There is urgent need to examine the Power Policy 2002 to see if it would adequately address all these issues within time

Dec 08 - 14, 2003

Electricity is a special commodity. It is consumed almost as soon as it is produced as it cannot be stored in large quantity. In order to keep the power system in balance, efforts are made to match the supply with demand. Matching process continues during day or night. As long as supply is there to meet demand there are no serious problems. However, when demand exceeds supply despite efforts of the utility, a situation develops when the utility is obliged to resort to load-shedding which puts the consumers in inconvenience. If power supply is cut off from commercial and industrial consumers, they suffer economic loss and therefore would not be happy with the utility. Normally, the utilities develop extra generation capacity to provide for maintenance and spinning reserves to cater to regular maintenance of power plants, losses in the transmission and distribution of electricity and the peak demand during different periods of the day night or the year. However, additional capacity means additional investment. The utilities tend to keep the investment in reserve capacity within certain limits generally depending upon their liquidity and support from the government.

Breakdowns or load-shedding may also be due to the problems with transmission or distribution networks. If there are frequent power break-downs or load-shedding large industrial and commercial consumers resort to alternate sources of electricity such as stand-by generators or self-generation for base load. This involves capital expenditure by them but in some cases it is considered a better investment as they are relieved of the load-shedding or break-downs and they have more dependable power supply. In both situations, there are implications for the utilities as well as the economy as a whole. A review of the power supply-demand situation during the last about twenty years, would help us develop better policies for the future. For this purpose extensive reliance is being made on the Five Year Plan documents and the Economic surveys issued by the government from time to time.

Demand for electricity during the 5th Plan period (1978-83) rose at a much higher rate than envisaged at time of initiation of the Plan. Electricity consumption experienced growth at over 12 per cent a year. Demand from the household consumers rose at a staggering pace of over 24 per cent a year. In part, this was the result of a housing boom and the conversion of a number of houses from other fuels to electricity and the enhanced use of air conditioners and other electrical gadgets.

Around mid-1982-83, maximum demand in the Wapda system was 2,794 MW. A demand of 3,050 MW was experienced on the system in July 1982 but could not be met with available capacity, leading to a load-shedding. Wapda estimated a maximum demand of 3,118 MW during 1982-83. In KESC system, the maximum demand that could be met in 1982-83 was 618 MW whereas the estimated maximum demand was 640 MW. The installed capacity lagged the peak demand and there were load-shedding.

The consumption analysis of Wapda system showed an actual growth rate of 12.2 per cent during the period 1977-78 to 1981-82. Accordingly a growth rate of 12.5 per cent had been assumed by the Planning Commission for the 6th Plan period. From this growth rate of energy consumption had been worked out as explained in below.

As a large investment required for creation of even a small additional generation capacity, electricity demand forecasts were developed by two different approaches. Based on the past growth trend particularly in the past two years and expected energy losses including auxiliaries. Wapda calculated the growth rates to be 12.3 per cent for the 6th Plan period, 11.2 per cent for the 7th Plan period and 8.3 per cent thereafter (for Wapda and KESC systems combined). In Wapda's own system this was projected to be 12.9 per cent whereas for KESC system it was 9.7 per cent per annum. An alternate set of demand forecast prepared by M/s. International Energy Development Consultants (IEDC) had shown unconstrained growth up to 12.4 per cent in overall demand for Wapda and KESC systems combined during 6th plan and 9.3 per cent thereafter. M/s IEDC had advised that the annual growth in the demand could be reduced from 12.4 per cent level by various conservation and demand management measures to about 10.6 per cent per annum.

The demand for Wapda system during the 6th Plan was expected to go up from 3,118 MW to 4,926 MW and for KESC, the demand of 640 MW in 1982-83 was expected to grow to 1,012 MW in 1987-88. The diversified maximum demand in 1982-83 estimated at 3,649 MW was expected to go up to 5,765 MW in 1987-88, showing a growth rate of 9.6 per cent per annum. The total installed capacity of the two systems (Wapda and KESC) during the 6th Plan was expected to increase from 4,809 MW in 1982-83 to 8,604 MW in 1987-88, resulting in total addition of 3,795 MW. Capacity addition was based on progress of on-going projects as well as other projects that were to be initiated during the 6th Plan period. Certain transmission projects were planned to be taken up to reduce the power losses. Also, in the distribution the main emphasis was to meet all the requirements of the agricultural and industrial consumers.

