Issues in energy for development

27 Feb, 2020

The welfare of humanity has critically depended on our ability to harness and use energy. Development in Pakistan has similarly faced huge obstacles resulting largely from our inability to organise the availability of energy at a reasonable cost in a world where energy supply is plentiful and evolving technology is making it cheaper. Our history is replete with episodes of 'stop-go' growth driven by energy shortages and excessive costs both of which arise from mismanagement.

Energy policy has been reactive, lacking coherence, foresight as well as cost consciousness. Instead of putting in systems of planning and management that seek to match supply and demand, governments have haphazardly thrashed about looking for quick fixes involving expensive supply contracts and costly projects. This reactive policy has resulted in extensive periods of energy shortages followed (or often accompanied by) rapidly rising cost of energy. Decades of this poor planning has now led to a price of electricity that is far higher than Pakistan's competitors. No wonder, exports have been stagnant as a percentage of GDP for two decades forcing the country to go to the IMF repeatedly.

Rising costs of energy Ironically, consumers in Pakistan are paying higher electricity prices with a lower per capita income than worldwide consumers who are paying lower tariffs with far higher per capita incomes. As depicted below declining worldwide electricity tariff imply that our industry and economy will further face higher power tariffs even if our rates remain the same as of today.

Arbitrary surcharges Inefficiencies cannot be exported, and neither can the legacy contract costs. The need to reduce the energy price basket is increasingly urgent, as energy rates are falling in other countries. There is now a new proposal to impose fixed charges of over Rs 5/kWh on captive power based on capacity of grid connection even if the grid power is not used. This will surely shut down industry in Pakistan as it will no longer be able to compete. Despite having an average fuel cost of Rs 4/kwh over the last year, the existing system is unable to meet costs in spite of an average selling price of Rs 21/kwh.

How tariffs rise! The tariff is extraordinarily high due to high capital costs, Tariff Differential Surcharge (TDS), line losses and non-recovery of billing primarily from provincial governments, tube wells and AJK, which are charged to all paying consumers. The extremely high TDS is a reflection of the much higher costs of Pesco, Hesco, Sepco, and Qesco as compared to Fesco and Lesco.

There are some important questions regarding charges and tariffs:

a) According to official documents submitted to Nepra by CPPA/Ministry of Energy the cost of service as estimated to an industrial consumer C3 is as follows:

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Component Rs/kWh

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Fixed Charges 6.79

Variable Charges 4.96

Distribution & Line losses 6.73

Total 18.48

Addition to this:

Non collection 82% 3.336 (18% add on)

21.81

Add: Financial Charges 0.43

Neelum Jehlum Surcharges 0.10

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Total 22.34

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This makes the cost of service of 14.4 cents/kWh against a regional cost of service of under 10 cents for our competing countries. How can Pakistan compete if tariffs are set to recover these costs which include inefficiency and legacy?

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Country Cents/KWH

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Pakistan 13

China-General 10

China-XinJiang 7.5

Vietnam 8

Bangladesh 9

India 8

India-Punjab 7 (Fixed for 5 years)

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b) Can the power sector cover the cost of idle capacity which according to Nepra is over 4,000MWs as total capacity costs exceed Rs 900 billion this year and as tariffs are high, demand is not picking up?

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Summary of Power Balances

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Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

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2018-19 Firm Gen. Capability 25,332 27,822 25,851 24,004 20,188 19,767 19,724 19,304 21,997 24,871 26,574 26,887

Peak Demand 24,589 26,306 22,435 20,990 16,738 16,383 16,329 15,865 18,592 21,427 25,816 27,261

Net Surplus/Deficit 743 1,516 3,416 3,014 3,450 3,384 3,395 3,439 3,405 3,444 758 (374)

2019-20 Firm Gen. Capability 27,477 30,296 27,720 26,325 21,787 21,112 21,400 20,568 23,716 26,279 28,630 28,892

Peak Demand 25,395 27,169 23,171 21,679 17,287 16,921 16,864 16,386 19,201 22,129 26,662 28,155

Net Surplus/Deficit 2,082 3,127 4,549 4,646 4,500 4,191 4,536 4,182 4,515 4,150 1,968 737

2020-21 Firm Gen. Capability 29,509 31,630 28,904 27,114 22,805 22,227 22,066 21,955 24,462 27,843 30,467 31,184

Peak Demand 26,451 28,298 24,134 22,580 18,005 17,624 17,565 17,067 19,999 23,049 27,770 29,325

Net Surplus/Deficit 3,058 3,332 4,770 4,534 4,800 4,603 4,501 4,888 4,463 4,794 2,697 1,859

2021-22 Firm Gen. Capability MW 31,678 33,667 33,496 31,594 26,757 26,374 26,195 25,678 29,169 32,057 35,582 35,883

