All those in the government circles bent upon getting more and more loans (and some investments, too) to set up new power generation units should read this: "the more binding bottleneck in the energy sector is not generation (which should be clear, as most generation units are working well below capacity), but distribution," according to the central banks latest annual report.
"Even if generating units are geared up to increased capacity utilization, the country simply does not have the capacity to distribute this power to where it is needed (i.e. from the main-grid to actual users). Hence, to reduce the demand-supply gap, greater policy focus is required on distribution, which means higher federal/ provincial government expenditures to improve the distribution network (to reduce theft & leakages)," the central bank said.
This echoes what this column has long been arguing, though to deaf ears. Hopefully, now that the SBP has spoken, the government will listen.
In an interesting initiative, the SBP has also done an assessment of the forex savings if the usage of gas is shifted from fertilizer to the power sector. The SBP says that the priority of gas users must be reworked to focus on more productive users with power sector users in the lead followed by industrial and commercial users.
The central bank stated that inadequate gas supplies and rising demand compelled the government to allocate scarce gas among competing users on the basis of the Gas Allocation and Management Policy of 2005, which had prioritized households and the fertilizer sector, resulting in the curtailment of gas supply to the power sector.
"FY14 witnessed improved gas supplies to the fertilizer sector while power sector only received 50 percent of its demand. As a result, most of power plants had to rely on expensive furnace oil or HSD, whereas plants which could run only on gas, remained idle most of the time," the report said.
The report added that almost 70 percent of gas-based capacity remained idle and only 2403 MW (almost 20 percent of total) electricity was produced from gas; whereas, on average, 65 percent gas-based capacity remained idle in last three years.
"If we had diverted the entire gas supplied to fertilizer (in FY14) to the power sector, this would have generated an additional 1,943 MW of electricity in that year (16 percent of total). Consequently, FO imports would have declined, and imports of urea would have increased," the central bank said. It estimates that the fiscal burden would also have been lower due to lower cost of power generation based on gas, compared to furnace oil.
In the final analysis, the SBP asserts that the allocation of gas from fertilizer to power could have saved Pakistan almost $1.4 billion during FY14, whereas "on the fiscal side, subsidies would have been reduced by Rs120 billion, while an additional Rs43 billion could have been generated on account of higher gas prices charged to the power sector compared to fertilizer".
So while it would have been interesting if the central bank had analysed the same equation to forecast the impact in FY15, the banks analysis reiterates the need to revisit the existing gas allocation policy. Hopefully, Islamabad is listening.

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