The International Monetary Fund (IMF) has allowed Pakistan to modify the price formula used to determine the captive gas levy, which will reduce gas prices for industrial consumers using the fuel for in-house power generation by up to 60%.

However, the IMF has conditioned the reduction with no adverse impact on the existing withdrawal of electricity from the national grid by the industrial consumers. In case of a dip in power demand, the government would increase the gas levy to 20% a month before the scheduled time of August this year, said the sources.

Government sources told The Express Tribune that the global lender had communicated its decision to allow Pakistan to change the methodology being used to determine the captive power levy.

According to the new arrangement, the levy will now be set by shifting the reference price from the peak of B3 industrial rate to a weighted average of the peak and off-peak B3 industrial rate.

This single change will result in a 60% reduction in the levy rate for March. Based on the current peak rate, the captive levy is Rs1,303 per mmBtu, which, if set at the weighted average of both rates, will come down to Rs522 per mmBtu, giving a relief of 60%. The 60% reduction is not guaranteed, but the past 10 months levy trend showed that user prices could go down in the range of 30% to 60%.

The request to change the price formula had been made by Petroleum Minister Ali Pervaiz Malik last month during the third review talks. At that time, the IMF stated that it would examine the feasibility of calculating the levy by using average tariffs, but did not make a final decision.

The government calculates the levy by considering the difference between the power tariff for the B3 industrial category notified by Nepra and the self-power generation cost of captive power plants (CPPs) at the gas tariff notified by Ogra. The IMF again rejected Pakistan’s requests to freeze the 15% additional gas levy on industry’s in-house power plants and to exempt efficient plants from the levy. It has told the government to increase the rate to 20%, which, according to the IMF, is more important now to keep prices high after the adjustment in the calculation formula.

However, in case the demand from the national grid plummets, the IMF may ask Pakistan to increase the rate to 20% from July, the sources said. They added that according to the IMF decision, if the demand for electricity from the national grid still drops further, the levy may even have to be increased above 20% to address the issue.

The levy is the difference between the scheduled notified industrial tariffs, intended to force industries to stop using gas to generate in-house electricity and shift to the highly expensive and unaffordable national power grid. The petroleum minister last month informed the IMF that the CPP levy was causing significant losses to Sui companies, as imported gas had been diverted to low-end consumers.

Owing to past policy missteps, consumers are unwilling to pay high electricity prices and are shifting to other sources, primarily rooftop solar. The IMF was informed that during the first half of the current fiscal year, the Sui companies incurred losses of Rs104 billion, and the collection of the captive power levy was also below estimates.

Bureaucrats are now coming up with different ideas to discourage the use of solar, including the requirement to get a licence for installing solar panels for household use. However, these tactics have not stopped the users from getting rid of the expensive electricity. Sources said the IMF observed that the CPP levy should be seen as a punitive tool to discourage the use of gas in these inefficient in-house plants. The shift of captive plants from gas to the power grid has increased costs for industry, particularly for export-oriented units.

There had been criticism in the past for providing expensive gas to less-efficient captive plants with only 30% efficiency. However, some plants are reported to have about 55% efficiency, with no independent verification of this claim.

According to sources, the IMF has asked that those captive plant users who have already shifted to the national grid should not switch back to the gas network after a change in the price formula.