Presentations made at the PSSP First Annual Conference - December 13, 14, 2012 - Planning Commission, Islamabad, Pakistan

1. 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. 2

3. 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

4. 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.

5. 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

6. Reasons for Electricity Shortages
a) Efficiency Crisis;
b) Fuel Mix Crisis;
c) Financial Crisis;
d) Financial Discipline crisis;
e) Governance Crisis;

7. 20
Demand - Supply Gap
18.9
19.2
19
18 17.4
17.9
17 6 KMW
(peak)
15.8
16
KMW
15
13.9
14 13.4
12.8 13.2
13 12.4
13.3 13.6
12.6
12 12.6
05 06 07 08 09 10 11
7

8. Electricity Demand & Supply Forecast
Source: National Electric Power Regulatory Authority (NEPRA)

9. • 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

10. Fuel Mix of Electricity Generation
Nuclear &
Coal/Others, Imported, 3.90%
0.10%
Oil, 35.10%
Hydro, 33.60%
Gas, 27.30%
Source: Energy Year Book, 2011
Coal Based Electricity Generation: 78% in China, 68% in India, 40% in Germany and 50% in USA

11. 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)
75 % of residential users use less than 300 units.
46.1% of the electricity is consumed by the residential users who pay an average rate of
Rs.7/Kwh

12. 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

13. 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 Budget 15,000 140,000 15,000 10,807 7,921
Refineries/OMC
s
Revised 175,000 70,000 11,224 10,807
Fertilizer Budget 10,360 12,860 210 185 162
Manufacturers
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

14. 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?

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

16. 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%.

17. 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.

18. 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

19. 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.

20. 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

21. 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.

22. 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

23. THANKS

24. 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.