Pakistan: Energy Crisis Myth or Reality

At present Pakistan is suffering from worst energy crisis, severely impairing economic activities in the country. The government, through Ministry of Finance has been injecting money to overcome circular debt issue but the situation has gone from bad to worse. Experts have been warning that ‘energy related riots may erupt any time’. Some nuisance was created in the past but economic managers completely failed in taking right and prudent steps. They (policy planners), at the best undertake ‘surface cleaning’ but the root cause remains there. Experts are of the consensus that looming crisis is not because of demand surpassing supply but an outcome of not following good governance.

Extended load shedding of electricity and gas has virtually crippled the economy and become the worst nightmare for general public. Running industries on standby generators is also becoming difficult because of curtailment of gas supply for ‘captive power plants’ and also sky rocketing prices of POL products in the country. Huge levies are charged on oil and gas to meet the shortfall in tax collection but electricity and gas supply position continues to deteriorate. There are prolonged outages and vehicle owners have to stand in queues for hours to fill CNG.

Line loss of electricity distribution companies and UFG of Sui twins are hovering at historic high levels. While efforts are being made to attribute these losses to depleting transmission and distribution networks, bulk of the losses are nothing but blatant theft, added to this is worn-out networks which results in higher technical losses. It has become almost impossible for electric and gas utilities to revamp their systems due to cash crunch. Consumers, particularly power plants, industrial and commercial consumers and state owned enterprises owe billions of rupees to fuel supplying companies.

To overcome cash crunch these entities have to borrow heavily from the banking system. This on one hand adds to their financial cost that consumers have to pay and on the other hand deprive the investors from seeking loans from commercial banks. As such the first choice of banks remains investing in government securities, which on one hand is a risk free investment and on the other hand offers lucrative rate of return. Financial institutions don’t have to do anything except submitting a bid keeping in view the auction target and maturities.

Lately, banks have started making tall claims that the size of their non-performing loans — as a percentage of total lending and investment — is on the decline. This in no way shows any improvement in efficiency but investment in government securities which are risk free.

With the reduction in discount rate banks have started complaining about shrinking spreads and also demanding reduction in minimum rate of return on deposits fixed by the central bank. It may not look wrong because profits after tax are on the decline. However, this is because of out of proportion administrative expenses and not because of the floor rate. If banks are serious in improving their income they have to bid farewell to easy income from investing in government securities and also follow austerity.

In power sector, there is excessive reliance on IPPs which enjoy sovereign guarantees. The share of state owned power plants in total electricity generation has become a minuscule percentage. Many of these plants are run either for shorter duration or face closure due to non-availability of fuel (furnace oil and gas) because they don’t have the money to pay the cost. While the numbers of units dispatched by distribution companies are on the decline, recovery has reduced to around 30 percent causing severe cash crunch.

Another factor responsible for hike in electricity tariff is the agreements signed with the IPPs. According to these agreements ‘fuel cost is a pass-on factor’. The persistent hike in furnace oil price and depreciation of Rupee value necessitate regular upward adjustment of the tariffs. In rental power case it was found that many of the power plants established by the favorite were given billions of rupees as advance and were also paid capacity charges without supplying even a single unit of electricity. It is on record that billions of rupees were recovered from such ‘delinquents’ and a lot remains to be recovered.

There is a general perception that electricity demand exceeds supply, which is totally incorrect. At present the country has an installed capacity of around 26,000MW (including KESC) but average generation hovers below 18,000MW that further declines when water at dams touches ‘dead levels’ The prime reason is that power plants, including IPPs are not operated at optimum capacity utilization.

Experts have been asking the government to change country’s energy mix but policy planners seem deaf and dumb. Despite being fully cognizant of the gravity of the situation they have completely failed in taking remedial steps. They know that cost of electricity generation at thermal power plants is phenomenal but no hydel plants have been added. Pakistan was required to construct one dam in a decade but no facility has been constructed after the completion of Tarbella in 1976.

Many experts blame delay the in construction of Kalabagh dam a mother of all evils. However, they completely ignore the fact that it is not the only solution. Ideally, the country should have gone for ‘run of the river’ type hydel plants. This experiment was successful in case of Ghazi-Brotha project and the latest addition is Laraib project sponsored by Hubco, the first ever hydel power plant established by the private sector in Pakistan.

The country has also failed in exploiting Thar coal reserves, often termed one of the largest coal reserves of the world. The delay can be attributed to non-allocation of funds and the most recent being the propaganda that it is not suitable for power generation. Some experts have made the situation even more complex as they insist on coal gasification, which has a very limited viability. In fact coal open pit mining and mine mouth power plant offers an ideal solution but groups having vested interest, have virtually killed the project.

It is also being alleged that oil lobby does not favor construction of hydel and coal-fired power plants. One of the evidence is closure of coal-based Lakhra power plant in Sindh. The plant was closed on the pretext that it was causing ‘too much pollution’. However, no one noticed that if required accessories are not installed how can dust emission be controlled?

Energy crisis can be overcome by containing theft, improving recoveries and above all following good governance at every level. The first objective should be to operate the existing facilities at optimum capacity utilization and improving cash flows of state owned distribution companies.

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