The Ministry of Economic Affairs has formed a task force to study BCCI’s proposal
Many residents in Thimphu and other urban areas can be found grumbling and scratching their heads due to a significant jump in their latest electricity bills, as the higher tariff rates approved by the government became effective from October 2013.
They are not alone as the Bhutan Chamber of Commerce and Industry (BCCI), on behalf of the private sector and urban consumers of electricity, has appealed to the government to review the revised electricity tariff rate.
The BCCI, in a letter to the Prime Minister dated 30th October, has appealed for a review. The BCCI has also submitted a 16-page report highlighting the impact of tariff increase on both industrial and residential consumers in Bhutan. The BCCI says the report is made after an extensive study carried out by the Chamber and Association of Bhutanese Industries and is titled “Impact of the Electricity Tariff Revision of October 2013-June 2016 on the Industrial and Residential Sector in Bhutan.”
The main focus of the report is on industrial consumers in the High Voltage (steel, ferro- silicone, etc.), Medium Voltage (food processing, beverages, smaller factories) and Low Voltage Bulk (hotels, institutions, etc.). The report also lists out the financial impact on low voltage residential urban consumers.
“If the tariff rate is not reviewed then most industries in Bhutan will go out of business,” said BCCI Secretary General, Phub Tshering.
He said, “We are not against an increase, but rather for an increase to a more affordable rate and so would like to appeal to the government to reconsider the increase.”
The Secretary General pointed out that if the tariff was not revised, it would affect other sectors of the economy. “As industries shut down people will lose jobs, government will lose tax revenue and industries would default on their loans to banks, which will create more financial problems,” he added.
The government on its end is also in a tight corner with all royalty power subsidy at its disposal spent in subsidizing the approved tariff rates which would have been even higher without the subsidies.
Ministry of Economic Affairs Minister Norbu Wangchuk said, “The government has exhausted the entire royalty power subsidy coming to around Nu 1.5 bn every year and the government has no money to give any more subsidy.”
However, the minister said that the government would not want to see any industries shutting down as a result of the tariff revision.
He said, “Both in the case of industries and urban residents, the government had examined the revisions and found it to be reasonable and affordable, but nevertheless we have received the petition from the private sector and it deserves a serious consideration and relook.”
The minister said a taskforce consisting of MoEA officials and the Bhutan Electricity Authority (BEA) had been formed to look into the report presented by BCCI and see what could be done.
The BCCI report prepared with help from the QED consultancy hired by it on retainer services lists the impact of the tariff hike on all class of consumers.
A key point of the report is that tariff for all categories of electricity users from the 1980’s have increased very gradually. Taking urban resident users as an example, it says that in the previous hike between 2010-2013 the hike was only around five percent every year coming to a total of 15 percent in by 2013 compared to the latest tariff hike of 2013-2016, which is an increase of around 15 percent every year coming to a 50 percent hike by 2016.
Impact on High Voltage users
High Voltage (HV) customers are those that take electricity from 66 kV voltage level or higher power lines. There are 14 HV customers in the country consisting of manufacturing industries based in Pasakha, Gomtu, Motanga (Samdrup Jongkhar) and Dungsam.
The report says that the increase in the tariff during the three-year tariff period (2013-2016) is 32.05% compared to 3.95% in the last tariff period of 2010-2013.
It says, “Such an increase results in a rate shock for HV customers leading to a very high electricity bill for HV users. Such an event will lead to many HV industries being very un-competitive in terms of production cost and will ultimately lead to the closure of the business.”
The report says that even though the annual average increase in the electricity rate is about 10.11% only, it results in a decrease in the Profit after Tax (PAT) by about 39.3% and a decrease in the tax collection by about 36.11%.
Therefore, if an HV industry has a peak demand of 20 MW, the increase will translate into an increase of Nu. 2,080,000 per month every year of the three year tariff period.
The report includes a sensitivity test done on five HV industries and the impact on their revenue over three years. The test claims that by the third year the electricity bills will be so high that of the 5 factories tested three will have to shut down while the remaining two will see severely reduced profits.
It says that the tariff will lead to many HV’s closing shop.
In 2011, the 14 HV industries had paid around Nu 438.31 mn in Corporate Income Tax and Business Income Tax to the government.
Impact on Medium Voltage Users
There are a total of about 43 Medium Voltage (MV) customers with most of them consisting of medium sized manufacturing industries based in Pasakha, Phuentsholing, Gomtu, and other industrial areas.
MV customers are those that take electricity from BPC at the 6.6 kV, 11 kV or 33 kV voltage lines.
The increase in the tariff during the three-year tariff period (2013-2016) is 48.01% compared to 18.59 percent in the 2010-2013.
Accordingly, if an MV industry has a peak demand of 2 MW, the increase will translate into an increase of Nu. 204,000 per month every year of the three year tariff period.
The report says, “The corresponding increase in the electricity bill for MV customers as a result of the revised electricity rates will lead to a similar result as for HV industries, wherein many MV industries will be forced to close down the business.”
Impact on Low Voltage Bulk Users
Low Voltage (LV) bulk customers are those that take power from BPC at the low voltage level, but are large and institutional in nature as compared to residential customers. Most of these customers are institutions such as schools, hospitals, military establishments, institutes and small to medium scale industries.
The increase in the tariff during the three-year tariff period (2013-2016) is 71.96% compared to 15.68 % in the 2010-2013.
This would mean that the annual tariff of these users would increase by more than 20 percent every year and affecting their business.
The report says that the biggest impact of the hike, in terms of highest increase in electricity tariff, will be felt by small scale industries or LV customers followed by medium sized industries or MV customers and large industries or HV customers.
Impact on Low Voltage urban resident users
While the above categories dealt mainly with big factories to small businesses the tariff hike, according to the BCCI report also takes out a chunk from mainly pockets of the urban residents.
The increase in the tariff during the three-year tariff period (2013-2016) is 50.97% with an annual average increase of 14.72%.
This is compared to the total tariff increase in the 2010-2013 at 15.58 % with an annual average increase of 4.94%.
The report taking an example assumes that an average Thimphu household in consumes around 1,022 units of energy per month using things like heaters, fridge, etc. This should generate a monthly electric bill of Nu 1,956 before the hike in 2013. After the current hike, the same bill increases to Nu 2,248 in 2013-2014, Nu 2,576 in 2014-2015, and finally Nu 2,953 in 2015-2016.
It says that this increase for urban resident consumers is very high.
The report says that the competitive advantage that many Bhutanese manufacturing industries have is the relatively cheap electricity which has been the only reason why many power intensive industries have been set up along the southern foothills on Bhutan close to the Indian border.
It says there is no way in which Bhutanese industries can compete with the cheap labor or the low transportation rates in India and the neighboring countries. The report says that these industries add a lot of value to the Bhutanese economy by way of bringing in much needed Indian Rupees/convertible currency, providing jobs, paying taxes to the Government, and other positive multiplier effects to the economy as a whole.
The report warns revised electricity tariff will translate into many businesses closing shop as the relatively cheap electricity rates that gave many Bhutanese industries the competitive edge as compared to their counterparts in India and other countries will no longer exist.
The BCCI also claims that Bhutan Power Corporation and Druk Green Power Corporation are already making huge annual profits, more than any other companies in Bhutan. It says that “Revising the electricity tariff upwards to make the two state- run monopolies more profitable at the cost of the industrial sector and the business community is not in line with ensuring a balanced and holistic growth of the overall economy. Such a growth model is flawed and is not sustainable in the long run.”