The economy of Pakistan has suffered a reduction of 2% in its growth rate due to energy shortfalls. Combined with Floods and international recession, the growth toll comes to 4% p.a., which has caused unemployment and loss of income to people. The ensuing loadshedding has tremendous social cost resulting in estrangement and despair of the people with the system and the state and government. Both long and short-term actions are in order.
We have now new ministers in the energy sector; Dr Asim Hussain leading the Ministry of Petroleum and Natural Resources and Naveed Qamar leading the Ministry of Water and Power, who earlier held the charge of Ministry of Petroleum. Some new initiatives are being taken by the minister of MPNR like tight gas policy, moves to eliminate Inland Freight margin and a new oil pricing policy,
expediting of Iran Pipeline project major reshuffle and induction of new blood etc Instead of expecting the two ministers to read my 500-pages long book, Pakistan's Energy Development; the road ahead, published some two years back, I am summarising here my thoughts and recommendations on the major policy steps and renewal that have to be taken, in my view, to come out the of the damning energy crisis.
Enormity of task and weak institutions Energy demand doubles every ten years. There are widely varying estimates of demand projections; 135,000 MW in 2025 projected by Planning Commission under its Energy Security Plan-2005, which appears to be a rather grotesque figure; 30,000 MW only in 2025 by some pessimist yet credible experts; and my own assessment of 75000 MW by 2030. Similar demand projections are there for other primary energy for industry and transportation. There are abundant energy resources within the country like, hydel, wind and coal and even unexplored Gas that together can meet whatever be the demand projections. However, having the physical resources is one thing and developing and bringing these on stream is quite another.
Institutional capacity in Pakistan appears to be lacking along with the socio-political environment and maturity, as has been indicated by the failure to utilise the Thar coal and Hydro resources. While the socio-political maturity may take some time, urgent attention would have to be paid to build and strengthen the institutional capacity to almost revolutionise the tempo, style and the processes replacing czars by modern managers.
Circular debt On the immediate front, Circular Debt issue has to be resolved; beg, borrow or steal. The immediate crisis would be significantly ameliorated if the existing capacity is brought on line, which is not possible due to the liquidity crunch in the whole energy sector caused by the circular debt. It is, however, a continuing problem made acute by a significant gap between the cost of production of electricity and the consumer tariff. The annual liability which the government has to subsidise is around 200 billion rupees, which the government promises but fails to provide. Continuing and unabated high oil prices have further compounded the problems. But something has to be done about this gap. Tariffs cannot be increased abruptly. The government has to bring in net cash, which can be done through either collecting income tax from agriculture. (Another option would be reducing the military expenditure, which has soared to a figure of 800-1000 billion rupees, if concealments and accounting classifications are corrected). There is no escape from immediately and sustainably resolving this problem. This gap can only be done away within a period of five years. In the meantime this has to be financed somehow. Otherwise, not only the existing crisis would continue but a negative signal would go internationally in the energy sector, casting doubts on Pakistan's market to pay, diluting credibility of sovereign guarantees and thus wooing away potential future DFI in the sector.
Transmission and distribution losses Transmission and distribution losses amount to 25% at the national level, more than half of it is pure stealing, both by the poor and rich and the weak and the powerful; in Sindh including the KESC, it is 35% and similarly in NWFP and Balochistan. Amazingly in Punjab, such losses are 12%. But Punjab leads in the theft of natural gas. Astonishingly, as claimed by the utilities, provincial governments and their departments are big culprits. These losses must be brought to at least 50% of the current level in the next five years. If this is not done, nothing else can compensate this kind of leakages. High losses cause a high cost of production, which leads to unfunded and unsustainable requirements of subsidies and the consequent circular debt. Force alone would not solve the problem. General Musharraf sent his sentries, nothing happened. Major initiatives would be required with the launching of dedicated projects and organisations to achieve this objective. There is new technology that is available such as smart distribution transformers with meters and the like. US AID is helping out India in this respect, the latter has similar issues, while we get drone attacks only. All promises remain unimplemented due to continuing problems in the strategic dialogue. Perhaps, we are also only interested in military equipment which we think can solve all our problems. This is a part of the socio-political problem that I mentioned earlier. We are moving in the right direction with the consolidation and sustaining of democracy but would take time to resolve these issues.