Peak Demand 27,890 29,838 25,447 23,809 18,985 18,583 18,521 17,996 21,088 24,303 29,282 30,921

Net Surplus/Deficit 3,788 3,829 8,049 7,785 7,772 7,791 7,674 7,682 8,081 7,754 6,300 4,962

2022-23 Firm Gen. Capability 35,065 37,098 33,036 31,812 26,800 26,166 25,995 25,793 29,015 32,332 37,347 37,786

Peak Demand 28,821 30,834 26,297 24,603 19,619 19,203 19,139 18,596 21,791 25,115 30,259 31,953

Net Surplus/Deficit 6,244 6,264 6,739 7,209 7,181 6,963 6,856 7,197 7,224 7,217 7,088 5,833

2023-24 Firm Gen. Capability 37,697 40,012 35,232 33,070 28,198 27,744 27,683 26,721 30,464 33,969 38,868 39,196

Peak Demand 30,393 32,516 27,731 25,945 20,689 20,251 20,183 19,611 22,980 26,485 31,910 33,696

Net Surplus/Deficit 7,304 7,496 7,501 7,125 7,509 7,493 7,500 7,110 7,484 7,484 6,958 5,500

2024-25 Firm Gen. Capability 37,786 39,835 34,952 33,055 27,585 26,804 27,062 26,424 30,040 33,670 37,607 37,935

Peak Demand 31,950 34,182 29,152 27,274 21,749 21,288 21,217 20,615 24,157 27,841 33,544 35,422

Net Surplus/Deficit 5,836 5,653 5,800 5,781 5,836 5,516 5,845 5,809 5,883 5,829 4,063 2,513

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c) Why is the government proposing to charge stranded costs, average network losses, cross subsidy, etc of over Rs 6/kWh from B2B transactions, thereby killing the establishment of an open and free electricity market by burdening the private sector with its legacy costs and inefficiencies.

d) The cost of generation is rapidly falling whereas the grid supplied electricity costs are increasing. Does the government want to kill all industry by forcing them to use the expensive grid instead of far cheaper self-generation and renewables?

e) With such wide variation in line losses at between at 9% losses in Lesco, Iesco etc., and 37% losses in Sepco, Pesco, does equalizing the tariff make any sense and is it fair?

f) Financial surcharge the interest cost of the circular debt payment to IPPs of Rs 480 billion in 2015. Is it fair to charge this to current consumers?

Technology cost decreased in all areas such as in cars, airlines, appliances and electricity as depicted above. However, electricity pricing remains stuck at the same level. The cost of grid electricity has either remained static or increased. This is beyond comprehension.

The question of losses and inefficiencies

Inefficiencies of the power sector directly impact living standard of household consumers, profitability of businesses, process of industrialization and economic growth of the country. Power is the bloodline of the economic development, the reforms and corrective policy measures listed below are essential for the power sector to perform.

1. Receivables position is further worsening due to unaffordable increasing tariff, which is forcing further theft and pilferage and making industrial revival even more daunting and insurmountable. Nepra needs to re-determine tariff of all thermal IPPs to Rate of Return on Equity equal to the stipulated policy rate (currently these IPPs are making well over 60% in dollar terms). This redetermination has been blocked by the IPPs as the Islamabad High Court has issued a stay order on redetermination by Nepra. Government of the day should ensure that the stay order is removed immediately. This redetermination will reduce the annual payments by over $1.6 billion per annum. Pakistan Coal Power Project Sahiwal and Port Qasim power tariffs are around 9 cents as compared to the competitively bid tariff of Jamshoro Coal Power Plant (1320MW), at a levelized 6.2 cents which tariff is in line with international norms. This is a reflection of the high costs associated with projects that are not subject to competitive bidding. Government should approach the Chinese government to reset the exorbitant tariff currently costing an additional $450 million per year. Since the higher tariffs are borne by consumers/industry the legacy contracts render the exports uncompetitive and make power unaffordable for masses.

RLNG-based generation is already priced above the economic dispatch threshold. These RLNG plants now have become a millstone and liability for the country. Currently, these RLNG plants produce electricity at Rs 17.50/kWh and are therefore not dispatched. There should be no addition of any projects which generate electricity above economic threshold price. The reason of high electricity tariffs from these projects is the expensive Qatari LNG contract. Resultantly, we are purchasing LNG at $8.6/MMBTU whereas India is procuring same at less than $ 3/MMBTU. We can make efficient use of these plants only if we procure LNG at competitive rates. However, we need to renegotiate the LNG contract with Qatar to bring it in line with market realities.

