Energy Intensity Trend: The Need for Efficiency and Conservation
Shahid Sattar & Madiha Nisar
“Business Recorder”
April 28, 2019
Energy has been globally recognized as one of the key inputs for the economic growth and social development of a country. Pakistan is one of the rapidly growing developing countries, where the annual growth rate of final energy consumption has enhanced considerably by 9.7% and reached to 55 million tonnes of oil equivalent during 2017-18 due to major increase in consumption of industry, agriculture and transport sectors. . In this situation, the concept of Energy Intensity comes under special focus to ensure energy security in an environmentally sustainable way.
The energy intensity level of primary energy is the ratio between energy supply and gross domestic product measured at purchasing power parity at constant prices. It is an indication of how much energy is used to produce one unit of economic output. A lower ratio indicates that less energy is used to produce one unit of output.
Energy Intensity of Pakistani industries is among the highest in the world and stands for enormous energy consumption with an annual increase of 5% to 6% of electricity demand. In 1980, Pakistan had the same level of energy intensity as India, nonetheless, improvement in energy-use efficiency in India (at 1.9 percent per annum) and Sri Lanka (at 1.5 percent per annum) was somewhat faster than in Pakistan (at 1.3 percent per annum). Now Pakistan is 15 percent more energy intensive than India.
The major energy-intensive manufacturing industries of Pakistan are that of iron and steel, brick kiln, textiles, fertilizers, cement, and paper, of which cement industry is the most energy-intensive followed by the textile industry. These industries account for over 37.46% of the energy consumed out of total energy supplied to the country. Transport is the second highest energy intensive sector with 33.8% consumption of total energy supplied.
The latest value for the energy intensity level of primary energy (MJ/$2011 PPP GDP) in Pakistan was 4.43 as of 2014. Over the past 24 years, the value for this indicator has fluctuated between 5.63 in 1999 and 4.43 in 2014.
The decline in overall energy intensity, however, conceals the fact that in some sectors of the economy, e.g. commerce and transport sectors, energy intensity has in fact increased, implying less efficient use of energy in these sector. Ironically, these two sectors benefit heavily from the total energy supplied to the country.
Energy inefficiencies play a prominent role in increasing energy intensity while structural changes cause a small reduction in intensity. In the global perspective, some countries (like US, China, India) have improved the level of energy intensity through the implementations of energy efficiency measures while others (France, Canada, and the United Kingdom) with structural changes.
Pakistan remains one of the most inefficient countries in Energy Consumption and conversion rate to GDP. Inspite of this, the energy savings potential in Pakistan from energy conservation and efficiency measures is substantial, at an estimated 20% of total electricity use, according to NEECA. The savings of 11 million TOE of energy can best be achieved by appropriate pricing and product standardization policies, which force consumers to make appropriate changes in equipment and lifestyle changes. This has happened in the industry, which has stayed energy efficient in order to stay competitive. However, the residential sector that is the biggest consumer of electricity and substantial user of gas remains unmoved because of the low energy commodity rates.
Recently chaos was created by consumers and media on overbilling issues by gas companies. Nonetheless, they ignored the fact that the main reason for overbills is inefficient appliances used by the domestic sector. Currently almost 90 percent of energy consumers use appliances that are only 22 percent energy efficient whereas in other countries no appliance is allowed to enter the market if it does not meet
the minimum efficiency standard (i.e. 50% energy efficiency). To tackle this problem, government should launch standards and labelling regime for energy-guzzling inefficient electric and gas appliances. Awareness campaigns should be started to motivate consumers to replace their conventional inefficient appliances with solar and hybrid appliances. These corrective measures to save gas and electricity can save 4 billion dollars per annum to economy, if fully implemented.
Moreover, energy prices have a significant effect in reducing energy intensity through efficiency channel. High energy prices propel consumers to switch towards energy conservation and more energy efficient appliances. Nevertheless, high energy prices badly impact the competitiveness of the manufacturing sector and decrease the performance of the external sector of the country. Therefore to avoid competitiveness, uninterrupted energy should be available at reasonable and regionally competitive rates.
Transitioning to a liberalized energy market model by bringing greater competition into electricity and gas markets in the interest of creating more competitive markets and reductions in price by privatization, is the way to ensure that the benefits of reliable and affordable electricity can translate into higher economic growth and shared prosperity.
There has been a strong policy bias in favor of household consumption of energy vis-à-vis consumption in productive sectors. The policy needs to be a little more balanced between the final use of energy and its use as an input into economic activity.
Pakistan had experienced high energy intensity since its inception. However, no target was ever set for a significant reduction in energy intensity and no steps were taken to reduce it. As Pakistan has
the potential of energy savings, relevant policies should be implemented to reduce energy demand pressures prevailing in the economy.
Government interventions through legislation enforcing minimum standards are required to make a serious impact on the inefficient use of energy. Energy conservation measures are profitable investments compared to new energy supply capacity – also cheaper and quicker to implement.
Without far-reaching institutional restructuring, piecemeal reforms are unlikely to form the basis of a sustainable and efficient energy sector. The quality of Energy Sector Regulators has continuously been declining as a result of creeping bureaucratic capture of both NEPRA and OGRA whereas DGPC remains a government department.
The technical organization and manpower needed to regulate a vibrant market-based energy sector were never hired. The regulators as a consequence have very narrowly interpreted their mandate and limited it to functions they were already performing i.e. tariff setting. The government should redefine the role of the regulators focusing on operational rather than just tariff setting. The regulators must focus on the creation of energy markets as defined in their acts.
Furthermore, there are no incentives present in Pakistan for small and large consumers to conserve energy and adopt energy-efficient products. Government should recognize and publicize the measures taken by large consumers to save energy. Government should also start awareness campaigns for the people about energy-efficient appliances through the publicity.
Reduction in energy intensity will not only increase the energy savings but will also contribute to increase the economic and social welfare in the economy.
(https://fp.brecorder.com/2019/04/20190428467951/)