Demand management The recent energy summit has prescribed short-term demand measures. Longer-term rules are required to be put in place. Two most important ones are suggested in the following:
1) Restriction of air-conditioning load during peak hours for consumers having demand exceeding 100-200 KW, and obliging them either to install gas based air-conditioning of absorption chillers or buy-in chilled water from distributed cooling systems. A sufficient notice of two years be given to such users. Malaysia has introduced this provision for quite some time now. Distributed cooling through chilled water distribution has become quite well known in several Middle Eastern and South East Asian countries.
2) Distributed and district cooling projects be promoted and mandated in co-generation and tri-generation mode which has a potential of a thermal efficiency of 75% as opposed to the present average of 40% in good cases.
Development of local energy resources Pakistan has imported 10-11 billion USD worth of oil per year over the past few years. High and volatile oil prices have damaged Pakistan's economy. The continuing reliance on oil for producing electricity is a highly dangerous trend. Most projects that have come on stream in the last few years and the ones in the pipeline are IC engines running on RFO. The danger stems from three directions; one is increasing cost of generation of electricity (COGE) and the other, raising the foreign exchange import bill. The oil price hike of 2007-08 virtually destroyed the economy and damaged electricity/energy sector. Thirdly, oil-based IC engines are less efficient than other options.
Developing Thar coal Thar coal is larger than the oil resources of our rich brothers of the Middle East. Total Middle East Oil and gas resources add up to an equivalent of 385 billion tons of Brown coal, out of which Iran and Saudi Arabia own 110 billion tons of coal equivalent each. Pakistan's Thar coal is 185 billion tons. There is an urgent need to develop Thar coal, without which Pakistan's energy problem can not be solved. Federal government and its institutions must support the Thar coal development. Only coal is a provincial subject, but electricity remains a federal subject even after the 18th Amendment.
The residual issue as it stands today is not the financing issue of the mining and power parts of the projects, however difficult it may itself be, it is the financing of infrastructure part, which is proving to be a stumbling block. Various estimates put these requirements to between 1 to 2 billion US dollars. More money is required for infrastructure, than the first coal mine and power plant itself. The government of Sindh obviously would not have such resources, nor would the federal government. And in these days of emphasis on provincial autonomy, where is the appetite for common projects? There are also issues as to the technical and management capability of the provincial bureaucracy, as the project continues to be run from the narrow confines of the Sindh secretariat. Apparently, there is no shaft of light at the end of this tunnel, although it is not the only one.
There are two options. One is to tender for a large project of 5000 MW or so, which may be able to assume the infrastructural development costs. The cake becomes big enough to absorb all kinds of interests. This is not new. In India, this size of coal projects are being planned already. The feasibility of this proposal in Pakistan's context can only be tested once it is actually tendered. The second option would be to float tenders for establishing a mining development company that undertakes to develop and finance the infrastructure and manages the Thar coal operations on behalf of the Sindh government, within the framework of the relevant rules and regulations. The company recoups its investments by granting mining leases and charging a fee on coal production by individual companies. Obviously such a company would be a multinational which may have a joint venture with a local private sector and government of Sindh's share in it. Such a company would offer many advantages. First of all to bring in finances, which appear to be well nigh impossible for the Sindh government to finance. Secondly, the operations would be more commercial-like and would be on a fast track.
Uncertainties over Thar coal implementation have compelled investors to think about imported coal. Several projects have been proposed in the past based on imported coal. Imported coal although cheaper than oil, it is no less volatile than oil in terms of price variability. In the oil price hike of 2007-08, coal prices also rose proportionally and came down proportionally. It is not coal per se, but the local resource development and controllable prices offered by local coal that is to be the preferred option. If at all, permission may be granted for imported coal for an interim period, conversion be required to be built in when Thar coal becomes available. Permitting imported coal project would send a final signal for closing off Thar coal resource.
Many oil-fired (steam turbine) power plants were converted to coal in the wake of the oil crisis of 1973, and the trend continues till to-date despite heightened environmental opposition. The dilemma that, however, is to be faced is whether it is local coal or imported one. Coal is already being imported for non-utility industrial purposes and local Hard coal is being mined locally as well, although under low productivity and an inefficient environment. Hard coal production, although with smaller deposits, could be fast tracked by installing modern mining equipment and management practices. Utilities use of this coal would spur such conversion. In Punjab, 50 MW coal based power plants have already been proposed under provincial domain. Conversion to imported coal should also be subject to the same provisos as has been proposed in the earlier para.
