 billion stimulus package. In Thailand, discounts were provided to 10 million households for March to June with free electricity up to 150 units for households with power meters lower than 5 amperes, varying discounts were also provided for February’s billing even up to over 3000 units. South America, the National Electric Agency, Brazil authorized the transfer of USD 400 million to guarantee liquidity amongst the companies in the electricity sector while concurrently prohibiting the suspension of power supply due to payment default for up to 90 days.

If a critical service such as electricity supply is put in jeopardy it will literally cripple all other efforts to combat the spread of the virus, to treat patients, and essential services and essential industries, will also grind to a halt. Energy suppliers have a special responsibility on their shoulders. To ensure that the power sector is shielded from the impact of such disasters, now and in the future, it is imperative that there is a roadmap in place for recoveries and necessary regulatory and policy decisions are swiftly undertaken that safeguard critical national resources, prime amongst them energy assets and energy security.

(The writer is CEO, K-Electric)