As the winter approaches talk of energy shortages in Pakistan are rife. After three decades of load shedding and electricity shortages now there is talk of critical shortages of gas. Each government since the 1970's has added to the problem of mismanagement, poor planning and misplaced priorities to the extent that one can say the energy sector is seriously broken. The chronic problems facing this sector are summed up below:
1. Installed generation capacity is 37,000 MW, while peak demand is 27,000 MW, which indicates that there is possibility for generation surplus. However, the transmission capacity is only 22,000 MW resulting in massive shortages in peak seasons. Over the past three decades there is been nominal investment in the transmission and support infrastructure resulting in a situation of shortages. Not tapping this surplus which is not consumed costs the country about 2% of GDP.
2. Consumer tariff levels are below the cost of generation and transmission for electricity resulting subsidies from the government to sustain lower tariffs for consumers. Residential rates at $0.10 per KwH is the same as the generation rate, so once the transmission and administrative cost is factored in there is a loss.
3. There has been no investment in upgrading the generation efficiency of the state owned power generations units resulting is a higher cost of generation. Currently many of Pakistan's power generation units use 14,000 BTU to generate 1 KwH against an accepted international standard of 8,400 BTU. This indicates that their power generation is almost 50% less efficient that the norm. It is estimated that 45.2 billion is needed to upgrade the existing plants.
4. It is estimated that between 20 to 30% of electricity produced is effected by what is politely called 'transmission loss'; which is really theft. Power theft for legally addressed in the Electricity Act of 2003 but virtually no enforcement has taken place. Political power and a corrupt enforcement regime means that people who steal the power are assured of getting away scot free.
5. Poor bill collection suggests that around 15 to 20% of bills are unpaid. While the biggest defaulters are the government agencies and departments there is a significant number of private and industrial consumers who just don’t pay their bills. In recent years there has been some effort for government agencies to try and be current on their bill payments but there isn't sufficient evidence that this is the case. In addition, there is such huge deficit of unpaid bills that it is very unlikely it will ever be caught up.
6. The result of these mismanagement issues have been that the combined amount of the subsidies and the unpaid bills have been financed by the Water and Power Development Authority (WAPDA) by bank borrowing backed by the government guarantees. This is massive amount as is commonly known as circular debt in the banking fraternity. This debt is rolled over each time tranche matures and is evidence of the extent to which the power sector has been mismanaged.
7. Structural Inefficiencies were created in the late 1990's and then again in 2007 when there were massive generation shortages. This power generation gap was covered by allowing private co-generation agreements to be put into place with new investors in the power sector with tariff structures that were not realistic. The new investors are pretty much guaranteed between 18% and 25% return on equity by structuring the off take rate at $0.12 per KwH. These agreements are still a bone of contention and also a major financial burden.
8. Capital inflows have not only dried up for new and more efficient energy system but we have also seen a dearth of finance for the maintenance of the existing power infrastructure. Fossil fuel, Hydro power and coal as the three main sources of energy generation and all suffer from poor investment in terms of upkeep and operations. Hydro dams are silted, old out dated technology is used in the furnace fuel generation plants and the transmission network is not only under capacity but also poorly maintained.
The Power sector in Pakistan while having massive potential is also the backbone for social and economic progress. The mismanagement and inefficiencies in this sector have become endemic and need a serious plan to be put into place to correct this vital sector. Some suggestions are summed up and while these are not entirely comprehensive, for which a major working paper would be needed, but it may help to concentrate on these points.
Main issues to address:
1. Pilferage of power and non payment of the bills, even by government departments should be addressed on a war footing. It is estimated that the combined effect of these two elements results in close to 50% of loss of revenue to the sector. (20% pilferage and 25% non payment of bills). Exemplary punishments should be handed out to those who are stealing power. Disconnection of power supply for non payment of current bills should be a policy even for government departments.
2. With the above measures the increased revenue collection should be used entirely or atleast 50% to enhance the transmission network so that the installed capacity can be brought to the consumers.
3. As of now there are about 10,000 MW of new generation capacity being installed or considered for installation. This capacity will take 4-5 years to be completed and it is presumed since it use newer technologies the generation cost will be significantly lower than $0.10 per KwH. Additional new capacity has to be studied to see if it is cost effective.
4. Private Power generation units that were given preferential rates in the lat 1990s and 2007 have had over 15 years to recover their capital costs. These agreements should be renegotiated to bring them into line with current market rates for their off take tariffs. The owners of these units have held the upper hand by threatening to reduce or terminate power supply but with new capacity coming on they will have less leverage in the future.
5. While it is estimated that $5.2 billion is needed to upgrade the existing capacity to make it more efficient a five year plan to achieve this should be put into place. As efficiencies improve the cost-benefit of these plants will significantly improve with some units being able to achieve a reduction in costs by as much as 45%. This in turn will reduce the power generation cost per KwH and thus reduce the subsidy that the government provides to this sector.
6. A massive effort to encourage solar farms and solar cogeneration should be immediately implemented. Unlike fossil fuel and hydro projects, which can take from 5 to 8 years to be completed, solar farms can be completed within a year. Additionally current technologies to created concentrated solar plants have not only brought the cost down from $3m per Megawatt 15 years go to around $1 million per Megawatt. These capital costs are significantly lower than any of the other options for power generation. In addition the cost per KwH for solar power is currently between $0.03 to $0.06 per KwH. As most of the solar power can be provided to smaller towns and cities this would eliminate the subsidies that are given to the residential sector in the tariff rate structure.
7. One of the major obstacles for new investment in the power sector is the massive corruption in the country. From the inception of the project design there are string of government officials who have to approve these projects who demand their 'cut' of the capital costs. One can go so far as to say that its like a mafia within this sector as reporting one official only results in his colleagues being even more difficult in approving the project. One person suggested that the 'cut' demanded is at times as high as 5-6% of the project cost!
8. Countering the 'oil mafia' within the country is one of the major issues for investors in renewable energy sector. There is within the country a coterie of businessmen and government officials who benefit for the import and distribution of furnace oil to the power generation companies. Whenever, there is a large renewable energy project under consideration this oil mafia works behind the scenes to scuttle the project. Whether such a mafia exists needs to be investigated and appropriate action taken to address their influence.
While the above measures are common sense and seem rather straight forward the real issue is implementing a plan that puts these into place. The extent of the current mismanagement and corruption is so massive that successive governments have been unwilling to tackle the problem. The clout of the private power generation companies has also been instrumental in the lack of ability to address these issues. For the private power companies their returns are pretty much guaranteed and thus it is not in their interests to change the status quo.
However, creating an efficient power sector cannot be achieved in one stroke but has to be carefully thought out and achieved in a series of steps. Over a period of three to five years one can implement these recommendations and thus looking forward create a viable power sector. If Pakistan is to achieve economic progress then this is imperative to implement with boldness and clarity.
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