The Case For Rationalizing RLNG Pricing in Favor of Captive Industry in Sindh

THE CASE FOR RATIONALIZING RLNG PRICING IN FAVOR OF CAPTIVE INDUSTRY IN SINDH – K-ELECTRIC

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July 3, 2025

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Writer: MR. ASIM RIAZ AN ESTABLISHED ENERGY EXPERT, M.PHIL. STRATEGIC STUDIES NDU,MASTERS IN ENERGY MANAGEMENT CIIT, B.SC. (MECHANICAL) UET, BS. MATH-PHYSICS PU.

Captive industrial consumers are currently burdened with Gas tariff of $15.38 per MMBtu (PKR 3500 Notified Tariff + PKR 791 Levy), rendering efficient in-house industrial captive power generation economically unsustainable which is vital for decentralized power grid and Renewable Integration to achieve climate targets. In contrast, K-Electric (KE) can be supplied RLNG by Pakistan LNG Limited (PLL) at an estimated cost of $9.60 per MMBtu, based on the June 2025 Brent mean of $67.26 and ENI indexation at 12.14%.

However, it had chosen to off-load the PLL ENI cargoes in International Market, resulting in huge TTF arbitrage to LNG supplier with no benefit to the consumers. Irony is Industrial captive consumers, despite demonstrating higher energy efficiency, are subjected to tariff structures anchored in grid-connected B3 industrial pricing and transitional grid integration levies. Parking inefficiencies of Power Sector in Gas tariff for Industries.

Despite capital investments exceeding PKR 544 billion since privatization, KE’s operational performance remains deeply inadequate. In 2005, KE’s net generation efficiency stood at 19.74%, reflecting the condition of a neglected, loss-making utility. Nearly two decades later, and after substantial financial inflows, that figure has improved only to 35.57%, which is calculated by adjusting the reported gross efficiency of 42% for 15.3% transmission and distribution (T&D) losses.

The scale of investment relative to this modest efficiency gain is, quite frankly, pathetic. Even basic single-cycle captive power plants now operate at 36% efficiency without access to public infrastructure, regulated tariffs, or subsidies. More impressively, modern Combined Heat and Power (CHP) systems deployed across Pakistan’s industrial sector regularly achieve up to 87.5% energy utilization by integrating electricity and heat recovery. These systems represent the benchmark in energy productivity and underscore how far behind KE remains, despite having every structural advantage.

The performance gap becomes more evident when considering KE’s Aggregate Technical and Commercial (AT&C) losses, which stood at 21.4% in 2023. When adjusted, KE’s effective or net energy delivery efficiency drops to just 33%. In practical terms, this means that only one-third of the energy input into KE’s generation system is ultimately converted into billable electricity. The remaining two-thirds are lost due to generation inefficiencies in older plants, high technical losses across the transmission and distribution network, persistent theft, faulty or tampered metering, and poor recovery in high-loss areas.

By contrast, both single-cycle and CHP captive plants deliver superior energy outcomes. Even under the same RLNG tariff applied to KE (reflecting marginal cost), captive units consistently beat the grid parity. This reinforces the case to recognize decentralized captive generation as not only viable but economically superior within Pakistan’s energy landscape. The disparity is particularly stark in Sindh, a gas-surplus province, where industry should ideally be supplied indigenous gas at OGRA’s prescribed price free from cross-subsidization distortions.

Ensuring priority allocation, in line with Section 8 of the OGRA Ordinance, 2002, would promote allocative efficiency, enhance industrial competitiveness, and ease the liquidity crunch in the E&P sector. Currently, however, the captive power tariff is more than twice OGRA’s prescribed gas price, and even higher than KE’s RLNG rate, despite captive generation delivering better net efficiency.

Gas market liberalization is essential to fostering transparency, competition, and long-term sustainability. Yet, the extension of the Captive Gas Levy Act to gas shippers and Virtual Pipeline (VLNG) operators—entities that facilitate gas delivery to industries—would create severe market distortions. This move wrongly conflates the role of consumers with that of third-party transporters, undermining the principles of unbundling, third-party access (TPA), and market-based allocation. Such a levy deters private investment, distorts price signals, and contradicts the objectives of gas sector liberalization.

The IMF Program originally mandated the disconnection of all captive power plants by January 31, 2025. However, in December 2024, this Structural Benchmark was revised. Rather than forcing disconnection, the government opted to increase tariffs to the RLNG equivalent and introduced the Captive Power Levy through the Off the Grid (Captive Power) Levy Act, 2025. As a result, the captive segment experienced rapid demand destruction. SSGC’s captive gas sales dropped from 180 MMCFD to 75 MMCFD, while SNGPL’s captive sales declined from 175 MMCFD to 35 MMCFD recently. These punitive measures run counter to the national interest.

