Pakistan’s Energy Crisis

Pakistan’s Energy Crisis
EconomySouth AsiaPakistan August 31, 2013 By Shabbir H. Kazmi Energy shortages are hobbling the economy and contributing to unrest. But the country has options. 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. 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Energy Supply Company, more on which below), but actual power generation hovers around 15,000MW, partly because of outdated and inefficient power plants and partly because of a cash crunch, which often does not permit power plants to operate at optimum capacity because of the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. Experts blame many of Pakistan’s problems on the “circular debt,” which mainly arises because of the poor recovery of receivables by the distribution companies. It is estimated that for every 100 units of electricity provided by a distribution company, it gets paid for 30. Of the remaining 70 units, nearly 40 are pilfered and the bills for the remaining 30 go to long-term receivables. Corrupt utility executives and workers contribute to this dismal state. After privatization, KESC’s new management tried to right size the company, but the move was resisted by employees, who enjoy significant political support. At any rate, analysts acknowledge that human resource costs may be high but it is transmission and distribution losses that really trouble KESC.

These losses currently hover at around 35%, mostly because of theft. A one percent improvement would improve the company’s cash flow by Rs1.5 billion per month. To overcome its electricity shortage, Pakistan has to come up with policies for the short, medium and long terms. The first step for the short term has been taken by clearing outstanding debt. Now, supporting policies must be prepared and implemented to ensure that circular debt does not rebuild. This requires containing theft and improving recovery. A hike in the electricity tariff could improve cash flow at distribution companies, but opponents argue that a higher tariff itself provides an incentive to pilfer electricity. They say the government should ensure an uninterrupted supply of electricity at affordable cost. As a medium-term policy, all power plants operating in the public sector need to be refurbished to improve efficiency, which will help bring down the cost of generation. However, the focus should be on achieving the highest possible output from hydro power, where the cost of generation is still Rs2.00/units, compared to the bulk power purchase tariff of US$0.70/unit being paid to IPPs, mostly being run on furnace oil. Simultaneously, efforts should be made to switch power plants from furnace oil to coal. Gas should be avoided. To begin with, power plants could use imported coal, but ultimately they will need to use an indigenous source. In this endeavor, Lakhra Power Plant near Karachi, which has been closed for some time, must be reactivated as soon as possible.

It uses coal produced at nearby mines. Under long-term measures, the government must prioritize the completion of the Thar Power Plant. Thar has more than 185 billion tons of lignite coal, suitable for mine-mouth power plants. It is estimated that Pakistan could generate more than 50,000MW of power from Thar coal alone. Experts say Pakistan should focus on hydro generation as the country has the potential to produce 40,000MW by constructing small and midsize dams and run-of-the-river projects. Two of the latter type (Ghazi-Broth and Laraib) are already in operation. The advantages of these projects are minimum displacement of people and minimum areas under water. An added advantage is the renewable aspect. Pakistan also has the potential to get electricity from sugar plants located across the country, especially in rural areas. Some industry experts suggest that sugar mills could deliver up to 3,000MW to the national grid. This option is very lucrative, because sugar mills will mostly use very low-cost bagasse to heat the boilers, using furnace oil only as a supplement. Yet another advantage of sugar mills is that they have the capacity to produce ethanol, which can be added to motor gasoline to produce E-10 (petrol containing 10% ethanol). This will help contain oil imports and conserve compressed natural gas. As the saying goes, there is opportunity in crisis, and this certainly applies to Pakistan’s energy sector. Notwithstanding the significant challenges, a large market and an enthusiastic government could entice bold investors, local and foreign.