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Description Rate (In Dollars per MMBTU)

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Fixed RLNG Price for SSGCL/SNGPL (February 2020) 11.19

Indian LNG Cargo Latest Purchase LNG+ Regas etc

2.80 + 1.50 4.30

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2. The recovery of capacity payments of around Rs 1 trillion per annum is only possible if focus of revenue collection from lower consumption to higher revenues through additional sales/consumption by reducing price significantly is managed. The current estimate of Nepra of surplus/idle capacity is 4000MWs for the next three to four years. This is understated as a 15% spinning reserve is already allowed in Nepra's calculations. Our estimates are 7,000 to 8,000MW are surplus/idle capacity. It is feared that the demand figures are grossly overstated. Nepra requires assistance from a competent tariff design consultant to design efficient tariffs for this purpose.

The current annual capacity charges are around Rs 900 billion and current (January) generation is 9,000MW out of an installed capacity of 26,000MW. A further 10,000MW capacity is also in the pipeline. The current capacity charge works out to Rs 3.32 per kWh at a 100 percent capacity utilisation. At a usage of only 35%, the fixed cost component would jump to over Rs 10 per Kwh and if demand does not increase substantially the surplus would increase exponentially in the coming years.

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Generation Cost Only (FY 2019-20)

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Months EPP CPP PPP EPP CPP PPP

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In Million Rupees Rupees per kWh

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July 78,633 67,143 145,776 5.36 4.58 9.93

August 71,940 72,365 144,305 4.84 4.87 9.72

September 60,101 80,711 140,812 4.42 5.93 10.35

October 54,669 77,182 131,851 5.26 7.43 12.69

November 39,706 76,451 116,157 4.65 8.96 13.61

December 43,685 75,076 118,761 5.00 8.60 13.60

January 56,020 74,147 130,167 6.23 8.24 14.47

February 37,774 74,647 112,421 4.76 9.45 14.23

March 54,722 77,134 131,856 5.57 7.85 13.42

April 71,751 77,207 148,958 6.36 6.84 13.20

May 85,518 77,064 162,583 6.45 5.81 12.26

June 83,467 78,045 161,513 6.00 5.61 11.62

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Total 737,986 907,174 1,645,160 5.43 6.67 12.10

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3. To fast-track the establishment of a market, all PPAs of existing IPPs should be renegotiated to guarantee purchase of only 50% of capacity, balance to be traded or sold directly on B2B basis through wheeling and or through a power exchange. All road blocks and additional charges on wheeling proposed by CPPA/Ministry to be rejected out- rightly so that B2B power business and market development is promoted and allowed to establish.

4. Line losses in the distribution companies exceed 24% whereas on the basis of a scientific assessment by USAID in 2012, the technical losses of the system do not exceed 11%. To control the line losses high loss feeders may be contracted with communes of linesmen and meter readers for billing and collection on a sliding scale basis compensation for improvements.

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Statement of Losses

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DISCOs Units Purchased Units Sold Percentage

MkWh MkWh Losses

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LESCO 24,339 21,132 13.18%

GEPCO 11,100 10,004 9.87%

FESCO 14,970 13,499 9.83%

IESCO 11,838 10,789 8.86%

MEPCO 19,367 16,310 15.78%

PESCO 14,427 9,074 37.10%

HESCO 5,557 3,917 29.51%

SEPCO 4,411 2,781 36.94%

QESCO 6,257 4,779 23.62%

TESCO 1,821 1,603 11.97%

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TOTAL 114,087 93,889 17.70%

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5. Government should make it mandatory for all consumers over 5KW connection to purchase their own prepaid smart meters which should be prequalified by Discos but on sale through private sector in order to ensure no cost or procurement by Discos.

6. A stagnant economy with 1.2% anticipated growth rate (negative in large scale manufacturing and agriculture etc) coupled with surplus generation of whatever amount (expecting 10,000 to 12,000MW) with mandatory capacity and unnatural rate of return payments is aggravating the problem and every possible reform measure will fall short of improvement unless the economy is beefed up with immediate reduction in interest rate from 13.25% plus KIBOR to single digit figure and special incentives are offered to exporters, ailing and closed units.

Thoughtful professional regulation is key

On the regulatory front, there is a lack of uniform parameters in the energy sector that promotes distortions between the gas and electricity sectors. Inconsistent regulation between the National Electric Power Regulatory Authority (Nepra) responsible for the regulation of the power sector and the Oil and Gas Regulatory Authority (Ogra) responsible for the regulation of the oil and gas sectors sends confused signals to investors and creates disharmony in pricing strategies between gas and electricity. This also allows for arbitrage between gas and electricity sectors and the capture of the cheap gas by influential lobbies at the cost of the country maximizing economic benefit from the gas resources. This is further complicated by the RLNG which is priced very differently without any public hearing or scrutiny while it flows as a comingled indistinguishable gas in the very same pipelines. As a result, the allocation of the cheaper domestic gas takes on a whole new political dimension as a result.