Targeting the bulk captive sector which was cash cow for Gas utilities the highest tariff-paying consumers, undermines energy productivity, accelerates deindustrialization, and erodes export competitiveness. This segment ensures optimal gas utilization through high-efficiency operations, continuous flow, and metered supply, resulting in significantly lower Unaccounted-for-Gas (UFG) compared to subsidized retail segments. It cross-subsidizes the broader network by over PKR 140 billion annually. Moreover, its forced disconnection has led to an estimated revenue loss of PKR 391 billion for the Sui companies.

The captive sector is vital for gas sector financial sustainability and to address liquidity crunch in E&P sector which has resulted in 10% depletion in system intake of Sui companies. Also about 270 MMCFD of gas is being curtailed due to surplus RLNG. OGDCL has warned that persistent RLNG oversupply is forcing curtailment of indigenous gas production, disrupting upstream operations and projecting industry losses of up to USD 378 million over the next 12 months. This imbalance, driven by declining gas-fired power demand amid rising solar penetration, underscores the urgent need to reoptimize LNG offtake and enable contractual flexibility for re-exports.

Meanwhile, K-Electric continues to receive RLNG at much less tariff compared to Industrial Captive consumers tariff despite persistent inefficiencies and elevated system losses, effectively rewarding underperformance and distorting cost-reflective price signals across the gas value chain. Even more troubling is the reported international arbitrage of ENI-sourced RLNG cargoes, indexed at 12.14% of Brent, during periods of high European gas prices. These arbitrages occur with little transparency and no demonstrable benefit to domestic consumers, raising serious concerns about LNG procurement policy and alignment with national industrial priorities.

Pakistan’s export-oriented textile sector, already operating on razor-thin margins, is facing a critical threat from the recent imposition of a petroleum levy of Rs. 77/litre (Rs. 82,077 per ton) and a carbon tax of Rs. 2.5/litre (Rs. 2,665 per ton), raising the effective cost of furnace oil (HFO) to Rs. 84,742 per ton. Many textile units depend on HFO-based captive power generation due to the unreliable and insufficient national grid. At the previous HFO price of Rs. 130,000 per ton, the cost of captive generation was about Rs. 33/kWh was comparable to grid electricity.

However, with the new taxes, this cost has surged to Rs. 51/kWh, making operations economically unviable. Switching to grid electricity is not a viable fallback. Karachi Electric (KE) and HESCO have quoted Rs. 8 billion each (Rs. 16 billion total) to connect two major textile mills, requiring full upfront payment and offering a 3-year timeline and with no guarantees of timely execution. Furthermore, multiple government approvals are required, adding time, complexity, and cost.

The result is a looming crisis in export competitiveness: many firms unable to transition to the grid may be forced to curtail production, triggering job losses, supply chain disruptions, and a decline in foreign exchange earnings. These cascading effects will worsen Pakistan’s balance-of-payments crisis and heighten overall economic instability. The industrial sector therefore urgently seeks exemption from both the petroleum levy and carbon tax on furnace oil to sustain operations, protect jobs, and safeguard exports.

To address these distortions, it is strongly recommended that: The Ministry of Energy reallocate RLNG to captive industrial users at the same $9.60 per MMBtu rate currently extended to KE. This would promote fairness across sectors, incentivize efficiency, revive industrial demand, and reduce circular debt accumulation. It would also re-establish financial discipline among subsidized utilities and uphold OGRA’s mandate for efficiency-promoting, cost-based tariff structures. Maintaining the current policy framework rewards inefficiency, sustains rent-seeking behavior, and places an undue burden on Pakistan’s industrial base.

Rationalizing RLNG pricing in favor of high-efficiency captive users is critical for energy market reform and national economic recovery. In my view, K-Electric’s privatization, once seen as a reform milestone, now reflects institutional privilege over performance. While financial and infrastructure gains are evident, the core objectives of efficiency, reliability, and accountability remain unmet.

Despite capital inflows and regulatory relaxations, KE continues to operate with high AT&C losses, inadequate recovery, and modest service improvements. Without structural reform, regulatory discipline, and real competition, KE risks remaining a monopoly in both form and function. Karachi’s energy future cannot depend on an unchallenged and underperforming model.