Energy Crisis In Pakistan Essay 2013 Honda

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Pakistan is in the midst of one of the worst energy crises in its history. This is both slowing the pace of economic activity and causing public unrest with prolonged outages of electricity and gas. Capacity utilization in some key industries has fallen to nearly 50 percent. Worst affected is the fertilizer industry, which faces interruptions to its gas supply and forced closures. Pakistan has the capacity to produce more than one million tons in exportable surplus urea, yet in 2011-12 it imported more than 1.1 million tons. This eroded the country’s foreign exchange reserves and effectively entailed the payment of millions of dollars in subsidies, being the difference between the cost of locally produced and imported urea. Pakistan urgently needs to make some strategic decisions and change the national energy mix.

Immediately after assuming power, the government of Nawaz Sharif came up with two policy decisions: pay half a trillion rupees (just under $5 billion) to energy companies and announce a new power policy. Both steps are aimed at resolving problems plaguing the companies belonging to the energy chain and bringing change to Pakistan’s energy mix to optimize the average cost of electricity generation.

Pakistan’s government paid Rs260 billion in cash to independent power plants (IPPs) to clear outstanding debt. It also issued bonds to pay off liabilities pertaining to state-owned companies such as exploration and production firms and oil and gas marketing entities. After clearing the debt of the IPPs, it was expected that they would be able to generate 1,700MW in additional electricity, attenuating the shortfall that currently exceeds 6,000MW. The situation is likely to improve over time.

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According to the available data, at present installed power generation capacity in Pakistan is estimated to about 22,500MW (excluding the Karachi Energy Supply Company, more on which below), but actual power generation hovers around 15,000MW, partly because of outdated and inefficient power plants and partly because of a cash crunch, which often does not permit power plants to operate at optimum capacity because of the inability to buy the required furnace oil. This could be best understood when one looks at the available data on power plants operating in the public sector, which have an installed capacity of over 4,800MW but actual generation hovering around 1,200MW.

At present, the bulk of electricity supply comes from hydroelectric plants (6,500MW) and IPPs (6,500MW). The output of the hydro plants is dependent on water availability in the dams, and can fall to as low as 2,500MW when water levels drop drastically. And as we have seen, IPP output is limited by money problems.

Pakistan’s woes have been exacerbated by its excessive reliance on thermal power plants, mainly using furnace oil. Two factors contributed to the emergence of this situation: a change in lenders from the public to private sector, and Pakistan’s failure to complete a hydroelectric project in recent decades. The last mega dam, Tarbella, was completed in the mid seventies and no other dam has been constructed since. After the signing of the Indus Water Treaty with India, Pakistan was required to complete construction of one mega-size hydroelectricity plant per decade to ensure year-round availability of low cost electricity and irrigation water.

Of Pakistan’s 6,500MW hydro capacity, the bulk is contributed by three projects: Mangla, Tarbella and Ghazi Brotha. There are nearly two dozen IPPs, but the major players are Hub Power Company, Kot Addu Power Company and Uch Power Plant. Pakistan also has three nuclear power plants, two in Punjab and one in Karachian, with aggregate capacity of over 800MW. However, the Karachi plant is at the end of its effective life and its capacity cannot be termed “dependable.”

Unlike the rest of Pakistan, Karachi gets its electricity from a compact utility, Karachi Electric Supply Company (KESC), which handles generation, transmission and distribution. The bulk of its generation comes from the Bin Qasim Power Plant, which has an installed capacity of 1,260MW. Another 500MW comes from smaller units. Since privatization, KESC has added another 500WM capacity at Bin Qasim but its output has remained erratic because of the inconsistent supply of gas.

Poor governance, incompetence, lack of transparency, distribution and transmission losses (a euphemism for theft), have made powering Pakistan a transMission Impossible.

A recently released book by the Woodrow Wilson International Centre for Scholars (Wilson Center) reviews the energy crisis in Pakistan and raises the question if there is a way out of Pakistan’s endless energy crisis?

A careful read of the book reveals that while there may be a way or more out of this mess, there are, however, no shortcuts. Given the challenges and structural constraints, Pakistanis may have to live with the energy shortfall for decades, if not more.

Edited by Michael Kugelman, Wilson Center’s expert on South Asia, the book represents a serious effort to understand the determinants of Pakistan’s energy crisis. The edited volume benefits from the views and expertise of eight specialists who have researched Pakistan’s energy challenges.