SHAHID SATTAR AND ASAD ABBAS

APR 18TH, 2019

Textile sector of Pakistan is facing many internal and external challenges including energy affordability and availability, current account deficit, shortage of raw material, credit availability, lack of institutional support, infrastructure constraints, skill development institutes, perception management, market access, GSP plus status continuation, sustainable supply chain, BCI cotton, water footprints reduction, social standards compliance and last but not least compliance linked
with SDGs and the WTO rules.

On the Cotton front, it is not only an essential segment of economic strategy but has social dimensions as even the farmers’ schedules of social activities which are dependent on expected cash flows from the value chain. Cotton as the basic raw material for the Pakistan textile industry accounts for almost 70% of the basic cost of production in the textile industry and any movements in price or quantity have significant impacts.
Cotton crop variety, quality and production witnessed a diminishing trend over the last few years. A decrease in cotton acreage, per hectare yield and imprudent government policies, have taken a heavy toll on cotton production. According to the Pakistan Central Cotton Committee’s (PCCC’s) report, cotton production target has been missed by 23 percent for the year 2019. Over the last five years, cotton production has decreased from 13.86 million bales to 10.84 million bales, witnessing a decrease of 22pc which has caused a huge loss to the economy. The shortfall requirement of the industry is 15.5 million bales and hence 5 million bales are short.

The cotton produced in Pakistan is of average quality with short fibre length (10-25 mm length) which cannot be used for producing high-end products required for exports. In Baluchistan, production of long staple length of cotton is expected and more areas are required to be exploited. Mostly, long staple length cotton is imported from Brazil, Egypt, Greece, Turkmenistan, the US, India, and Spain. Currently, the cotton crop is suffering from the encroachment of land (sugarcane encroached best cotton growing area), poor quality seed, cotton leaf curl virus (CLCV), pest management issue, lack of plant resistant seeds, depleted technology, late sowing and the severe shortage of water. There are 24 well-known pests and diseases of the cotton crop in the world, Pakistan has 22 of them. There is no adequate pest and disease control mechanism available in Pakistan to bar impact and spread of pest attack. Reasons for low quality and production include old technology, lowquality seed, changing weather conditions, low-quality pesticides, and high prices of competing crops.

