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Finding an exit from the energy crisis

After thorough analysis, following have been identified as some of the major causes of power shortage in Pakistan:

  • Increase in circular debt because of failure to curb power theft
  • Inability to recover billed amounts from consumers
  • Decline in hydro power because of water shortage
  • Decrepit secondary transmission lines

The increase in circular debt was bound to happen because it is inherent in government policy. Circular debt clogs the system as it deprives cash flow to all players at each stage of the supply chain. Government policy and management has much to do with it. At one end of the chain, there is theft of power and under recovery of bills by DISCOs. This loss far exceeds that from tariff differential. Loss in revenue affects cash flows and hobbles the system. In addition, increased reliance on furnace oil this year has increased cost of electricity and consequently the subsidy. Increased reliance on furnace oil literally adds fuel to the fire of circular debt. Government’s entire focus on power generation as the solution to the energy crisis is the third contributing factor. Each unit of power carries a subsidy. The loss from theft and under recovery is in addition. Incremental power will only add to required subsidy.

While increasing generation capacity, government must also fix the broken governance system and revisit gas use policy. Else, new capacity may also likely suffer the impediments that present power generation faces. It must also examine its policy of tariff subsidy and ensure that budget provision accurately reflects the needed amount. Approximately Rs. 850 billion is required to clear the circular debt stock and its buildup during the year. If government doesn’t do so energy shortage will continue. One risky development is the borrowing by PSO and some others from the banks. This is a case of long term sustainability compromised for short-term expediency. It will put at risk profitable companies, but not help in oiling the system. There is no option but for government to retire circular debt and give up the artifice of controlled fiscal deficit. Government performance creates circular debt. It must own it and not look away.

Theft and under recovery of bills make investment in the power sector unsustainable. Sale proceeds from households, business, and public-sector consumers generate cash flows that facilitate the generation, transmission, and distribution companies to operate. The role of DISCOs is most important here. Large-scale power theft is not possible without knowledge about the culprits. Similarly, bill recovery is entirely for them to ensure.

 

To begin with, government must reconsider its approach to energy policy. Currently, the policy places too much emphasis on generation and not enough thought on why there is shortage in the first place. In addition to generation capacity, power shortage exists for three reasons:

UNSUSTAINABLE SECTOR

In its present structure, the sector is financially unsustainable. The system does not recover the cost for generation, transmission, and delivery of power.

Inefficient transmission and production of thermal power in the public sector:

A large part of the system is inefficient. O&M backlog and aging equipment in GENCOs means they produce electricity way below capacity. Transmission has always been under invested. Both suffer from policy issues of who should invest.

WRONG PRIORITIES

Government has set wrong priorities. This is seen in high gas allocation to fertilizer at the expense of power, major public investment in roads and not enough in revamping decrepit generating plants or transmission lines.

RECOMMENDATIONS
  1. Immediate action needs to be taken to improve billing and recoveries by DISCOs. Improved cash flows through the system will enhance power production and reduce shortage. It will make future investment feasible. This situation can be improved through administrative action, better management practices, and accountability of officials running DISCOs. This is entirely in the government’s domain. The combined loss from power theft and under recovery has a deleterious effect on the sector. It results in high tariff and an ever-increasing circular debt. This in turn leads to below capacity generation. Instead of improvements, performance of DISCOs has worsened in the last year as recovery of bills fell even in the well performing units.
  2. Improving gas supply to power producers, prioritizing the more efficient IPPs.
  3. Accelerated public investment to improve GENCOs efficiency and investment in power transmission even at the expense of road projects should be made while ensuring transparency and accountability in approving contracts.
  4. Reform the power sector by privatizing DISCOs, mandating NEPRA to develop competitive power markets and power exchanges by providing open access to producers for transmission and distribution, setting tariffs through open and transparent bidding, and introducing smart technologies.
  5. The International Energy Agency (IEA) has forecasted that demand for primary energy will increase by 40% between now and 2030. The mounting energy demand in Pakistan is a huge challenge for development and stability. To curtail the country’s energy issues, apart from fuel substitution, Pakistan should also divert its policies and consequent actions for alternate/renewable energy.
The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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