There are numerous policies that relate to narrow sub-sectors; there is no entity responsible for the energy sector as a whole and there is no integrated energy policy or physical or financial planning. Merger of the energy sector regulators with expanded and more specific responsibilities is an essential reform for the sector. Strictly applying the criteria for selection of members and revoking amendments allowing bureaucratic capture. This can be solved by increase in the number of members of Nepra to 9 by appointing 4 professional members apart from the provincial members.

Mandatory stock exchange listing Enforcing mandatory listing of all Discos and public sector energy SOEs on the stock market will ensure operational and disclosure standards in line with good corporate governance.

Large size of Discos The size of contracting certain Discos such as Lesco and Fesco is unmanageable and there is a requirement that the Disco size is made manageable. The size of Discos must be reduced to a manageable level prior to privatisation or contract management.

Need for conservation/efficiency Furthermore, Pakistan consumes 30% more energy for each unit of GDP than competitors. There is tremendous scope for conservation/efficiency gains. Private energy conservation companies can help realize latent efficiencies. Policy advocacy has to plug the knowledge gap in this area and also reach and strengthen constituencies that currently get drowned out by stakeholders whose primary focus is to increase installed capacity because of the huge returns involved. The reforms should include an upgrade of the power system load dispatch & control and management at the national and regional levels. A proper and transparent EMS system can be purchased from the market with a contract for operations which includes training.

The evolving energy mix without forward planning Short of outright privatization, efficiency in the power generation and distribution can only be achieved through management contracting. The management and workers of the utilities have opposed implementation of new technology, which solves many of the problems, this issue needs to be addressed by the newly inducted contract management as state employees have not be able to take the bold steps required.

On the other hand, building reservoirs and dams are not only the key to cheap energy tariffs, but also address our other screaming issue; water scarcity. The water scarcity is not only a function of not building the necessary reservoirs but also the wasteful manner in which it is used. To put it in perspective Pakistan has world's fourth highest rate of water usage per unit of agricultural output. Major parts of Pakistan have good soil, abundant sunshine, perfect farmers and yet crop yields, both per cubic meter of water and per hectare, are much lower than international standards. In contrast yields from reliable and self-provided groundwater are twice as compared to unreliable and inflexible canal supplies.

In the twentieth century around 46,000 dams were built of which 22,000 in China, 7,000 in USA and 4,600 built in India. The decision has resulted in massive progress in development and wellbeing of these countries providing the key input for a flourishing agriculture sector.To meet its growing water needs it is imperative for Pakistan to focus on building dams which have a political consensus such as Bhasha dam. Bhasha dam had been delayed by nearly ten years so far even although it was unanimously approved by the CCI in 2010. The dam will have storage capacity of around 8.1 million-acre feet, electricity generation capacity of 4500MW costing approximately Rs 4.5 per kWh. Bhasha Dam will yield an additional 8 billion dollars per annum to the GDP at current water use efficiency rates. Bhasha dam will also increase the life of Tarbela for at least 20 years but will also allow Dasu to produce far more and cheaper electricity.

Resuscitating Bhasha dam is therefore the key to Pakistan's economic future because it will cater for both water storage and electricity generation. Unless corrective action is taken, Pakistan is fastly becoming one of the most water-stressed countries quite apart from the high power tariffs. Attention of the decision makers must therefore focus on construction of Bhasha Dam with as little delay as possible.

Power sector circular debt The power sector bills an estimated Rs 1.5 trillion per annum. The average recovery is 85 percent therefore 15 percent of Rs 1.5 trillion accumulates as circular debt apart from other matters outlined below. Circular debt accumulation rate is far higherthan Rs 20 billion per monthwhenthe factors stated below are accounted for:

Factors which cause circular debt to accumulate are:

--- Nepra does not give any allowance for interest on late payment to IPPs

--- GST is collected by FBR on billing whereas collection of Discos is on average 85%.

--- Nepra does not recognize Agreement with AJK to provide fixed price electricity and fixes AJK tariff at much higher rates which are not paid

--- Ministry of Finance pays a fraction of the cost supplied to FATA as subsidy whereas there is no bill payment in FATA

--- Inefficiencies such as excessive line losses beyond Nepra determinations.

--- GencoS do not produce power at efficiencies determined by Nepra

--- Billing collection rates in some Discos are dismal because of disputes with the Provincial governments and uncovered subsidy to tube wells in Balochistan.

--- Cost of delayed notification of tariffs results in cash crunch and addition to circular debt as interest charges on loans.

--- Fuel price adjustment is retrograde rather than prospective and the formula needs reformulation to capture full FPA.

Note: This paper does not fully cover the issue of circular debt as it deserves a detailed analysis on its own and cannot be covered in short write ups.

(The views expressed in this article are not necessarily those of the newspaper)

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