On the basis of issues, a detail way forward is suggest as follows:
There is a dire need to improve cotton quality by controlling contamination and trash content through enforcement of the standards laid down in the Cotton Control Act and Cotton Standardization Ordinance. Pakistani ginned bales contain up to 10% trash, world averages 2 to 3 percent. Encroachment of crops in cotton growing areas shall be curtailed through the adoption of appropriate policy changes in sugarcane pricing and cropping patterns. The land under sugarcane cultivation is 1,217,000 hectares while under cotton, it is 2,489,000 hectares; wheat is produced on 9,052,000 hectares. If we revert even half area (608,000 hectares) under sugarcane production with the help of corrective measures of the government which restrict its cultivation area, this area with cotton cultivation will add an additional 0.25 percent to GDP, along with minimum 1.273% of additional wheat contribution to GDP per annum. Most of the sugar mills have doubled the extension beyond the sanctioned capacity. Therefore, unsanctioned enhanced capacities should be cut back. Zoning laws for crops may be enforced strictly.

The government of Pakistan should ensure import of best quality seed and its availability at affordable prices to farmers. A package deal should be negotiated with Monsanto to ensure better quality seed availability for farmers.
— A comprehensive training and capacity building program shall be developed to establish a system in the private sector for grading and classifying cotton. Incentives shall be provided to ensure that proper premiums are paid for increased production of contamination-free graded cotton. Labelling of cotton bales with trash content, moisture content and weight of cotton bale should be made mandatory.Measures shall be introduced for production of long-staple cotton for value-added products and to meet domestic demand for high-quality fabrics, including the introduction of BT cotton on priority basis. Trained staff from relevant government department should carry out training sessions, provide farmers with information about soil analysis, crop management, weather and On the other side, Pakistan Central Cotton Committee (PCCC) has totally failed to launch new seed qualities due to lack of dedicated and sustained research. Pakistan’s average cotton yield is 17 maunds whereas progressive farmers are getting 40 maunds yield in Pakistan. PCCC is required to ensure availability of cotton to the industry at reasonable prices throughout the year and develop such varieties of cotton seeds that are resistant to diseases and enhance per acre cotton yield. The industry requirement is increasing with each passing year but indigenous production of cotton is further decreasing. It would be difficult for the textile industry to compete with textile giants like China, India, Bangladesh and Vietnam when we have to import a larger amount of expensive cotton to meet the shortfall of our cotton requirements. Promotion of cotton means the promotion of exports while the failure of cotton crop translates into heavy damage to the country’s economy.It is mandatory to increase the cotton production to 15 million bales within the next 2 years and 20 million bales in the next 5 years

(The views expressed in this article are not necessarily those of the newspaper)
Pakistan: cotton area, production & yield

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PERIOD AREA ‘000’ HECTARES PRODUCTION 000′ BALES OF 170 KG YIE
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Sindh Punjab Total Sindh Punjab Total Sindh
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2014-15 596 2,323 2,919 3,573 10,277 13,850 1,019
2015-16 621 2,243 2,864 3,766 6,002 9,768 1,031
2016-17 637 1,815 2,452 3,597 6,978 10,575 960
2017-18 612 2,053 2,700 3,775 8,077 11,946 1049
2018-19 394 2290 2,684 2,600 8,077 10,847 1122
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SOURCE: TCO/PCCC/PBS

