Electricity generation cost to spike as commodities get dearer

KARACHI: With the commodities experiencing an upswing, the cost of generation on coal, furnace oil (FO) and re-gasified liquefied natural gas (RLNG) has gone up significantly.

“The high cost of generation will likely [to] be realised in the beginning of [the] next year,” Jahanzaib Zafar at AKD Securities noted in a report.

“The impact of higher fossil fuel prices will be reflected during the month of January-February 2022 and a monthly adjustment of Rs2 toRs2.25/unit is expected, which will have to be passed on to the end consumer through monthly fuel adjustments. The adjustments coincide with lower seasonal inflation, keeping inflationary readings contained.”

The impact of higher commodity prices was partially negated by higher dependency on hydel and nuclear generation, which allowed the government to contain the generation costs. However, with the proportion of hydel generation likely to fall, the contribution of inefficient furnace oil generation will likely to increase during the winter months, which would take the overall cost of generation higher.

The global commodity prices have been on a major upswing, amid resumption in economic activities across the globe. The pent-up demand has resulted in 76 per cent year-on-year jump in the WTI crude, 175 per cent surge in RLNG and 178 per cent increase in coal prices.

Analysts believe, unlike last year, the gas crisis is likely to hit during the peak winter (November and December) season, where the share of hydel generation in the overall generation mix is considerably lower, amid lower water supply.

Consequently, the shortfall in generation will likely to be bridged through expensive furnace oil- based generation.

The cost of generation on coal has increased to Rs18.2/unit, while the cost of generation through RLNG and furnace oil are estimated at Rs20/unit and Rs24/unit, respectively.

“Though the prices have increased significantly in absolute terms, coal still retains its position as the cheapest non-renewable. The dependence on coal in the national grid hasn’t increased any further since February 2021, as no new coal projects have come online,” Zafar said.

With the increased dependency on the furnace oil comes increased risk of the circular debt accumulation, as the full impact of cost of generation isn’t passed on to the consumers.