Issues in energy for development

The welfare of humanity has critically depended on our ability to harness and use energy. Development in Pakistan has similarly faced huge obstacles resulting largely from our inability to organise the availability of energy at a reasonable cost in a world where energy supply is plentiful and evolving technology is making it cheaper. Our history is replete with episodes of ‘stop-go' growth driven by energy shortages and excessive costs both of which arise from mismanagement.

Energy policy has been reactive, lacking coherence, foresight as well as cost consciousness. Instead of putting in systems of planning and management that seek to match supply and demand, governments have haphazardly thrashed about looking for quick xes involving expensive supply contracts and costly projects. This reactive policy has resulted in extensive periods of energy shortages followed (or often accompanied by) rapidly rising cost of energy. Decades of this poor planning has now led to a price of electricity that is far higher than Pakistan's competitors. No wonder, exports have been stagnant as a percentage of GDP for two decades forcing the country to go to the IMF repeatedly.

Rising costs of energy Ironically, consumers in Pakistan are paying higher electricity prices with a lower per capita income than worldwide consumers who are paying lower tariffs with far higher per capita incomes. As depicted below declining worldwide electricity tariff imply that our industry and economy will further face higher power tariffs even if our rates remain the same as of today.

Arbitrary surcharges Inefciencies cannot be exported, and neither can the legacy contract costs. The need to reduce the energy price basket is increasingly urgent, as energy rates are falling in other countries. There is now a new proposal to impose xed charges of over Rs 5/kWh on captive power based on capacity of grid connection even if the grid power is not used. This will surely shut down industry in Pakistan as it will no longer be able to compete. Despite having an average fuel cost of Rs 4/kwh over the last year, the existing system is unable to meet costs in spite of an average selling price of Rs 21/kwh.

How tariffs rise! The tariff is extraordinarily high due to high capital costs, Tariff Differential Surcharge (TDS), line losses and non-recovery of billing primarily from provincial governments, tube wells and AJK, which are charged to all paying consumers. The extremely high TDS is a reection of the much higher costs of Pesco, Hesco, Sepco, and Qesco as compared to Fesco and Lesco.

There are some important questions regarding charges and tariffs:

a) According to ofcial documents submitted to Nepra by CPPA/Ministry of Energy the cost of service as estimated to an industrial consumer C3 is as follows:

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Component                            Rs/kWh

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Fixed Charges                        6.79

Variable Charges                    4.96

Distribution & Line losses       6.73

Total                                       18.48

Addition to this:

Non collection                         82%         3.336 (18% add on)

21.81

Add: Financial Charges          0.43

Neelum Jehlum Surcharges   0.10

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Total                                       22.34

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This makes the cost of service of 14.4 cents/kWh against a regional cost of service of under 10 cents for our competing countries. How can Pakistan compete if tariffs are set to recover these costs which include inefficiency and legacy?

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 Country                                                      Cents/KWH

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Pakistan                                                           13

China-General                                                 10

China-XinJiang                                               7.5

Vietnam                                                            8

Bangladesh                                                      9

India                                                                 8

India-Punjab                                                     7 (Fixed for 5 years) ==================================================================

b) Can the power sector cover the cost of idle capacity which according to Nepra is over 4,000MWs as total capacity costs exceed Rs 900 billion this year and as tariffs are high, demand is not picking up?

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Summary of Power Balances
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                                                   Jul           Aug         Sep           Oct            Nov         Dec          Jan            Feb           Mar          Apr            May          Jun
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2018-19 Firm Gen. Capability   25,332    27,822      25,851     24,004      20,188     19,767      19,724      19,304      21,997      24,871      26,574      26,887
Peak Demand                           24,589    26,306      22,435     20,990      16,738      16,383      16,329     15,865      18,592      21,427      25,816      27,261
Net Surplus/Deficit                    743         1,516        3,416       3,014         3,450       3,384         3,395       3,439        3,405       3,444          758          (374)

2019-20 Firm Gen. Capability    27,477    30,296     27,720      26,325       21,787     21,112      21,400      20,568     23,716      26,279       28,630     28,892

Peak Demand                            25,395     27,169     23,171      21,679      17,287      16,921      16,864      16,386     19,201      22,129       26,662     28,155
Net Surplus/Deficit                      2,082      3,127        4,549       4,646        4,500         4,191        4,536        4,182       4,515       4,150         1,968         737

2020-21 Firm Gen. Capability     29,509    31,630     28,904       27,114     22,805        22,227      22,066      21,955     24,462     27,843      30,467      31,184
Peak Demand                             26,451    28,298     24,134       22,580      18,005       17,624     17,565       17,067     19,999     23,049       27,770     29,325
Net Surplus/Deficit                      3,058       3,332        4,770        4,534         4,800         4,603       4,501         4,888       4,463       4,794        2,697       1,859