The book’s value as a reference text is rather limited, owing to the less than adequate referencing. Still, given the paucity of research on the same in Pakistan, Wilson Center and Michael Kugelman must be commended for this timely publication.

Also read: Why Pakistan's power woes will get worse

The Challenge

The blackouts (loadshedding) lasting for hours are the most ominous sign of the energy crisis in Pakistan. The reason is simple: the demand for electricity in Pakistan exceeds supply by 5,000 MW. At its worst, the shortfall could be as high as 8,000 MW. The installed electricity generation capacity is around 22,000 MW.

It surprises me a great deal that energy experts in Pakistan define the shortfall as the difference between the installed generation capacity and the actual production. This approach erroneously assumes that the installed capacity is sufficient to meet the total electricity demand in Pakistan. Given that a large segment of the population is not even connected to the grid, their power needs are not being accounted for in the stated shortfall. Furthermore, it is again erroneous to assume that those fortunate ones connected to the grid will not consume more power (latent demand) if it were available in addition to the installed capacity.

One wonders why Pakistan cannot generate sufficient electricity to meet the demand. The answer to this simple question is rather complex.

Affordability:

First is the affordability challenge. Thanks to poor planning and governance, Pakistan generates very expensive electricity. The cost per unit kilowatt-hour (kWh) of generated electricity in Pakistan is around 14 cents (14 Rupees). Consumers, on average, pay 11.50 Rupees per kWh. The systematic subsidy, which is almost 15 per cent of the cost, adds up to billions in losses.

But this is not all. There are distribution and transmission losses, which in Pakistan is a polite expression for theft. Across the country, 22 per cent of the generated electricity is lost due to theft and some transmission losses.

Collection:

Collection is another challenge, where the distribution companies fail to collect outstanding dues from consumers. The recovery rate ranges between 80 per cent to 90 per cent. Dr Musadik Malik, who holds a doctorate in Pharmacy and advises Prime Minister Nawaz Sharif on energy, offers an analogy that I have adapted below.

Let us assume that Pakistan generates 100 units of electricity. The system loses 22 units to theft. Thus, only 78 units reach consumers. We further assume that the distribution companies collect approximately 85 per cent of the amounts billed to consumers. The system, therefore, recovers revenue for only 66 units of the 100 generated.

See: ‘Private sector can help overcome energy crisis’

Now comes the subsidy. Since it costs 14 cents to generate a unit of electricity, and the average tariff charged is 11.5 cents, the system recovers revenue at full cost for a mere 54 units.

Effectively, the total loss from transmission losses, theft, recovery, and subsidies is 46 per cent. This leads us to the other self-inflicted financial wound, i.e., the circular debt.

Circular debt:

Each year, it adds up to billions of dollars. Why, you may ask. According to the CIA World Fact Book, Pakistan generated 94.65 billion kWh in 2011. Since it costs the system 14 cents to generate a kWh of electricity and the real recovery rate is merely 54 per cent, the total annual circular debt is estimated at US$6 billion.

Some energy experts may argue that the circular debt is not that large. They may be right. The amount of circular debt will be lower if less power is generated, losses due to theft are lower, and the recovery rate is higher. However, even when transmission, distribution, and theft losses are down to 10 per cent and the recovery rate rises to 95 per cent, the annual circular debt, owing to the subsidy, will still be around US$3.9 billion for 95 billion kWh.

The circular debt, therefore, is the amount the State fails to collect from consumers and transfer it to the State’s oil-procuring agencies. This stops oil shipments to independent power producers, who halt the production, but continue to receive payments from the State for the installed capacity rather than for generated electricity.

Why the subsidies?

We are told that the subsidies are required to protect the poor. This is partially true. The complete truth is that the subsidies protect the profit margins of the very rich involved in generating power at such expensive rates. Even in the South Asian neighbourhood, Pakistan generates one of the most expensive electricity at 14 cents per unit.

The high cost is a result of using petroleum or its derivatives for power generation. Generating electricity with coal or gas is much cheaper. The real question to ask is why Pakistani planners recommended oil-based power plants to independent power producers, and at the same time committed to providing cheaper oil and buying electricity at higher tariffs. I’d submit that the circular debt is not an unexpected development but an inevitable consequence of poor economic planning.

Coal and Gas to the rescue

Experts believe Pakistan’s energy crisis may have a solution in coal or gas. Thar coal is being touted as the answer to Pakistan’s power crisis. Thar’s 175 billion tons of coal reserves have given several authors in the book the hope for a long-lasting solution. I admire their optimism.

