The problem in Pakistan’s economy is lack of ground research while decisions are made on arbitrary demand forecasts at subsidised prices. The outcome is usually excess expansion of infrastructure amid low growth in demand at actual prices. This creates fiscal and external gaps, and to bridge them pricing adjustments have to be made - higher prices leading to further demand suppression, and to counter inflationary pressures due to non-demand factor, the monetary policy is tightened. And with government being the biggest buyer of banking credit, the fiscal deficit further widens due to higher interest rates - it's a vicious cycle.
For example, back in 2008, a senior foreign consultant, at the cost of a donor, did a research for planning commission on energy demand. Ten years down the road, the expansions are taking place but actual demand is too low. The research said, "Based on conservative annual GDP growth forecasts of 4 percent, the total energy demand is expected to double to 122 MTOE in ten years. At $50/bbl crude oil price, the annual energy import bill would exceed $27 billion by FY2018"
The actual primary energy consumption stood at 86.3 MTOE in FY18, while total energy import bill including POL, LNG and coal stood at $15.7 billion and the Brent averaged at $63.7/bbl in FY18. The story is that the Planning Commission, without assessing the exact demand, came up with plethora of new power plants at guaranteed returns, and other energy infrastructure expansions including huge capacity payment irrespective of what amount of energy is being consumed.
Now since the energy consumption is less than the capacity and infrastructure that is being added, there are pressures to revise up tariffs due to growing capacity payment. The only sane way to lower the per unit capacity payment is by increasing the number of units being consumed. That can only happen if the demand grows proportionately. Since demand is a function of price, the lowering down of subsidies, has been putting an upward pressure on pricing, and the demand goes down at higher prices.
Plus, the technology is improving day by day and less energy is required as efficient plants are coming online, such as RLNG plants versus old FO/gas based plants. The productivity in the manufacturing processing is also improving to lower the energy need at any given level of production. For instance, cement plants’ fuel efficiencies are improved; better automobiles are coming with higher fuel efficiencies; inverter air conditioning and LED lights have lowered the bill for the same level of consumption in domestic and commercial use - and the list goes on.
The demand forecasts and implementation of new energy plants are not incorporating all these variables. First the machinery imports, and later the fuel imports are straining the current account deficit while energy related subsidies are creating fiscal imbalances. In order to counter those, the energy prices have to be revised up, and in result the demand will compress further. These fiscal and economic costs erode competitiveness, which is not good for exports or general economic expansion.
Then the economics of renewable has improved significantly in the last decade, and the energy future is in renewable - be it solar, wind or biomass. With solar becoming more accessible, commercial and domestic energy consumption would rely less on the grid. The other factor for low reliance on grid is growth in captive generation in the past decade. The expansion in the energy sector plants did not incorporate the growing reliance on the captive sources in days of high load shedding. Now with expected increase in grid energy prices, the industry is more inclined to use their own energy producing sources.
What has happened is the past. There are a number of long term commitments in the pipeline. There are multibillion dollar projects in the country's long term plans - such as the TAPI and IP gas pipe lines, RLNG import terminals, coal projects, and the list goes on. It's time to introspect and revise plans accordingly while encouraging research to gauge demand at various prices level and have a dynamic model to assess the impact on other economic variables.
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