Wind power - a fast track solution A near immediate solution is Wind Power. Wind Power projects can be implemented in less than two years, almost the fastest. All other technologies take 4-5 years. Wind Power is now competitive with coal and hydro already in many countries, with wind tariff as low as 7 cents per kWh. Wind turbine prices have come down and there is a supply glut there used to be demand glut earlier due to which our wind power projects remained unimplemented. Currently wind Power tariffs awarded by Nepra are as high as 15 cents. Those who were awarded 12 cents have applied to get it enhanced to 15 cents also.
We are following an obsolete policy of cost-plus, which gives abundant opportunities to the project promoters to jack -up prices and demand unreasonable tariff. At such atrocious tariff as 15 cents, only a few projects of 50 MW can possibly be inducted. Wind enthusiasts should understand that it is the low tariff that would drive the demand. It is not a supply problem any more. Only a few days ago, Norway and Nordix have offered 500 MW and are groping for a tariff. We are already suffering with rising costs and unaffordable tariff. Who will pay for all that? At a reasonable tariff of 10 cents or lower, as much as 500 MW can be inducted and implemented. Cost-plus negotiations and processes consume at least one year of time. It is time to announce feed-in-tariff as in other countries, which can be combined with auctioning and may bring lower offer than announced prices. This may also solve the problem of whom to award; the lowest technically qualified bidder takes it. The Grid in the Southern region, Karachi-Hyderabad-Sukkur-Multan may have to be strengthened to induct wind power. KESC alone can absorb some 500 MW of Wind Power. Their pressure on gas can be released to benefit industrial and residential consumers.
Exploring natural gas resources But the rather lesser acknowledged is the natural gas option. It is true that known resources of gas are on the way to exhaustion and the existing production rates are not commiserate with the demand rates. However, it is widely known among professional circles that there is a very sizeable gas potential that lies buried. Instead of enhancing the digging of exploratory wells, exploratory activities have come down. Law and order problems are only a lame excuse. Political problems of some nature are there in the resource-rich regions of many countries including India, but business goes on. Instead of continuing with the confrontation and vendetta of the past regime, the tribal leaders can be accommodated offering face-saving and some cash. In fact, I would favour an above-the-board arrangement for sharing some royalty with them, if the resources are found on their land. In the US law, royalty goes to the landowner. In addition to solving the political problems, something may have to be done with the malaise and inefficiencies of our public sector exploration companies. Supply side of service companies has to be improved, such as drilling contractors and other service companies' .GOP has already decided to raise wellhead gas prices. If we are ready to buy LNG and the Iran pipeline gas at almost equal to oil prices, why can't we be paying to the local producers slightly more than what they are getting now. This would require an increase in Gas Tariff, so be it. I only pay a few hundred rupees in terms of gas bill. There is some space in gas tariff, much more than in electricity.
Controlling high cost of generation of electricity (COGE) All efforts must be made towards controlling electricity costs and tariffs. The full brunt of the high-cost projects has not yet been felt, due to the availability of one-third electricity from the old hydro-project like the Tarbela at Rs 1.30 per unit. There are three aspects that need special attention.
1. Capital costs, esp of power generation projects.
2. Thermal efficiency
3. Reduction of technical and non-technical losses.
There is a general consensus among experts in Pakistan that capital cost of generation projects are high. In the adjoining table, we provide data on comparative capital cost, which is self-explanatory. There may be both technical and commercial reasons for this. Regulatory effort and capability in this respect needs a lot of improvement. In developed companies of all market size, electricity generation prices are market-driven. In India, there is a big market and local industry and sufficient domestic market data is available. CERC India is able to announce benchmark rates for capital cost with much less difficulty. In Pakistan, Nepra does not have recourse to such inputs. Neither does Nepra seem to have made adequate efforts to enhance its capability in this respect. It relies on simple browbeating the proponents into some downward adjustment, based on some input from inadequately informed interveners, and EPC quotes.
In this respect, we make the following recommendations:
1. Nepra should announce benchmark capital cost for three years (indexed) based on external/foreign consultant recommendations.
2. EPC for turnkey projects is replaced by a package approach, whereby a project is tendered in 5-6 packages.
3. PPRA procurement rules must be made mandatory for all regulated projects, including energy and electricity.
4. Nepra invests in acquiring and subscribing to 3rd party data source on capital costs, instead of constructing buildings for its offices.