2021-22 Firm Gen.Capability MW 31,678   33,667    33,496        31,594      26,757      26,374      26,195       25,678      29,169     32,057     35,582     35,883
Peak Demand                             27,890    29,838      25,447       23,809      18,985       18,583      18,521      17,996       21,088      24,303    29,282     30,921
Net Surplus/Deficit                      3,788      3,829        8,049          7,785         7,772         7,791       7,674        7,682         8,081         7,754      6,300      4,962

2022-23 Firm Gen. Capability     35,065      37,098     33,036        31,812       26,800      26,166      25,995      25,793      29,015       32,332     37,347    37,786
Peak Demand                             28,821      30,834     26,297         24,603      19,619      19,203      19,139      18,596       21,791       25,115     30,259    31,953
Net Surplus/Deficit                       6,244       6,264       6,739            7,209        7,181        6,963        6,856        7,197         7,224         7,217       7,088      5,833

2023-24 Firm Gen. Capability       37,697      40,012    35,232        33,070       28,198      27,744       27,683      26,721      30,464      33,969       38,868    39,196
Peak Demand                            30,393        32,516     27,731         25,945       20,689     20,251        20,183     19,611       22,980      26,485       31,910    33,696
Net Surplus/Deficit                     7,304            7,496      7,501           7,125        7,509        7,493          7,500       7,110         7,484        7,484         6,958      5,500

2024-25 Firm Gen. Capability      37,786       39,835      34,952         33,055       27,585    26,804        27,062      26,424       30,040      33,670      37,607    37,935

Peak Demand                              31,950       34,182      29,152         27,274       21,749      21,288      21,217       20,615        24,157     27,841      33,544    35,422

Net Surplus/Deficit                        5,836          5,653       5,800           5,781         5,836       5,516         5,845        5,809         5,883         5,829        4,063       2,513

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c) Why is the government proposing to charge stranded costs, average network losses, cross subsidy, etc of over Rs 6/kWh from B2B transactions, thereby killing the establishment of an open and free electricity market by burdening the private sector with its legacy costs and inefficiencies.
d) The cost of generation is rapidly falling whereas the grid supplied electricity costs are increasing. Does the government want to kill all industry by forcing them to use the expensive grid instead of far cheaper self-generation and renewables?
e) With such wide variation in line losses at between at 9% losses in Lesco, Iesco etc., and 37% losses in Sepco, Pesco, does equalizing the tariff make any sense and is it fair?
f) Financial surcharge the interest cost of the circular debt payment to IPPs of Rs 480 billion in 2015. Is it fair to charge this to current consumers?
Technology cost decreased in all areas such as in cars, airlines, appliances and electricity as depicted above. However, electricity pricing remains stuck at the same level. The cost of grid electricity has either remained static or increased. This is beyond comprehension. The question of losses and inefficiencies.

Inefficiencies of the power sector directly impact living standard of household consumers, profitability of businesses, process of industrialization and economic growth of the country. Power is the bloodline of the economic development, the reforms and corrective policy measures listed below are essential for the power sector to perform.
1. Receivables position is further worsening due to unaffordable increasing tariff, which is forcing further theft and pilferage and making industrial revival even more daunting and insurmountable. Nepra needs to re-determine tariff of all thermal IPPs to Rate of Return on Equity equal to the stipulated policy rate (currently these IPPs are making well over 60% in dollar terms). This redetermination has been blocked by the IPPs as the Islamabad High Court has issued a stay order on redetermination by Nepra. Government of the day should ensure that the stay order is removed immediately. This redetermination will reduce the annual payments by over $1.6 billion per annum. Pakistan Coal Power Project Sahiwal and Port Qasim power tariffs are around 9 cents as compared to the competitively bid tariff of Jamshoro Coal Power Plant (1320MW), at a levelized 6.2 cents which tariff is in line with international norms. This is a reflection of the high costs associated with projects that are not subject to competitive bidding. Government should approach the Chinese government to reset the exorbitant tariff currently costing an additional $450 million per year. Since the higher tariffs are borne by consumers/industry the legacy contracts render the exports uncompetitive and make power unaffordable for masses.
RLNG-based generation is already priced above the economic dispatch threshold. These RLNG plants now have become a millstone and liability for the country. Currently, these RLNG plants produce electricity at Rs 17.50/kWh and are therefore not dispatched. There should be no addition of any projects which generate electricity above economic threshold price. The reason of high electricity tariffs from these projects is the expensive Qatari LNG contract. Resultantly, we are purchasing LNG at $8.6/MMBTU whereas India is procuring same at less than $ 3/MMBTU. We can make ef􀃨cient use of these plants only if we procure LNG at competitive rates. However, we need to renegotiate the LNG contract with Qatar to bring it in line with market realities.
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Description Rate (In Dollars per MMBTU)
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Fixed RLNG Price for SSGCL/SNGPL (February 2020)          11.19
Indian LNG Cargo Latest Purchase LNG+ Regas etc              2.80 + 1.50 4.30
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2. The recovery of capacity payments of around Rs 1 trillion per annum is only possible if focus of revenue collection from lower consumption to higher revenues through additional sales/consumption by reducing price signiplus/idle capacity is 4000MWs for the next three to four years. This is understated as a 15% spinning reserve is already allowed in Nepra's calculations. Our estimates are 7,000 to 8,000MW are surplus/idle capacity. It is feared that the demand  are grossly overstated. Nepra requires assistance from a competent tariff design consultant to design efor this purpose.

