PIP asks government to privatise power plants, deregulate tariff

The Petroleum Institute of Pakistan (PIP) has recommended deregulating the power tariff with no pricing slabs and government subsidy except targeted subsidy for lifeline consumers to create a competitive market. PIP has also proposed to the government to privatise the state-owned power plants to improve efficiency in power sector.
The report ''Pakistan Energy Outlook'' released by Petroleum Institute of Pakistan argues that the current price and fiscal regime for the energy and power (E&P) sector in Pakistan is not attractive for major investments, and neither is it appropriate for creating a dynamic environment, particularly for offshore drilling and unconventional gas resources such as tight gas, shale gas, coal bed methane, gas hydrates etc.
According to the report, the power tariff in Pakistan does not reflect the change in ground realities given the serious crisis in the sector and with growing power shortages. In this scenario, the report says, the power tariff must be de-centralized to distribution circles (initially Discos and KESC) to reflect the true costs of power generation & distribution that exist in different parts of the country. Also, the power tariff for each distribution circle must be de-regulated, with no pricing slabs and no government subsidy (lifeline consumers may be given a direct subsidy) with open access to the power transmission and distribution grids being provided for all third-party power suppliers, at a regulator-controlled grid tariff, to create a competitive market.
PIP suggested that tariffs for hydel and nuclear power should be gradually adjusted by the government to reflect replacement value, which included the high cost of building new dams & nuclear plants. Pakistan''s power generation capacity of 20,000 MW (effective 13,400 MW) will require to be at least doubled in the next 15 years. The state-owned thermal power plants with 5000 MW power generation capacity have low conversion efficiencies and are expensive to maintain and operate.
The private-sector power plants with generation capacity of 8,000 MW are more efficient but are under-utilised due to fuel availability and circular debt problems. PIP recommended that all power generation based on oil, gas and coal should be in private sector, and the state-owned power plants should be privatised.
The report says that the government specifications for petrol and diesel are out-dated and not in line with global innovations in fuel quality. Local refineries do not have the capability to produce future fuels and require fiscal support for upgrading their refining assets and processes.
The report recommended that a ''Thar Coal Development Master-plan'' should be formulated with international support. The government should allocate funds for key infrastructure development for the Thar-coal fields. It should initiate a strategic dialogue for development of Thar Coal reserves with potential international investors.
According to the report, innovative political solutions will be required to open-up access to large Exploration and Production (E&P) activity in the country which is currently off-limits for security reasons, and assured continuity of policies by successive governments will be a pre-requisite for major E&P investment in Pakistan.
The report recommends that the E&P sector be progressively de-regulated and, as the first step, be allowed to sell new natural gas discoveries, both conventional and unconventional, at market based de-regulated pricing under standard government taxation and royalty conditions.
The E&P sector has open access to the gas transmission and distribution grids at regulator-controlled grid tariffs and should be allowed to sell natural gas directly to the proposed private sector gas distribution and marketing companies as well as to bulk consumers in the industry and power segments.
The report adds that with attractive market conditions, the E&P companies are likely to work closely with the federal and provincial governments to develop suitable security and policy arrangements for sustainable E&P development in Pakistan. Unlike oil imports which can be bought on short-term/spot contracts due to a highly liquid market, LNG has been typically sold against long-term, take-or pay contracts which require the buyer to have a high credit rating for assurance of long-term payments. Pakistan''s current credit rating of below investment grade is not conducive for long-term LNG contracts.
By fast-tracking LNG imports, Pakistan will benefit from competitive LNG prices through spot/ short-term purchases, which will also provide a check on local gas prices as the gas market de-regulates. LNG imports will be a key element in meeting the energy short-fall in Pakistan and providing assured gas availability for the industry and power sectors, leading to higher revenue generation and accelerated GDP growth, the report adds.