LAHORE - Resolution of energy crisis that curtailed country’s economic growth for last few years, is expected to be one of the main themes while subsidy for power consumers would be reduced by 60 per cent in upcoming Federal budget 2012-13.Financial experts said that government will introduce energy sector reforms including announcement of subsidy target of Rs 120 billion, which is less than the last fiscal year by around 60 per cent.‘Besides recent increase in power tariff, government will reaffirm its commitment to introduce energy sector reforms that include ending untargeted subsidies, restructuring the energy sector and issuance of TFC’, experts stated. They said that government is likely to announce subsidy target of Rs 120 billion, which would be similar to the announced target last year but is 60 per cent lower than the estimated disbursement of Rs 275-300 billion in FY12.With political ramification, it is expected government would not completely bridge the gap between cost of generation and recovery from consumer and will be hesitant to follow through its plan to revamp the energy sector.Though the government will surpass its subsidy allocation of Rs 120 billion to Rs 200 billion in FY13 but it would still be lower than estimated subsidy of Rs 300 billion in FY12, slowing down the built up in the circular debt and slightly easing IPPs liquidity issue. Another, silver lining in this regard is the recent decline in oil prices that could further reduce the monthly built-up in the circular debt and thus ease subsidy.Government likely stance of bearing the burden of subsidy, would affect IPPs operating under 2002 policy (like NCPL, NPL), while it would be comparatively less negative for the ones operating under 1994 policy.  With stalled energy sector reforms, liquidity issues would remain at the heart of power sector, while higher portion of electricity shortage is attributable to liquidity crunch caused by circular debt. Currently, effective electricity capacity after adjustment for transmission losses and idle hydel stands at 14,000MW. But due to liquidity concerns, the country is generating around 11,000 mw despite an average demand of 15,500 mw.Thermal power generation swinging towards expensive furnace oil (51 per cent in FY11 as against 31 per cent in FY06) amid gas shortage would add expensive electricity to the national grid and aggravating generation - recovery gap in the electricity tariff.Though IPPs earnings are based on fixed return formula but circular debt do create liquidity problems for the IPPs particularly for those under 2002 policy. The policy does not guarantee capacity payment on account of non-availability of fuel. IPPs operating under 1994 policy, the policy guarantees fuel availability that allows them to pass on the liquidity pressure to State own entities (particularly PSO).According to them, in FY13, the country’s oil production will increase by 5 per cent, while gas production is expected to increase by 4 per cent. During FY12, the sector’s oil production has remained stagnant, while gas production increased by 5 per cent.The government will reaffirm its commitment for the resolution of energy crisis through energy chain restructuring. However, political consideration may not allow the government to follow through its plan.Government will try to resolve circular debt by TFC issuance and recent increase in power tariff by 0.5 per cent turnover tax to continue for downstream oil sector. Recent electricity tariff increase would likely slow down the circular debt built-up. It is estimated actual subsidy will reach Rs 200 billion in FY13 versus Rs 300 billion estimated in FY12.Thus, OMCs cash position is expected to be relatively better in FY13. The issuance of new bonds is expected to be a short-term remedy for the liquidity problems of the energy chain with full and final settlement of circular debt lies in complete revamping of entire energy chain.