A case in point is the remarkable difference in capital costs and COGE of wind power, among India and Pakistan. In India, the capital cost of wind projects is half that of Pakistan, 1200 USD per kW vs 2500-2700 USD per kW in Pakistan. Apart from potential and ubiquitous padding, local production of wind turbines in India and total imported content in Pakistan, many have resulted in such a large cost differential.
Up-front tariff and auctioning In most countries, electrical generation tariffs are either based on hourly auctions in energy exchanges or up-front tariffs are announced where such markets do not exist. In Pakistan also, there is a provision of up-front tariff, which has been used for coal, but without success. The reason had more to do with policy, logistics and other infrastructure. For routine projects, up-front tariff would prove to be quite successful in reducing the time, uncertainty and confusion in getting tariff approval. Cost-plus provisions may be kept available for large and non-typical projects. Up-front tariff may be applied both for solicited and unsolicited projects. Also the issues of the rate of return on equity for power projects and even in other energy projects are highly variable and at times even arbitrary. Capacity to pay should also be kept in view, the lack of which is amply demonstrated by the circular debt issue. Allowing and promising higher return and being able to pay later will be more dangerous for attracting foreign investments.
The World Bank got a RoR approved in keeping with its interest servicing requirements for SNGPL and SSGC projects. Recently, a RoR on Equity of 20.5% has been notified for coal power projects coming on stream by 2014. Wind power promoters have started asking for similar returns. Resultantly, a project has been recently proposed, asking for 7 cents per unit of equity component, while internationally, this much is a total project tariff. The issue needs to be studied carefully and methodically, by some credible economists and a policy be announced in this respect.
Two-track markets Due to lower incomes and productivity, energy prices in Pakistan may have to be kept affordably low, at least for some targeted sectors or regions. This may remain a permanent problem and an issue, militating against full cost-recovery and requiring subsidies. This may discourage investments and supplies. On the other hand, there may be sectors in the economy, which may be willing to pay more.
To solve this problem, a two-track market may be created, both in electricity and gas. The controlled market with lower prices may be catered to by the public sector companies, so long as these continue to be there. There is to be a parallel open market with least controls and permissions and no control on prices meant to cater to large and aggregate customers whereby energy suppliers and energy consumers bilaterally negotiate contracts and prices. This market is to be supplied essentially by the private sector. Once public sector companies are privatised, quotas may have to be prescribed by the government for the two markets. For this to happen, open wires and open-pipes policy may have to be enforced by the regulatory authorities for third party electrical or gas transmission and distribution. Transmission rates and protocols may have to be announced ex-ante in advance obviating negotiations on a project-to-project basis among the parties. The net effect of these would be immediate activity and opening up of some hitherto blocked routes of supply and would enhance availability. Eventually supply and transmission businesses may have to be separated. Similarly rules for Community Power such as small hydro are to be worked out.
Constitutional issues Constitutional issues especially in the light of the 18th amendment need to be resolved including the feasibility of uniform or non-uniform energy (electricity and gas) pricing; the rights of producer provinces vis-à-vis energy allocation and its contradictions with commercial principles and investment issues; royalty issues in hydro, gas coal and wind and the distribution among local governments. Backdate compensation and arrears for Balochistan have been agreed to. However, the issue of hydro royalty has not been resolved on a long-term basis. The solution to which is very simple; 12% of free electricity to the producer province ala India and a formula of apportionment among provincial and local governments and project affected people.
Institutional issues Integrating the energy subjects under one institution or ministry and the regulatory institutions are already under consideration of the GoP. Various alternatives are available. Decision in this respect ought to be finalised early enough so that problems are handled in a more cogent manner. Transparency issues also merit considerations.
The oil and gas sector is worth more than twenty billion US dollar in terms of sales and output. Except for gas T&D tariff and mere posting of petroleum retail prices and gas wellhead prices, there isn't much to show by OGRA. The sector is almost totally regulated, theoretically, except LPG where there is confusion as to the regulatory domain. Admittedly OGRA works within the framework of the role assigned to it by the Ministry of Petroleum and Natural Resources (MPNR) and the GOP. It cannot arrogate powers to itself, although it can build pressure towards a higher domain and role for itself. The due process is lacking in the following areas: Surely there are and must be rules in the following areas, which in itself, is not enough. The actual application and adjudication of those rules is to be the subject of due public process, where price is not determined by the market forces. International transparency moves and initiatives these days even go beyond the public tariff and pricing determinations. They are demanding Publish what you pay (PWYP) policies and regime, for it has been found that the actual payments vis-à-vis publicly determined tariff may be deviating for legitimate and not-so-legitimate reasons. Following areas should come under some process of public input and scrutiny through the regulatory process of OGRA and the latter should not restrict posting the results, but invoke the whole regulatory input and process into these.
