Unreasonable Energy Taxes Burdening Consumers' Wallets

Unleashing the Ripple Effect: The Impending Energy Storm for Pakistan's Textile Sector

Get ready to feel the heat! Pakistan's textile industry, a labor of love for millions, is on the brink of a storm as the federal government imposes a whopping Rs 77 per litre petroleum levy on furnace oil (HFO), coupled with a carbon tax of Rs 2.50 per litre. The result? A hefty new tax bill amounting to Rs 84,742 per ton, which is already past its sell-by date at a whopping Rs 130,000 per ton!

For export-focused textile mills, many of whom operate on HFO-backed captive power for uninterrupted production, this tax torpedo will severely undermine their viability. With captive generation costs soaring to a mind-boggling Rs 51 per kWh – an increase of more than 50% – companies face a stark choice: continue to bleed money or switch to the unpredictable, more expensive, grid supply. But for the majority of these firms, the grid is a pipe dream, with DISCOs in Lahore, Karachi, and beyond often denying connections due to infrastructure constraints and overflowing transformer capacity.

Even when connections are offered, they come at a hefty price: demand notices that reach into the tens of billions of rupees, with no assurance of timely service and lead times stretching up to a brutal two to three years. In other words, pursuing a grid hookup is neither economically feasible nor operationally practical, especially when inseparable from frequent electricity sags and load-shedding. It's like trying to catch a greased pig without even a sliver of hope!

The government's decision to apply a punitive tax on HFO follows hard on the heels of a controversial "grid transition levy" on gas consumption by captive power users – a tax that the government itself admits is miscalculated but refuses to correct. This levy is allegedly designed to align the cost of captive power with grid tariffs, but it's a recipe for disaster that relies on an eight-year-old Nepra determination of captive O&M costs – a figure that has more than doubled or tripled due to inflation and currency depreciation – and incorporates a series of arbitrary errors that inflate the final rate, forcing efficient captive generators onto an unprepared grid.

Over the past month, major textile production units have faced repeated outages, voltage spikes, and unexpected shutdowns – incidents that have caused significant damage to equipment, disrupted production lines, and left numerous workers out in the cold. Unfortunately, these are only the beginning of a trail of disasters. Pakistan's electricity grid, mired in a state of distress, lacks both the capacity and reliability to cope with additional industrial loads, threatening disaster for the textile industry if the government persists in its ill-fated plans for HFO levy.

So, what's the alternative? Instead of investing in grid modernization, grid expansion, and aging infrastructure updates, the government has chosen to deploy the brute force of levies on alternative energy sources, slowly squeezing out the grid as the only viable option. First, gas, and then HFO – solar panels may soon be next on the list. Politicians hail the market-driven approach and competitive pricing, but their actions speak louder than words as punitive taxes are used to bully industrial users onto a creaky and unreliable grid system that is ill-prepared to meet their needs.

But there's more at stake than just individual factory bills. Pakistan's textile industry accounts for over 50% of export revenue, provides millions of jobs, and props up rural livelihoods through cotton farming. A sudden surge in energy costs is likely to erode global competitiveness, triggering plant closures or the offshoring of production to more stable energy markets. The hubris of misguided energy policy could lead to the stranglehold of industries once held dear, and potentially – a hollowing-out of the very growth narrative that the government claims to champion.

So, what's the way forward? Here's the three-point plan to save the day:

Hit the Pause Button: Suspend the new petroleum and carbon levies on HFO until a thorough analysis of their impacts is conducted in consultation with industry stakeholders, DISCO representatives, and energy experts.
Fix the Grid Transition Levy: Revise the calculation for the grid transition levy so it accurately reflects current grid power tariffs, captive generation costs, and inflations, without supporting artificial price inflation that forces efficient captive generators onto the grid.
Grid Modernization: Commit to a multi-year grid-modernization plan that addresses bottlenecks, reduces line losses, and ensures that the grid provides reliable power at a competitive regional rate of 9 cents per kWh or less.

Without these urgent corrective measures, the government risks imposing an undue and unnecessary burden on Pakistan's most crucial export sector, one that is already struggling on the precipice. Why suffocate the markets with coercive taxes when policy could be used to foster growth, provide stability, and sustain prosperity? It's time for a reversal of the fossil fuel levies, alongside a clear, bold roadmap for grid improvement – if we're to save the textile sector from becoming a casualty of misguided energy policy, and to reaffirm Pakistan's reputation as a formidable competitor on the global stage.

Enrichment Data:- The new levies on furnace oil are part of Pakistan's first carbon pricing mechanism, aiming to discourage the use of fossil fuels and promote green energy programs.- Refineries currently produce 2.5 million tons of furnace oil annually, with 1.5 million tons exported. If international crude oil prices remain above $75 per barrel, furnace oil prices might surge by up to 67%.- Over the past three years, furnace oil consumption in Pakistan has been decreasing by about 40% due to the shift from furnace oil to coal and liquefied natural gas (LNG) in power generation.- Furnace oil consumption in electricity production has drastically declined, with the share reduced to a marginal level, primarily used by some Independent Power Producers (IPPs) and in emergency situations.

The new levies on furnace oil, coupled with carbon taxes, could trigger a surge in inflation, making investments in the textile sector riskier.
The higher costs associated with grid electricity, due to demand notices and inadequate infrastructure, may force textile companies to consider reallocating their value elsewhere, outside of Pakistan.
With sports often being a reflection of national identity, the potential decline of Pakistan's textile industry could have ripple effects, impacting the nation's global competitiveness and economic growth.
To avoid the risk of further straining the textile sector, the government should consider revising energy policies, implementing grid modernization, and fostering growth through competitive taxation and sustainable energy incentives.

Unreasonable Energy Taxes Burdening Consumers' Wallets