Electric supply plays a vital role in any country's economic growth; shortage of electric supply affects all sectors of the society in one way or the other. Uptake of electricity increased with time in both absolute and percentage terms, indicating that increasing access outstripped the population increase.
Use of electricity increased across all income groups in-particular it is at the top of the so called energy ladder and dominates household energy choice among urban households. Biomass-kerosene, the most common choice in rural areas in the last two-three decades is less common now, presumably because an increasing percentage of house holds are able to replace kerosene for lighting with electricity as a result of expanding electric supply.
Pakistan's total installed capacity for electricity generation is 20,456 MW with actual dependable supply of 16000 MW in summer and 13000 MW in winters. Whereas the total peak demand in 2007 summer remained around 18,000 MW and is expected to grow to the level of 19,000 MW in mid 2008. There is no reliable data available to precisely determine the projected demand - supply, however, it is believed to be around 3000 MW by the end of 2008.
It is very ironical that despite being aware of the projected demand of electricity in the country increasing approximately 6% per annum, the demand-supply gap is widening over the last few years. The following graph depicts an alarming situation, whereby it is amply clear that the country requires around 5,500 MW of capacity by 2010 to fulfil the requirements of the growing demand.
The energy sector in Pakistan has gone a number of changes in the last decade. In July 1992, the Government of Pakistan (GOP) visualised privatisation of the Water and Power Development Authority (WAPDA). In this discourse, WAPDA, being the main electric utility in the country was to be gradually privatised by way of its unbundling into separate generation, transmission and dispatch, and distribution companies.
The delays in sector reforms adversely impacted the efficiency of both WAPDA and the IPP program, and left the sector overly vulnerable to economic downturns. Considering the investment profile required for the development of the power projects, GOP has undertook various measures to mobilise resources from the private sector, to meet the anticipated deficit in power supply.
Such measures include the introduction of a legal framework for implementation of power projects in the private sector. GOP and its agencies have learnt and adapted their policies to facilitate private sector transactions.
The creation of three new entities, namely the Private Power and Infrastructure Board (PPIB) - the "one stop shop" - in-charge of negotiating the contractual framework (referred to as the Security Package) on behalf of the Government; WAPDA Private Power Organisation (WPPO) in-charge of negotiating the power purchase agreements (PPA); and the National Electric Power Regulatory Agency (NEPRA) in-charge of regulating and determining the tariffs in the interest of all the stakeholders including the consumers, have played a formidable role in developing the power sector in Pakistan.
To attract the financial resources required for the power projects, Government has planned to deregulate the economy and increase reliance on the private sector. The power policy, promulgated in March 1994 (hereto referred to as the 1994 Private Power Policy) was hugely successful in attracting the private sector.
Government issued Letters of Support to 34 projects for more than 9,000 MW. Including Hubco, 20 IPPs with a total installed capacity of about 4,500 MW reached financial close, of which four totalling 435 MW were later terminated.
Macroeconomic instability in the country and financial problems in the power utility revealed some of the shortcomings in the policy and its implementation. Unilateral attempts to terminate and re-negotiate IPP contracts led to a tumultuous three year workout period.
In hindsight, the selection criteria under the 1994 Policy enabled the implementation of many subprojects which were not consistent with the least-cost expansion program in terms of fuel selection (excessive reliance on imported fuel oil, as opposed to domestic natural gas, although at that time gas allocation for power was difficult to secure and overall gas reserves were thought to be on the decline).
It is ironical that the Government, pursuant to the power policy of 2002 has not yet been able to develop projects on fuels other than oil and gas. In Pakistan, approximately 44% of electricity is being generated through gas. The option of using 'heavy furnace oil' is becoming the most unviable means of producing electricity in view of the recent increase in the international oil prices and the indigenous gas reserves are insufficient to fulfil the demands of gas fired power plants beyond the year 2012.
One could argue that had the implementation of the 1994 Policy been not limited to oil based power plants, WAPDA may have been better able to absorb the capacity charges. There was no clear mechanism for the Government to prioritise projects in terms of the availability of fuel and their prices over the life of project periods (25 - 30 years).
Fuel price is allowed to be pass-through to the power purchaser; the oil prices have increased from US $90 per tone in 1997 to US $662 tone in the year 2008. This increase in the oil prices have resulted in the increase on the fuel cost component of the tariff applicable to the oil based power plants from cents 2 /kWh in 1997 to cents 16 /kWh in the year 2008.
