Shahid Sattar and Asad Abbas
November 20, 2019
Power shortages and high power tariffs in Pakistan have been at the root of many problems faced by the Pakistan economy; substantial reduction in the rate of GDP growth, economic stagnation, slow job creation, increasing unemployment, serious adverse impact on the federal budget, and extreme household consumer distress. As a result of the erratic and unreliable grid supply, industrial consumers have been forced to install relatively inefficient but reliable in-house capacity which by any standards is uneconomic.
Without sufficient and continuous power supply, it is impossible to achieve sustainable long term growth rates. A study by Pasha et al. (2013) on the impact of power shortages on economic activity estimated power outage costs at 7 percent of GDP and found that electricity shortages have reduced the country’s economic growth by about 2 percent per annum. This is primarily due to insufficient investment (especially during 1995-2015) to improve electricity generation capacity; the shortfall in electricity supply was as much as 32 percent of total demand. Together with poor governance and sector management, these problems led to higher losses in transmission & distribution and increased financial instability. Insufficient investment in the energy sector has also led to overloaded, antiquated and inefficient transmission and distribution systems. As a result, the gap between demand and supply widened, leading to prolonged power outages experienced by all consumers, where rural areas had more frequent breakdowns than urban areas as a matter of injudicious government policy.
Industry-specific price rates had reached levels that were significantly higher than in neighbouring countries and had contributed portentously rendering exports of Pakistan uncompetitive on world markets.
The current government recognized the severity of the highly uncompetitive industrial tariffs and announced regionally competitive tariff of 7.5 cents for export-oriented sectors. This regionally competitive (albeit implementation is currently patchy) tariff rates to have any real long term impact, would have to continue for at least 05 years so that the industry can grow and invest in expansion and rehabilitation to increase the exports.
Investment in power generation since 2014 has covered the demand-supply gap more than adequately but suffers from a fatal aw; unaffordable and uneconomic tariff rates. These tariffs have rendered the entire supply of energy a luxury item for the people and made our exports uncompetitive in the world market. Some examples of high-generation tariffs are as follows: 1320MW coal power plants that obtain USc 8.3601 & USc 9.16 tariffs per Kwh, while international tariffs are around 6 cents per Kwh. Solar power plants are operating at 18 to 19 cents/kWh tariff rates, whereas solar tariff in India our direct competitors are 7-8 cents/KWH whereas the current solar tariffs are below Rs 5/KWH or 3 cents/KWH.
Over the past eight years, frequent power breakdowns in Pakistan have instigated issues of law and order. However, an improvement in the supply situation over the last few years has reduced the frequency of protests against load shedding but resentment has shifted towards higher tariffs. The resolution of the power crisis is therefore crucial not only for the economy of Pakistan, but also for political stability.
Household consumption of electricity has increased since the last 42 years at an average annual rate of 10 percent per year. The government also actively pursued a rapid electrification policy for rural areas during this period. Resultantly, households’ share of total electricity consumption increased from
12 percent in 1971-72 to 47 percent in 2000-2001. This primarily was at the expense of industry, whose share in the same era fell from 54 percent to 30 percent.
Lifeline tariff for 50 units of consumption of the Rs 2/KWH is neither economic nor conducive to efficiency and requires the government to dish out massive annual subsidies. Alternative to the life line tariff is a direct subsidy to the poor consumers through existing channels such as BISP. This would inculcate a sense of efficiency and reduce wastage of electricity so that it can be used for productive purposes.
The shift in demand pattern has also resulted in industrial tariffs for certain categories and slabs becoming unsustainable, particularly in a regime where budget subsidies are require accordance with IMF conditionalities.
The period (2000-2007) witnessed a credit-driven consumption boom, increasing the use of electrical appliances across Pakistan. The Asian Development Bank’s (2008) report states that the prevalence of inefficient electrical appliances means that more than one quarter of the electricity used by households is wasted.
Energy intensity of Pakistani industries is among the highest in the world and stands for enormous energy consumption with an annual increase of 5 percent to 6 percent 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.
Despite the presence of a variety of natural resources, Pakistan had been facing a signi cant constraint in the power generation. The level of investment in the sector decreased sharply particularly during the period 1995-2015, leading to a slower expansion of installed capacity than required as well as depriving the sector of key investments to improve efficiency.
Pakistan’s total installed power generation capacity has now surpassed peak demand. Power sector nancial problems stem primarily from poor governance and ineffective government policies that fail to change the prices charged to customers, despite signi cant cost increases.
More and more consumers are now opting to go out of the system because of the lower cost of self-generation since installed capacity is more than required (a classic capacity trap), the cost of idle capacity is borne by the consumers on the grid. With decrease in dependence of the consumers on electricity supplied by the grid, the grid will eventually become totally unaffordable as more and more consumers opt for self-generation.
Management-related issues include low levels of human resource capacity, corruption, rent-seeking and poor regulatory capacity. Although electricity transmission and distribution losses have decreased marginally in Pakistan (from-25-28% of total electricity generation in 1995 to 20% by 2017), the rate and degree of change is lower than many developing countries, including some utilities in South Asia. Continued high rates of losses have high nancial implications for both utilities and the government. Although the government has tried to introduce performance plans to track progress and ensure improvements over time, there is no documented evidence of effective enforcement
To defer the issue of payment to IPPs to reduce the circular debt, the government has planned to issue bonds to IPPs. These bonds will legitimate the billing and dues created by the IPPs through billing at rates which have generated them rate of return of over 60 percent in dollar terms. The matter is under investigation of NAB and such schemes should not be considered till such time as the NAB inquiry is under way. To avoid repetition of this disastrous situation, Nepra should conduct periodical
audits so that the generation tariffs do not generate returns over and above the policy committed 15 to 16 percent.
Dealing with the crisis in the power sector needs a multifaceted response. Some of the changes needed to tackle the issue include:
Increasing efficiency in the sector by pushing generation and new investment by a conducive market based approach.
Investors should start adopting market based approaches (e.g. bidding on the price of power they produce, develop their own customer base) and not rely on government guarantees, e.g., market-based power sector.
Freely allowing Housing societies to generate distribute and sell power as Captive power units without requiring and licensing or tariff setting by Nepra.
Finally, all Discos must be run by the boards in accordance with corporate principles.
Furthermore, the following changes in the administrative and legal system toward power consumption in addition to a shift of consumer attitudes need a radical change, some of these are:
a) New investments must be based on competitive bidding and a power market be operated to allow free sale and purchase of electricity generated.
b) The function of NEPRA needs rede nition towards a market based system.
c) Strengthening NEPRA’s nancially and provide an oversight to avoid costly mistakes of unjustifiable high priced generation tariffs being awarded.
d) Consumers need to accept that electricity is not a free commodity so they must pay for the power they consume; the police and judicial system must promptly investigate and prosecute all complaints about electricity theft.
e) Regular and ongoing investment to upgrade and maintain networks, and adopt state of the art management systems for better surveillance of distribution to companies.
f) Investment not only for maintenance of existing equipment, but also for acquiring modern technology and systems.
g) Strengthening the legal framework for investigating, prosecuting and penalizing theft and corruption.
h) Use Renewable Energy (RE) to lower costs through judicious injection of RE where the total cost of RE is less than the fuel component of the installed capacity.
i) Give high importance to initiatives such as energy conservation and adoption of more efficient energy usage practices are viable, desirable and sustainable.