However, in earlier writings for the Dawn, I had shown that when it comes to Thar, we may be counting our chickens before they hatched. Only 2.7 out of the 175 billion tonnes of Thar coal are categorised as measured (proven) coal reserves. The rest of the reserves (172 billion tonnes) fall under hypothetical (undiscovered), inferred, and indicated category.

Other experts believe that despite there being a shortfall in Pakistan of two billion cubic feet, natural gas offers the potential to generate electricity at affordable costs. Also, almost 11 per cent of natural gas remains unaccounted for in Pakistan.

The recent agreement between Iran and Western powers opens the possibility to build a gas pipeline to Iran and link it with India and China. The recent Chinese announcement of $35 billion investment in power infrastructure in Pakistan has earmarked loans for the Pak-Iran-China gas pipeline. Cheaper gas may mean affordable electricity for Pakistan.

Source: Kugelman, Michael. Pakistan’s Interminable Energy Crisis: Is there any way out?. Woodrow Wilson International Center for Scholars. Washington, DC. 2015. Pp. 157.

What to do?

The Wilson Center publication offers advice on how to address the energy crisis in Pakistan. The book highlights the need for better governance of the power sector and the need to eliminate redundancy in regulatory authorities.

Improving governance in Pakistan is easier said than done. The challenge is a lack of qualified personnel to regulate these complex entities. While ‘experts’ are plenty in Pakistan, qualified experts are in short supply. Individuals with training in energy economics and infrastructure engineering are few, and even fewer in the public sector. Without the desired human capital and presence of political will, it is unlikely that governance will improve in the short-run.

Pakistan’s energy mix has to be altered to reflect the resource-constrained realities of the nation. Pakistan’s reliance on expensive imported oil has worsened the energy crisis. Unlike India and China, Pakistan generates very little power from coal. The call to shift to coal and gas makes sense.

The book, however, does not mention nuclear as an option. Belgium, France, Lithuania, and Slovakia, generate more than 50 per cent of their electricity from nuclear. Some may argue that nuclear is not the cheapest alternative. Still, not having any mention of nuclear in the book seemed odd to me, especially when Pakistan already generates a fraction of its electricity from nuclear.

Experts strongly recommended the need to limit losses during transmission, distribution, and because of theft. The switch to smart, temper-proof metres being installed in Islamabad and Peshawar is a welcome development. MicroTech, a Pakistani firm specialising in smart metres, is providing the technology to limit theft in the system. At the same time, assistance from the US AID for smart metres to monitor the national grid covering 9,000 feeders is a timely development to modernise the command and control structure.

Even though the book was published before the heatwave in Karachi that killed over 1,200 people and exposed the inadequate performance of the city’s privatised electric supplier (K-Electric), experts were reluctant to call for an outright privatisation of state-owned distribution companies.

A recent report by the regulator, NEPRA, revealed that K-Electric, despite its tall claims of adding thousands more megawatts to its generation capacity, is limited to carrying no more than 2,200 MW. What’s the point in expanding generation capacity, but not being able to distribute the power?

Read: Analysis | K-Electric: Tripping on the exit

The State’s omnipresent intervening role in power politics in Pakistan hampers reform in the energy sector. Even when K-Electric has been privatised, its establishment can still not rationalise its workforce without intervention from the State. The lack of law and order in Pakistan implies that any attempt to lay off surplus workers will likely meet a hostile reaction, thus allowing the State to step in and pull rank.

Violence also ensues when tariffs are raised for electricity, natural gas, or gasoline. The authors urge the government to raise tariffs for natural gas to the wholesale levels in the UK, i.e., $8-10 per million British Thermal Units (BTU). At the same time, they urge doubling the industrial tariff for natural gas to $10 per million BTU.

The motivation behind the call to raise tariffs is to curb the excessive consumption of natural gas in Pakistan, which results from the inherent subsidy that keeps prices low. Doubling tariffs will likely have political repercussions. It is hard to imagine any incumbent government anywhere surviving such drastic increases in the price of utilities.

There are, however, no shortcuts to an electrified future of Pakistan.

The authors mention the 900 MW solar power plant near Bahawalpur and the Gadani 6000 MW project as examples of new capacity being added to the system. Large power plants will take anywhere between 5 to 10 years to come online. Improving governance and curbing theft should not take that long.


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