Abbas Hasan
Wednesday, July 22, 2015
From Print Edition
Pakistan has one of the highest energy tariffs in the world. Due to high line losses and a poor energy mix, it is caught in a vicious cycle of extensive loadshedding, circular debt and expensive power with tariffs that are 40 percent higher than regional countries.

This can potentially cripple our industrial competitiveness. The recent reduction in the price of furnace oil may have helped reduce loadshedding slightly, but fundamental problems remain. With so much latent demand the government should not raise expectations by giving deadlines for load shedding. Instead it should focus on developing affordable energy, reducing line losses and eventually reduce loadshedding.

During the two-year tenure of this government, despite a fifty percent decrease in prices for furnace oil, and increases in power tariffs, the circular debt has inexplicably increased from Rs500 billion to Rs615 billion, while line losses have remained the same – high – pointing to an institutional failure, so much so that lenders are now questioning our sovereign guarantee’s worth. It is also noteworthy to point out that Pakistani governments have borrowed as much from 2010 till 2015 as they did from 1947 to 2010 – effectively crowding out the private sector from the debt market.

The three principal reasons for the current power crisis are: i) unaffordable power due to a poor energy mix (reliance on furnace oil), inefficient plants and costly dollar-denominated IPP contracts; ii) substantial reliance of imported fuel while charging the consumer in rupees (40 percent of the cost increase was due to rupee depreciation); and iii) high line losses and bills delinquency.

The government had three options for a solution that takes into account Pakistan’s inherent energy advantages, developing hydel, Thar Coal and solar power. Instead inexplicably it chooses to focus primarily on stop-gap arrangement imported LNG and coal. Imported coal is risky (and environmentally damaging) as moves are afoot to slap punitive export duties on coal and carbon tax in order to reduce greenhouse gas emissions – while the price of LNG is tied to the price of oil. In both cases the risk of rupee depreciation is being borne by the consumers.

India’s plan in contrast focuses on installing an expected 100,000MW of solar capacity in the next five years (or more the half the total expected new power capacity), with Softbank of Japan, Foxconn and Bharti planning to invest $20 bn to produce 20,000MW of solar power, at a price comparable with local coal power plants.

The tariff structure for the planned LNG, coal and solar plants in Pakistan are worryingly high. Bangladesh has offered a tariff of Rs5.4-6/unit for imported coal power plants. Pakistan is offering Rs8.4/unit. The UAE is producing solar power at Rs5.85/ unit. The Quaid Azam Solar plant is selling it for Rs15/unit. LNG costs $7.5/MMBTU with power from such units costing Rs7 per units. We are selling LNG to power plants at $12/MMBTU and purchasing the power at Rs11 per unit. What if by 2025 the rupee declines? Is it fair for the consumers to bear the extra cost? As compared to hydel or Thar coal where the tariff would be less than Rs5 per unit or half of what we are planning to pay.

The $0.9 billion Nandipur Power Plant is one case where the government has failed to deliver, whereas the similar Combined Cycle Gas Turbine (CCGT) units at Kot Addu run on furnace oil. One year later, the 400MW Nandipur unit is struggling to operate on RFO.

At this critical juncture all political parties should shed their development strategies, which are based on a three to five year election horizon and collectively work for an affordable and sustainable solution for power with a 15-20 year horizon. Watching hapless ministers remonstrating on television about the power crisis demonstrates how disconnected they are from real issues – such as: i) provision of affordable energy now and in the future and not ‘energy at any cost’; ii) distinction between the needs of the country and the political, provincial or financial imperatives of their respective political parties; and iii) de-emphasising investment in expensive loss-making infrastructure projects that lead to political and economic instability.

Had the same financial priority and focus been lavished on completing the Tarbela extension project and the Neelum Jhelum project as was on the Pindi Metro, Nandipur Power and resurfacing of the Lahore Islamabad Motorway approximately 2500MW of cheap and clean hydel energy could have been in the grid. Or had Thar coal been sufficiently investigated, with a functioning pilot power plant and bankable feasibility developed, another 20,000MW of affordable power projects could have been ready for development.

We must realise that we are all in the same boat and if it sinks we all sink. Although the government inherited a poor situation, it needs to reset its strategy. The opposition must realise that heated debates in the media do not generate power, only the current government’s actions do that. The army must ensure that the ship is on an even keel – given that it has been singularly instrumental in all recent critical decisions. In the words of Yogi Berra: “If you don’t know where you are going you will probably end up somewhere else”. Unfortunately, Pakistan is running out of time and money.