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Businesses have to take lead for delivering energy at a reasonable cost under a planned strategy and implementation of actions expediting deregulation and assisting in overcoming our increasing energy imports.

This would require incentivizing and facilitating the massive foreign direct investment (FDI) (est. $150 billion) that is needed to build the energy infrastructure, deregulated markets with independent regulator(s)with teeth and reduction in imported fuel from 28% to 20% by 2031 as per Indicative Generation Capacity Expansion Plan (IGCEP).

No more business as usual—II

All of this needs to come at the back of confidence-building measures and an acceptance that making profits is kosher and that investments are not from money laundered funds.

The government needs to ensure policy continuity, transparent bidding, honouring of agreements/contracts and changes, if any, applied prospectively, fulfilment of obligations including timely honoured payments, regulator interference only when self-monitoring fails and above all, acceptance that private sector establishes power plants, be it in Indonesia or Bangladesh, with USD indexed ROE, $debt and other components to cover country risk.

Collaboration with “Pakistan NDRC” (like National Development and Reform Commission of China”” of Industry and its Associations in form of guidance to undertake bankable feasibilities of projects for gas and fuel pipelines, refinery and petrochemical complex, oil and gas storage, oil city development at Gadani and Gwadar, logistics/supply chain and coal gasification with knowledgeable international consultants hired by industry, is critical to define home-grown approaches and encourage FDI.

No more business as usual-I

Focus on industrial competitiveness requires a 20-year implementation plan by Ministry of Maritime Affairs that has to define the infrastructure roadmap for exports and energy imports to reverse the rising trade deficit since 2003, with the aim to have exports and remittances greater than twice imports.

The Ministry of Railways and Communications should implement a roadmap for energy supply chain with a 30-year perspective, including plans on eliminating its annual Rs 45 billion subsidy by increasing freight volumes, enhancing productivity and facilitating post-harvest infrastructure.

With Ministry of Industries ensuring an environment that encourages Product, Cottage Industry and SMEs Development focus on value addition in a process conducive for start-ups to raise funds without establishing holding companies abroad and increasing export of goods and services from 9% (2021) vs world average of 42%.

Services include IT, hospitality and export of surplus skilled, unskilled labour and farmers, nurses, doctors, and technicians, engineers and computer science graduates to Gulf and West.

Ministry of Energy in turn should take the lead in preparing an energy roadmap for transmission, distribution and generation (31.6 billion dollars NPV FDI per IGCEP, estimated $50-60 billion amount for deliverance network and another USD 30-40 billion for energy security projects).

Additionally, a revision in gas tariff has to be notified per law and going forward it should be charged at the LNG notified price and for electricity at cost of Furnace Oil. The multi-tariff, fuel adjustment charges, withholding tax, Circular Debt interest, etc., would have to be determined upfront every year to be adjusted end of year. The present practice of belatedly raising tariff to catch up with past delays needs to end.

WACOG (weighted average cost of gas) is an interim step that delays competitive market pricing. Strict enforcement of 18th amendment, even if painful, is required with provincially mandated pricing of energy.

Policy measures must ensure Circular Debt (Rs 5 billion in gas and electricity) is not created and financed off the federal books nor delaying settlements of IPPs due to impact of changes in Libor, Kibor and rupee devaluation.

Our Energy Mix has changed significantly over the last 15 years for the better.

As per a LUMS Report in 2022, over the next decade our power purchase price of FY16 @Rs 7.2 rose to FY21 of Rs 11.3/kwhr with capacity payments projected to peak in FY23 at Rs 13.1 and decrease to 10.8/kwhr by FY30.

The -1% decrease in EPP of Rs 645 billion from 823 billion does not offset the 8% increase in Capacity Charge to Rs 2243 billion from 1875bn and was based on Rs 158/$ exchange rate, Libor of 0.3% and Kibor of 7.26%. This will now change due to revised exchange and interest rates.

Moreover, Brent till recently hovered in the same range as about 2 years ago but the impact of PKR depreciation is significant on gas and fuel.

Risk of intermittency of Renewable Energy (RE) and water shortage in early months now exists due to climate changes and our present energy margin is between 20-30% versus 15-20%, as per LUMS Study.

The dependable capacity is 40,532MW but the peak demand was 30,000MW of which only 25600MW could be provided because of 3500MW load shedding necessitated due to high loss feeders. The actual availability is lower due to seasonality impact of wind power which is available for 10 months and hydel for 9 months and mothballed plants of Gencos.

We tend to forget the impact on the ensuing grid/tariff structure of the additional capacity of 25000MW, primarily Renewable Energy and based on 5% peak demand growth. Our merit order should be based on Energy +Capacity Charge to ensure that impact of capacity payments of high capex projects is also understood.

The cross-subsidy for 60% of the population using 200 units is distorting the tariff for those above the limit who end up paying Rs 44 and Rs49 for 1033 and 579 units, respectively, with taxes being 22% which reduce to 6% after adjustment of income and sales tax.

The wrong narrative of idle capacity payment can end with capacity additions based on winter demand and acceptance of load shedding. For now, peak demand shifting can reduce bill by 15-17% by closing of commercial markets earlier and active conservation undertaken by users.

Pakistan will always be in a catch-up mode to meet its energy demand despite best efforts and thus requires significant efforts to use it efficiently.

National Energy Efficiency and Conservation Authority (NEECA) has been in a learning mode as surprisingly, energy conservation was started as a USAID project in 1985 and not much has been achieved by National & Provincial Energy and Conservation Authority (Enercon in 2016) or under Energy Conservation Policy 2006 or 2023 National Energy and Conservation Policy.

Whereas the European Union took on the challenge recently through European Natural Gas Demand Reduction Plan and achieved in 3 years about 15% reduced consumption by households and industry.

Regional economic cooperation is essential and requires review of our policies with our neighbors to develop energy network like the EU, Africa and be part of an initiative with Afghanistan, India, Iran, Bangladesh, the Middle East, China and Central Asia to enable us to deal with repercussions due to international events that are beyond our control.

This will allow balancing export of surplus winter power capacity, build flexibility in import of oil and gas in winters, and ensure procurement of energy molecules directly from producers. However, this can progress only through an integrated cross-functional approach.

Copyright Business Recorder, 2023

Sheikh Imran Ul Haque

The author has served as Managing Director of Pakistan State Oil (PSO) and CEO of EETL, EVTL, and ETPL. He can be contacted at [email protected]

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