Independent’ money producers?
Shahid Sattar and Madiha Nisar
“”
April 07, 2019
Water and Power Development Authority (WAPDA) and the Karachi Electric (KE) owned all power generating plants in Pakistan up until the mid-1980s. In 1985, a lack of funds in the public sector forced the Government to discontinue its support to WAPDA. Consequently power policy 1994 was formulated to meet power shortages and it was highly successful as it attracted substantial foreign direct investment to Pakistan’s power sector. However, the policy also generated a great deal of controversy in which the independent power producers used various means to secure money-spinning contracts.
The largest private sector power generation venture in Asia; HUBCO and the rest of Pakistan’s independent power producers(IPPs); all of them thermal plants, now account for almost 46 percent of total installed capacity of electricity generation in Pakistan.
However, this share enjoyed by the IPPs does not exist without a price. Since the introduction of the IPPs in the country in 1994, the electricity tariffs have been rising constantly. The liberalization of the power generation sector has drained power sector resources and trapped it into huge losses. According to financial reports of WAPDA and the Discos’, the utilities incurred a Rs. 325 million operating loss in FY17 and now it has reached to billions of rupees. Nevertheless, the IPPs alone cost the government billions of dollars in capacity payments every year. Hypothetically speaking, this means that if all of the IPPs in Pakistan do not produce a single unit of electricity, government would still have to pay them for the availability of their capacity. The latest estimate of fixed costs versus variable costs of CCPAC states that 70 percent of costs are not variables.
Previous governments offered very lucrative incentives to investors to actively attract investment for the power sector. The incentives include a cost plus method to determine tariffs and the cost used for tariff determination was based on assumptions, not on actual cost of IPPS. Power plants were said to be instrumental in getting very high upfront tariffs. Apart from high tariffs they had the leverage to use any technology and any main fuel they want. These seemingly unrealistic power tariffs, high inefficiencies, low payment recovery and the inability of the government to manage its subsidies mechanism caused massive losses to the country, which has been estimated to be 2 percent of GDP per annum.
Through purportedly questionable means wind power projects successfully got high upfront tariff of Rs. 12.71/KWH and levelized tariff of Rs. 15.32/KWH (world-wide Wind power tariffs are 2.6 cents/Kwh) against the assumed capital cost of $1.5-1.8 million/MW. While the installed capital cost of similar projects worldwide average at US $ 0.8 million and even in India it is less than US $ 0.7 million. Similarly, coal projects have been awarded on very high costs and high tariffs causing a gigantic loss to the energy sector.
These practices created cost inefficiencies on the IPP side as they were assured return on equity regardless of their performance whereas the efficiencies stated in the NEPRA determination were already 2.5-3 % below the actual efficiency of the power projects, apart from the other costs being massively overstated. By virtue of these suspicious terms, IPPs received huge overpayments causing billion of rupees to the economy of Pakistan.
Pakistan’s history is full of instances where governments have formulated policies based on exaggerated growth models and misplaced assumptions, ultimately implementing them in a highly
non-transparent manner. The long-term consequences are often ignored for short-term political and personal financial gains. The IPPs made, and are still making huge profits on virtually zero-risk investments.
Case of the oil-based IPPs: NEPRA determined 15 percent return on equity to IPPs but, each oilbased IPPs, is receiving a profit of $27 million against a legitimate return of $6.2 million per annum. This excessive profitability is almost $160 million per IPP in the last 8 years equating to 61 percent return per annum in dollar terms on a80:20 debt equity ratio. This has only been possible as the NEPRA tariff determination procedure was manipulated and understated efficiency figures and massively overstated costs. The government tried to stop this through energy audit and NEPRA redetermination of tariffs but couldn’t succeed.
The oil-based IPPs were also allegedly involved in sale of excessive fuel oil (because of higher efficiency) in the underground market.
Governments since 1994 have accused each other of corruption, disloyalty, and political victimization, and absolved themselves of all responsibility. In the meantime, the public has been paying ever-rising electricity bills. The question remains: who should be blamed for this fiasco? The IPPs, the governments, or the consumers who are not standing up for their rights? In the meantime the entire industry and economy of Pakistan has been priced out of the international market due to the excessive energy costs.
Power sector issues can only be resolved by formulating fair and just polices. Looking ahead, taking heed from mistakes of the past is the key to formulating a workable economic recovery plan. An energy audit and tariff redetermination is required to recover the overpayment of over $1 billion in the last 8 years to these oil-based IPPs.
The government should also take steps to strengthen NEPRA by decentralizing it making it more transparent and accountable to Parliament. NEPRA should be expanded to include over sight and monitoring both technical and financial to avoid repetition of such blunders.
======================================================================= Summary of Overpayments to Power Projects ======================================================================= Power Source Annual Overpayment Life of the project Million Billion ======================================================================= Coal Power Projects (2400 Mws) $ 475.00 $ 14.2 Wind Power Projects(2000 Mws) $ 430.00 $ 10.7 Solar Power Projects (400 Mws) $ 94.64 $ 0.9 Fuel Oil Based IPPs(1400 Mws) $ 80.00 $ 1.8 TOTAL AMOUNT $ 1,079 $ 27.77 Billion =======================================================================