1) Wellhead prices of oil and gas.
2) Ex-refinery prices of petroleum products such as gasoline and diesel, including crude oil imports
3) Oil pipeline tariff
4) PSO imports of petroleum products (50% of the total demand is met through imports valued at around 8 billion dollars)
5) Furnace oil pricing despite claims of being in the open sector; and most importantly
6) High Speed Diesel (HSD) pricing.
7) Capacity payments for IPPs.
On the other hand, what little powers have been granted to OGRA, successive leadership of that organisation have not chosen to make use of those. For example who stops OGRA in holding a public hearing for discussions on the other constituents of petroleum prices, if the ex-refinery (wholesale or producer price) is made an untouchable tree for it?
With this background, let me summarise my recommendations in brief (which have been extracted from my forthcoming book, Issues in Energy Policy).
1) Solve Circular Debt problem; beg, borrow or steal as they say.
2) Bring Electrical T&D losses to fewer than 10% in the next five years; synchronise subsidy withdrawal with the reduction in T&D losses. These losses are almost equal to the amount of subsidy, depending on the oil price level. Launch dedicated projects/organisations for loss reduction. US GOV is supporting several such projects in India.
3) There are abundant undiscovered or tight gas resources. Fast track gas exploration; enhance wellhead gas prices suitably but not hugely; revitalise OGDC, PPL to implement earlier performance target of 100 wells per year or even more; take US institutional aid wrt shale gas.
4) Implement Iran Pipeline, while continuing to persuade Iran to modify its pricing policies. They should agree to a price cap/ceiling.75% of Oil prices and 100 USD per barrel price cap.
5) Fast Track Thar coal; announce 5000 MW Mega Project packages. Look for CBM (Coal Based Methane) resources as well under an independent programme; invite credible companies to pursue underground coal gasification.
6) Establish a coal jetty at around Keti Bandar, to import hard coal and export Thar Coal (to India) through sea route. Import Electricity from India under a Thar coal-based Power production in India (on the border).
7) Wind Power has now become competitive with coal and hydropower in many countries. Auction 500 MW of Wind Power projects, at an announced price of 10 cents per kWh; shun traditional cost-plus approach. Wind Power has become cheaper everywhere except in Pakistan. Order major reappraisal of wind power policies including tariffs.
8) Launch BMR of existing power projects of GENCO.
9) A major reorganising initiative is required to rejuvenate energy institutions. Launch a Power development company with a substantial capital with private-public partnership and possibly merge PPIB along with AEDB in it.
10) Institutional and financial capacity of the private sector in Pakistan is very limited; prefer and promote direct foreign investment.
11) Create an International LPG market either at Gwadar or/and Torkham drawing upon LPG supplies from Central Asian markets.
12) Promote captive generation under, "open wires policy".
13) Promote Energy Efficiency and conservation; Energy Labelling, District Cooling and Heating by utilising exhaust gases and off-peak hour capacity, energy storage through ice; gas storage in shut down gas wells.
14) Investigate the possibilities of introducing a parallel, open and secondary energy market (oil, gas, electricity) along with the existing controlled system; two-track system whereby public sector companies cater to the controlled price and subsidised sectors while open market system works for private producers and large consumers; also open pipes policy, separating transmission from gas suppliers.
15) Create an Energy Development Fund, possibly drawing from PTCL R&D Fund or levying a modest energy cess on energy-producing industries, to promote indigenization in energy production equipment.
16) Create a unified Ministry of Energy and merge Nepra and Ogra, while strengthening capacities of these institutions.
17) Announce an Energy Policy, integrating the multi-faceted and multi-sectoral issues. Revisit existing Tariff policies. Go for announced tariffs both in electricity and gas production, transmission and distribution. Cost-plus project specific tariff determination to be continued for difficult and non-typical projects.
18) Work towards zero-energy taxation, whereby subsidies and taxation balance each other.
(The writer is a former Harvard Fellow on Energy Policy, and has published a book on the subject, "Pakistan's Energy Development; the road ahead. Another of his book is in print," Issues in Energy Policy")