Nonetheless, the public and political perception is that the cost of private power is too expensive. Pakistan has unbalanced fuel mix for its power generation; too much reliance is placed on oil and gas fired power plants.
In Pakistan, 64% of the total power generation is based on oil (20%) and gas (44%) as opposed to 27% of the total world power generation relying upon oil and gas. Only 7% of the world's power generation is based on oil as opposed to 20% of the total power generation in Pakistan relying upon oil.
To combat the challenge of power shortage in the country, Government is now ready to take all possible measures for a sustainable growth of power sector. At this juncture, it is imperative to take stock from the initiatives taken in past and follow the international practices to overcome shortage of power.
Such international practices clearly suggest that Pakistan should diversify its fuel mix for power generation. It is pertinent to mention here that 40% of total world's power generation is based on coal as apposed to only 3% of coal fired power plants in Pakistan.
The Government has though shown its interest in developing coal fired power plants, however, there is an absence of a comprehensive policy framework, concerning incentives, fiscal treatment, and pricing in relation to the coal fired power plants; the inadequacy of the institutional arrangements for the review, negotiation and approval of private sector coal fired power projects is a serious impediment for a speedy development of such projects by the private sector.
Pakistan has plenty of low grade lignite coal reserves in Thar coal-fields located in the province of Sindh. Based on preliminary investigations, it is understood that approximately 185 billion tons of coal is available in Lakhra, East of Indus and Thar, however, this indigenous coal is considered to be of very low grade quality and only suitable for mine mouth power plants.
Further, the site lacks the water availability which is one of the key inputs for coal fired power plants. The Government will therefore be required to play a key role in facilitating development of the indigenous coal fired power plants, which under the given circumstances would entail a development period of 5 - 7 years for mining alone.
To overcome the challenges associated with the indigenous coal and the requirement of more sustainable coal based power projects in Pakistan, the Government has exercised the option of importing coal for power generation as practiced in other neighbouring countries such as China and India.
In March 2007, the Government took the initiative of issuing two letters of interest for two 1000 - 1200 MW each imported coal based power plants to two international companies AES Corporation and Mitsui Japan.
The phenomenon of generating electricity through imported coal is practiced world-wide. Indonesia, Australia, South Africa and Russia are the top ten coal exporting countries which aggregately controls 65% of the world steam coal seaborne trade.
Currently, more than 500 million tone of steam coal is exported, which is sufficient to generate 160 GW. Given the massive trading of coal in the international market, the cross border transportation facilities of coal have also been significantly developed.
Pakistan has a geographical advantage of being located at a reasonable distance from all these aforesaid sources; the transportation cost can be optimised through rationalising supply from each source in bulk sea carriers.
Coal is abundantly available in the world and unlike oil its sources are scattered around the globe. Based on the historic data, the prices of coal have always remained far lower than that of the oil. It can safely be inferred that the price of oil and gas as compared to coal would always remain higher in the foreseeable future in terms of US dollar per MMBTU.
Today, China is world's largest producer as well as the biggest consumer of coal which accounts for 78% of its total energy requirement. Realising importance of coal, many countries in other parts of the world have switched over to coal to meet their energy needs. India, Indonesia, Germany, USA, Australia and UK are among those countries that have embarked upon new coal based power plants. USA is world's second largest user of coal whose 60% requirements for energy are met with coal.
The scale of private investment in power generation should be aligned with the most viable option of fuel staggered over the future years so as to have minimum costs of electricity. In a nutshell, the option of using coal to generate electricity is the most viable option for a sustainable power generation in Pakistan.
As an alternative to the non-availability of indigenous coal, the option of importing coal should be seriously pursued for the development of the coal fired power plants in Pakistan.
The Government should facilitate the private investors who have shown interest in developing the imported coal fired power plants in terms of negotiating and finalising the Security Package required for the financial closure of such projects which as compared to the oil fired power plants are likely to be four times cheaper (the price of imported coal is approximately US $4 per MMBTU as compared to HFO of US $17.5 per MMBTU).
The coal fired power plants nevertheless entails higher capital investment cost yet due to lower price of coal in terms of MMBTU, the cost of producing electricity through coal is cheaper as compared to the HFO based power plants.
By year 2010 additional power required will be 5529 MW. Since assumed future country conditions at appraisal can be substantially different from what actually emerges, it is important that the international practices for the power generation are followed to be more politically sustainable. The option of producing electricity through coal as in the case of other countries such as USA, China and India should be given due attention.
Comments
Comments are closed.