The current annual capacity charges are around Rs 900 billion and current (January) generation is 9,000MW out of an installed capacity of 26,000MW. A further 10,000MW capacity is also in the pipeline. The current capacity charge works out to Rs 3.32 per kWh at a 100 percent capacity utilisation. At a usage of only 35%, the ed cost component would jump to over Rs 10 per Kwh and if demand does not increase substantially the surplus would increase exponentially in the coming years.

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Generation Cost Only (FY 2019-20)
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Months            EPP             CPP               PPP              EPP           CPP            PPP
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In Million Rupees Rupees per kWh
——————————————————————————
July                78,633           67,143          145,776           5.36          4.58          9.93
August           71,940            72,365          144,305          4.84           4.87         9.72
September     60,101           80,711           140,812          4.42           5.93        10.35
October          54,669           77,182           131,851          5.26          7.43         12.69
November      39,706           76,451           116,157           4.65          8.96        13.61
December      43,685           75,076           118,761           5.00          8.60         3.60
January          56,020           74,147           130,167           6.23          8.24        14.47
February        37,774            74,647           112,421           4.76          9.45        14.23
March            54,722             77,134          131,856           5.57          7.85         13.42
April               71,751            77,207           148,958           6.36          6.84         13.20
May                85,518            77,064           162,583           6.45          5.81         12.26
June              83,467             78,045           161,513           6.00          5.61         11.62
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Total               737,986          907,174         1,645,160        5.43           6.67        12.10
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  1. To fast-track the establishment of a market, all PPAs of existing IPPs should be renegotiated to guarantee purchase of only 50% of capacity, balance to be traded or sold directly on B2B basis through wheeling and or through a power exchange. All road blocks and additional charges on wheeling proposed by CPPA/Ministry to be rejected out-rightly so that B2B power business and market development is promoted and allowed to establish.
  2. Line losses in the distribution companies exceed 24% whereas on the basis of a scientiy USAID in 2012, the technical losses of the system do not exceed 11%. To control the line losses high loss feeders may be contracted with communes of linesmen and meter readers for billing and collection on a sliding scale basis compensation for improvements.

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   Statement of Losses
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DISCOs           Units Purchased             Units Sold              Percentage
                         MkWh                            MkWh                       Losses
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LESCO             24,339                          21,132                      13.18%
GEPCO            11,100                          10,004                        9.87%
FESCO            14,970                           13,499                        9.83%
IESCO              11,838                           10,789                       8.86%
MEPCO            19,367                          16,310                      15.78%
PESCO             14,427                            9,074                      37.10%
HESCO             5,557                             3,917                       29.51%
SEPCO             4,411                              2,781                       36.94%
QESCO             6,257                             4,779                       23.62%
TESCO              1,821                            1,603                        11.97%
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TOTAL              114,087                         93,889                       17.70%
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  1. Government should make it mandatory for all consumers over 5KW connection to purchase their own prepaid smart meters which should be prequalied by Discos but on sale through private sector in order to ensure no cost or procurement by Discos.
  2. A stagnant economy with 1.2% anticipated growth rate (negative in large scale manufacturing and agriculture etc) coupled with surplus generation of whatever amount (expecting 10,000 to 12,000MW) with mandatory capacity and unnatural rate of return payments is aggravating the problem and every possible reform measure will fall short of improvement unless the economy is beefed up with immediate reduction in interest rate from 13.25% plus KIBOR to single digit gure and special incentives are offered to exporters, ailing and closed units.

Thoughtful professional regulation is key

On the regulatory front, there is a lack of uniform parameters in the energy sector that promotes distortions between the gas and electricity sectors. Inconsistent regulation between the National Electric Power Regulatory Authority (Nepra) responsible for the regulation of the power sector and the Oil and Gas Regulatory Authority (Ogra) responsible for the regulation of the oil and gas sectors sends confused signals to investors and creates disharmony in pricing strategies between gas and electricity. This also allows for arbitrage between gas and electricity sectors and the capture of the cheap gas by inuential lobbies at the cost of the country maximizing economic benet from the gas resources. This is further complicated by the RLNG which is priced very differently without any public hearing or scrutiny while it  ows as a comingled indistinguishable gas in the very same pipelines. As a result, the allocation of the cheaper domestic gas takes on a whole new political dimension as a result.

