Why cheap electricity at the last stage does not make our exports competitive

Why cheap electricity at the last stage does not make our exports competitive

In response to: "Export reality", Dawn editorial — https://www.dawn.com/news/2028058/export-reality

Dawn's editorial "Export reality" makes a fair point. The trade deficit has widened sharply in the first two months of this fiscal year, FPCCI is right to call the cost of doing business a binding constraint, and the paper is also right that this is not the whole story our product mix has barely moved in decades while competitors climbed the value chain, and value addition was always the way out of that trap.

I want to add one thing to that diagnosis, because I think it explains part of why value addition has not happened.

We keep looking at the value-added exporter in isolation, instead of at the cost structure that produces his final product.

Take textiles. In spinning and weaving, electricity can be 20–30 per cent of the cost of production. In stitching and garment manufacturing, it may be 5–7 per cent. The garment exporter is connected at low voltage and gets the cheaper B2 tariff. But the fabric he buys already carries the higher B3/B4 electricity cost of the spinner and the weaver, embedded in its price.

So the policy effectively says: we will give the exporter cheap electricity, and make his raw material expensive.

That does not improve export competitiveness. It shifts the energy cost upstream and hides it inside the input price. The exporter still pays it. He just cannot see it on his own bill.

The pricing runs against the cost of supply

What makes this harder to defend is that it is upside down technically as well.

High-voltage consumers are cheaper to serve. They take supply at 11 kV, 33 kV and 132 kV, largely bypassing the distribution network where most of the losses sit. They build, own and maintain their own switchgear and grid stations. On any reasonable calculation, the cost to serve them is 20–30 per cent lower than serving a low-voltage consumer.

They also use the system better. B3 and B4 run at load factors of roughly 49.8 and 57.4 per cent — well above the system average. In a sector where the capacity payment is the dominant fixed cost, consumers who draw steadily around the clock are precisely the ones absorbing that fixed cost and spreading it for everyone else.

And the scale is not marginal. B3 and B4 together are only 3,566 consumers — under 1 per cent of industrial connections — but they take 17,965.8 GWh a year, about 65.1 per cent of all industrial electricity.

Cheaper to serve, better utilisation of installed capacity, two-thirds of industrial consumption — and priced above the category below them. That is the inversion.

It is not only textiles

The same structure repeats across every chain we say we want to move up:

Chemicals and polyester — the intermediate is electricity-intensive, the converter is not

Plastics — resin and film extrusion upstream, packaging and moulding downstream

Paper and packaging — pulping and paper machines upstream, printing and conversion downstream

Steel and engineering — melting, casting and re-rolling upstream, fabrication downstream

Food processing — cold chain, milling and drying upstream, packing downstream

In every one of them, the energy burden sits at the stage that makes the material, and the relief is given at the stage that ships the box.

And the cost is not only the tariff

There is a second cost that never appears in any tariff table. Upstream units run continuous processes. A trip of two seconds, or a voltage dip, is not a two-second loss: yarn breaks across the whole frame, a steel heat is wasted, an extrusion line runs off-specification, and it takes hours to restart. Motors, drives and control panels degrade with repeated voltage excursions.

NEPRA and the Power Division have framed the Performance Standards (Distribution), which is a genuinely good step and even provides for compensation where standards are not met. But there is still no visible system in which an industrial consumer can log such an event, have it verified against the DISCO's own SCADA and event records, and claim that compensation. A standard without a recording and complaint-management mechanism behind it stays on paper.

What I would ask for

Two things, neither of which needs a rupee of subsidy:

Correct the inversion — bring the B3 rate down by around Rs 3 per unit and B4 by around Rs 5 per unit, so that price follows cost of supply.

Make reliability accountable — a complaint hotline and online portal for large industrial consumers, a permanent recording system in every DISCO, transparent verification, and a working route to the compensation the Standards already promise.

If we are serious about value-added exports, we have to optimise the energy cost of the entire chain. The final /converter exporter in the value chain pays for every inefficiency embedded in his raw material — whether or not it shows up on his own electricity bill.

Reference: "Export reality", Dawn editorial — https://www.dawn.com/news/2028058/export-reality

Rehan Javed writes on energy pricing and industrial competitiveness. The views are his own.