Power tariff hikes: The more you devalue rupee, the more capacity charges you pay

Top official says capacity amount has doubled after dollar exchange rate jumped from Rs100 to Rs300

LAHORE (Web Desk) – Devaluation – a process that started under former finance minister Miftah Ismail in late 2017 and late 2018 but gained momentum under the PTI government – is the root cause of inflation shouldn’t be a contested statement as it has made imports even more expensive for Pakistan.

And that’s countries like Pakistan are the worst affected due the rising commodities prices in global market as weaker currencies mean the overall impact is much deeper for them than the rest.

Read more: Rupee collapse is the reason behind all ills Pakistan is facing

This argument was endorsed by none other a high-ranking government official – Power Division Secretary Rashid Langrial who said on Monday that the capacity [charges] payment had doubled after the dollar exchange rate increased from Rs100 to Rs300, thus resulting in skyrocketing electricity tariffs for consumers. 

Capacity Payment doubled as dollar rose from PKR 100 to 300. Foreign-funded dollar-denominated IPPs have contributed the most. Locally funded RLNG plants's capacity payment has increased by 60 % while foreign-funded coal plants' payment has gone up by 145 %. Policy lessons ? pic.twitter.com/HbEhpYvEIn

— Rashid Langrial (@Rashidlangrial) September 18, 2023

One must remember that the capacity payment rates are set in terms of dollar, not the local currency, to attract investors. Sharing the details, Langrial said the foreign-funded dollar-denominated IPPs had contributed the most to the trend as questioned whether it was a policy lesson.

According to Langrial, the capacity payment to the locally-funded RLNG (Regassified Liquefied Natural Gas) has increased by 60 per cent the same for foreign-funded coal plants jumped by a whopping 145pc.

The total payable amount under capacity payment is Rs2,152 billion out which Rs643bn is for coal-fired power plants followed by nuclear Rs510bn, alternative energy Rs260bn, hydel IPPs Rs255bn, Wapda Rs147bn, RLNG Rs139bn and Gencos Rs46bn.

But Pakistan is bound to follow the guidelines set by the International Monetary Fund (IMF) – which has made the State Bank of Pakistan completely independent – as the market is supposed to determine the exchange rate without any government intervention.

Read more: Dollar pull effect: How a weaker currency makes you hostage to dollar

Certainly, Langiral is right in asking about policy lesson whether it be about pricing power generation in terms of dollar, or the very idea of capacity payment and linking it to the dollar, or the unchecked devaluation of rupee under the open market principle.