 

There are numerous policies that relate to narrow sub-sectors; there is no entity responsible for the energy sector as a whole and there is no integrated energy policy or physical or nancial planning. Merger of the energy sector regulators with expanded and more specic responsibilities is an essential reform for the sector. Strictly applying the criteria for selection of members and revoking amendments allowing bureaucratic capture. This can be solved by increase in the number of members of Nepra to 9 by appointing 4 professional members apart from the provincial members.

Mandatory stock exchange listing Enforcing mandatory listing of all Discos and public sector energy SOEs on the stock market will ensure operational and disclosure standards in line with good corporate governance.

Large size of Discos The size of contracting certain Discos such as Lesco and Fesco is unmanageable and there is a requirement that the Disco size is made manageable. The size of Discos must be reduced to a manageable level prior to privatisation or contract management.

Need for conservation/efFurthermore, Pakistan consumes 30% more energy for each unit of GDP than competitors. There is tremendous scope for conservation/efciency gains. Private energy conservation companies can help realize latent efciencies. Policy advocacy has to plug the knowledge gap in this area and also reach and strengthen constituencies that currently get drowned out by stakeholders whose primary focus is to increase installed capacity because of the huge returns involved. The reforms should include an upgrade of the power system load dispatch & control and management at the national and regional levels. A proper and transparent EMS system can be purchased from the market with a contract for operations which includes training.

The evolving energy mix without forward planning Short of outright privatization, efciency in the power generation and distribution can only be achieved through management contracting. The management and workers of the utilities have opposed implementation of new technology, which solves many of the problems, this issue needs to be addressed by the newly inducted contract management as state employees have not be able to take the bold steps required.

On the other hand, building reservoirs and dams are not only the key to cheap energy tariffs, but also address our other screaming issue; water scarcity. The water scarcity is not only a function of not building the necessary reservoirs but also the wasteful manner in which it is used. To put it in perspective Pakistan has world's fourth highest rate of water usage per unit of agricultural output. Major parts of Pakistan have good soil, abundant sunshine, perfect farmers and yet crop yields, both per cubic meter of water and per hectare, are much lower than international standards. In contrast yields from reliable and self-provided groundwater are twice as compared to unreliable and inexible canal supplies.

In the twentieth century around 46,000 dams were built of which 22,000 in China, 7,000 in USA and 4,600 built in India. The decision has resulted in massive progress in development and wellbeing of these countries providing the key input for a ourishing agriculture sector.To meet its growing water needs it is imperative for Pakistan to focus on building dams which have a political consensus such as Bhasha dam. Bhasha dam had been delayed by nearly ten years so far even although it was unanimously approved by the CCI in 2010. The dam will have storage capacity of around 8.1 million-acre feet, electricity generation capacity of 4500MW costing approximately Rs 4.5 per kWh. Bhasha Dam will yield an additional 8 billion dollars per annum to the GDP at current water use efciency rates. Bhasha dam will also increase the life of Tarbela for at least 20 years but will also allow Dasu to produce far more and cheaper electricity.

Resuscitating Bhasha dam is therefore the key to Pakistan's economic future because it will cater for both water storage and electricity generation. Unless corrective action is taken, Pakistan is fastly becoming one of the most water-stressed countries quite apart from the high power tariffs. Attention of the decision makers must therefore focus on construction of Bhasha Dam with as little delay as possible.

Power sector circular debt The power sector bills an estimated Rs 1.5 trillion per annum. The average recovery is 85 percent therefore 15 percent of Rs 1.5 trillion accumulates as circular debt apart from other matters outlined below. Circular debt accumulation rate is far higherthan Rs 20 billion per monthwhenthe factors stated below are accounted for:

Factors which cause circular debt to accumulate are:

  • Nepra does not give any allowance for interest on late payment to IPPs
  • GST is collected by FBR on billing whereas collection of Discos is on average 85%.
  • Nepra does not recognize Agreement with AJK to provide ed price electricity and es AJK tariff at much higher rates which are not paid
  • Ministry of Finance pays a fraction of the cost supplied to FATA as subsidy whereas there is no bill payment in FATA
  • Inefxcessive line losses beyond Nepra determinations.
  • GencoS do not produce power at efy Nepra
  • Billing collection rates in some Discos are dismal because of disputes with the Provincial governments and uncovered subsidy to tube wells in Balochistan.
  • Cost of delayed noticular debt as interest charges on loans.
  • Fuel price adjustment is retrograde rather than prospective and the formula needs reformulation to capture full FPA.

Note: This paper does not fully cover the issue of circular debt as it deserves a detailed analysis on its own and cannot be covered in short write ups.