The systemic breakdown of the power sector on the 16th of May 2018 has sharply focused eyes on what exactly is the state of supplies of electricity to consumers. The widespread narrative of the shortly outgoing Government has been that the days of large-scale power load shedding are over due to a major expansion in power generation capacity, such that the demand-supply gap during peak hours has been closed.
What then is the true state of the power sector? The Pakistan Economic Survey (PES) of 2017-18 contains a chapter on Energy as usual. Thanks are due to the Ministries of Water and Power, Petroleum and Natural Resources and the Hydrocarbon Development Institute of Pakistan (HDIP) for honestly reporting the trends in the power sector for the first eight months of 2017-18.
The Government has claimed that new generation capacity of 10000MW to 12000MW has been added to the power system during its five-year tenure. According to the PES, the installed capacity at the end of 2012-13 was 22812MW. The PPP government added 3392MW from 2008-09 to 2012-13. The capacity as of February 2018 is 29573MW. This implies that the augmentation in capacity by the PML (N) government is 6761MW, most of which has been commissioned in 2017-18. This represents a major addition of 30 percent to system capacity. However, in absolute terms it is much less than the increase claimed by the government.
The mystery deepens further. The PES publishes information on the gross fixed capital formation by sector at the constant prices of 2005-06. Annual figures are available on total investment in electricity generation and distribution and in gas distribution. It is indeed surprising that from 2008-09 to 2012-13 the cumulative total is reported at Rs 338.5 billion, while the corresponding estimate for the period, 2013-14 to 2017-18, is Rs 324.7 billion, actually lower by 4 percent.
Therefore, the Pakistan Bureau of Statistics (PBS) estimates that the investment in the energy sector by the PML(N) government is less than that earlier by the PPP government, despite the fact that the former has added twice as much generation capacity. The only way to explain the unexpected result is that the PPP Government invested much more in transmission and distribution of electricity and gas. Unfortunately, this has not given the due priority by the PML (N) government.
The PES clearly highlights that in the first eight months of 2017-18 while there has been a major expansion in capacity of 30 percent, the rate of utilization of available capacity has fallen sharply. Actual generation has increased by only 2 percent.
A number of possible reasons can be identified for this divergence. First, the increase in capacity may not be fully effective, with some of the new plants having teething problems. Second, the phenomenal increase in circular debt to over Rs 900 billion may be impacting adversely on the liquidity position of IPPs. Third, delivering additional supplies of electricity may be increasingly constrained by the lack of expansion and replacement of the transmission and distribution system.
In fact, the increase in overall electricity consumption since June 2013 has been modest in character. The average annual growth rate is 4.8 percent. Demand for electricity has probably been rising at, more or less, the same rate. As such, it is unlikely that power load shedding would have been reduced in a big way. According to NEPRA, a relatively high incidence of outages continues in regions served by PESCO, MEPCO, SEPCO, HESCO and QESCO. More recently, K-Electric has also entered this list.
A positive development is the decline in transmission and distribution losses. In 2012-13, the generation was 96496 Gwh and the amount of electricity which reached the consumers was 76789 Gwh, implying a loss of as much as 19707 Gwh, or 20 percent of the amount generated. This has declined somewhat to 18 percent in 2016-17, but still remains high.
Turning to the pattern of electricity consumption up to February 2018 in 2017-18, the worrying development is a decline actually in the case of industrial consumers of 2.5 percent. The manufacturing sector is reported by the PBS as having shown a growth rate of almost 6 percent in value added. How can such a high growth rate be achieved in the presence of a declining input of electricity? In fact, the growth rate of the sector has fallen sharply to below 2 percent in March 2018.
There has also been a decline in consumption in the case of commercial consumers of 0.3 percent and of agricultural consumers by 1.4 percent. The only group of consumers with an increase of 3.5 percent is domestic consumers. There appears to be a tendency to allow more load shedding in industry rather in neighborhoods with predominantly housing.
The next issue relates to the change in the fuel mix and in the energy costs of generation. The new plants are primarily based on the use of |RLNG and coal. Has this led to a big change in the fuel mix and reduction in fuel costs?
The change has been magnified by restrictions recently on the use of furnace oil for power generation. Consequently, for PEPCO companies, NEPRA shows that by March 2018 substantial changes have occurred following the commissioning of new plants. Greater reliance is increasingly being placed on coal and RLNG. Almost 15 percent of the generation now is by coal and 24 percent by RLNG. The share of furnace oil has fallen sharply from 33 percent to 16 percent.
The big change in the fuel mix has had significant implications on the overall fuel cost. The fuel cost per kwh of coal is relatively low at Rs 6.88, while in the case of RLNG it is Rs 8.85. Both these costs are lower than that of furnace oil at Rs 10.83. Consequently, there have been fuel cost savings which have been passed on to consumers. The fuel adjustment charge for the month of March 2018 set by NEPRA is a negative 1.83 Rs per kwh. However, the fuel cost difference between furnace oil and the new fuel sources is magnified by the higher taxation on the former source.
Overall, there have been some mixed developments in the power sector. Substantial new capacity has been added although not as much as claimed by the Government. However, the overall rate of utilization of generation capacity has been low due to various constraints in the system. Transmission and distribution losses appear to have declined somewhat. Industrial consumers have received lower priority in terms of increase in supplies and reduction in the frequency of outages. The shift away from furnace oil to coal and RLNG has led to a significant reduction in fuel cost, but probably at the cost of lower tax revenues.
The task ahead for the incoming government, following the elections, will be to enhance substantially the rate of utilization of existing generation capacity. In the short run, this may require retirement of a large part of the circular debt, as was done by the new government in June 2013. Emphasis will then have to be placed on improving the transmission and distribution system. Meanwhile, we can look forward to power load shedding remaining a big issue in the summer months leading up to the elections.
(The writer is Professor Emeritus at BNU and former Federal Minister)