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Energy situation – The way forward

The present government is talking much for the energy crisis. Their statements look more like political slogans and nothing are passed to the customers yet. Despite of many announcements, the public is still facing the electricity load shedding problem. The government policies are not consistent, one day; one department announced a project and the next day the other denied to support.

The present energy situation is very confusing; the government has signed the long term Power Purchase Agreements of approximately 5,000MW & 4,000MW on imported LNG and Coal respectively. Similarly, the longer term agreements are in process for approximately 1,500MW solar and 3,000MW wind projects respectively as well. In addition to this more than 3,500MW projects are under construction to be operated on local coal. By the installation of these projects, the country’s generation capacity will cross the 35,000MW by 2020. Presently, the maximum energy demand is around 22,000MW. This will clearly make an energy surplus situation that will cause many power plants to remain shut down.

It is important to understand how it will impact the tariff and put the additional load on the public. As discussed above, some plant will remain shut down due to excess electricity. But the government has to pay the capacity payment for these shut down plants without purchasing electricity just to keep them standby. The Capacity Payment for the excess electricity standby plants will put the impact on overall electricity cost. The cost of electricity unit will increase as it also contains the capacity payments of the unutilized plants.

The same situation happened after the installation of power plant under the 1994 Power Policy. The plants installed under 1994 achieved commercial operation between 1997 and 2000. These plants were utilized very less till 2005-06. Then these plants start high dispatch from 2006-07, now after installation of new high efficient plants, the dispatch to the plants operating under the 1994 power policy will reduce once again. It is not good for the public that the plant that is designed for 30 years of operation is fully utilized only for 18-20 years despite of capacity payments of 30 years.

Now the people of Pakistan will face this extra tariff burden for next 10 years in any case till the expiry of agreements of the 1994 power policy plants. To avoid this type of scenario again in the future, the government should change the energy policies. It is a viable option to make the future tariff policies on “Take and Pay” basis. This will definitely affect the investor that can be managed through other incentives, but overall it will be better for the country.

 

Before going into detail, first we will discuss the different types of the tariff.

Take or Pay Tariff: A “Take or Pay” tariff is a rule, the Power Purchaser either takes the electricity from the Power Producer or pays for the availability of the plant (known as Capacity Payment).

Take and Pay Tariff: A “Take and Pay” tariff is a rule, the Power Purchaser pays the both energy and capacity payment only for the power it takes based on the energy meter readings. The power purchaser is bound to run the plant strictly on Economic Dispatch Merit order (Cheap plants first). If power purchaser asked to run an expensive plant ahead of the cheap plant, then it will pay the capacity payment (fixed payment) to the cheap plant.

The Take and Pay Tariff Policy is good if government add following incentives for the investors:

  • Allow the Power Producer to offer discounts on the Electricity Price. For example, if the Power Producer is at No. 50 in the merit order and his electricity cost is Rs. 7 per unit. The country electricity requirement is fulfilled by plants up to No. 42 in merit order (Say electricity Cost 6.8 per unit). The Power Producer can come up in the order by offering a discount and give electricity at Rs. 6.78 per unit. This option can be very fruitful. The investors (Power Producers) will make improvement in their process to provide cheap electricity and remain in merit order.
  • Second issue is as per the government regulations; the government can run any plant out of merit order due to system constraints. This clause is very risky for the power producer as it is very difficult to determine whether the government is running any plant out of merit order due system constraint or not. Also the system constraint is not the power producer’s issue. In order to attract investment through “Take and Pay” tariff; the restriction of the system constraint need to be removed.

It would be better for the energy sector of the country that all regulatory agencies should be on the same page to give the investor confidence to invest in the country. We hope the energy crisis will be resolved in next three to four years and then the regulators will keep on adding the plants with proper planning under “Take and Pay” tariff to avoid the same situation in the future.

 

Muhammad Farhan is an engineer by profession and has been working in the power sector since 2007. twitter: @farhan6309902

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of Pakistan & Gulf Economist

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