Considering modest maintenance and spinning reserves, integrated system demand growth rate of 9.6 per cent, and the capacity additions as discussed above, the overall power balance for the month of September and May of each year were worked out. September is the high water month whereas May is the low water month. Hydel capacity declines in lean water months. The September balance for the Plan period showed about 10 per cent surplus capacity each year except 1984-85 when there was a small deficit in capacity. However, the May power balance showed about 20 per cent capacity deficit in the initial three years of the Plan period. Under the May balance, demand at 3,635 MW in 1982-83 was expected to increase to 5,581 MW by 1987-88. Improvement could be expected in 1985-86, if there were no slippages in the implementation of projects underway. It was suggested that measures for demand management and orderly load-shedding in the lean months might be initiated in advance to avoid serious dislocations.

The targets of the 6th Plan, as regard installation of additional capacity, were not met. Against the planned addition of 3,795 MW, only 2,018 MW were added, raising total installed capacity to 6,716 MW. The country had been facing load-shedding since the early eighties while demand continued to grow in the grid system without any sign of deceleration. In fact, the growth would have been higher if the areas which were denied electricity had been connected rapidly. The load-shedding and the consequent loss of economic activities, realized the government of the need to associate private sector in this sector so far restricted to the public sector only. Therefore, the government in 1985 decided for induction of the private sector so that the GOP's financial resources and institutional capabilities were augmented with the enterprise, leadership and resources of the private sector.

Over the 7th Plan, without load management or energy conservation and with a real average tariff increase of 5.6 per cent per year, the diversified peak demand was projected to increase from 5,674 MW to 9,570 MW or a growth rate of 11 per cent per year. With load management and conservation, the peak demand was envisaged to rise to 8,900 MW in 1992-93, the terminal year of the 7th Plan period, the growth rate being 9.4 per cent per year. The national grid energy sales were projected to increase from 24,195 Gwh to 38,626 Gwh during 1987-93 periods and assuming electrical energy conservation of 1.098 Gwh in the terminal year. Per capita consumption of electricity was expected to increase from 233 Kwh in 1987-88 to 320 Kwh in 1992-93.

The 7th Plan provided for additional installed capacity of 6,558 MW to bring the total installed capacity to 13,112 MW, after allowing a retirement of 162 MW at the end of plan period. The rationale for 7th Plan power sector generation programme also included: (i) bringing oil and gas plants on line to meet the short-term need of eliminating load-shedding and to balance the country's generation capacity by providing greater thermal generation which is unaffected by seasonal water fluctuation, and initiating work on large and medium hydels, including detailed engineering of Basha dam and a run-of-the-river project at Ghazi Ghariala to assure significant contribution for low cost, indigenous resource-based generation.

An analysis of generation capacity and electrical demand projections for 7th Plan, it appeared that there would be no significant loadshedding after 1990-91 and continuing in the early years of the 8th Plan if the planned targets for load management and energy conservation were met. This conclusion, however, was based on minimum margins of reserves. It was mentioned in the Plan documents that the resource constraints had limited the provision of greater reliability and high reserve margins. It was also load-shedding could be distinct possibility in the unusually low water years and in case of a shortfall in the achievement of targets for conservation and load management. The power programme had assumed that about 20 per cent of the proposed addition to capacity during the 7th Plan would come from the private sector, participation of which were to play an important role in achieving the power balance.

By June 1993, the installed capacity had risen to 9,786 MW by addition of 2,992 MW which was only 47 per cent of the target for the 7th Plan period. Resource constraints and physical implementation delays were the reasons for lower generation capacity realization than the target. The private sector projects were also delayed because their original schedules for formulating project details and arranging finance were over-optimistic. Maximum demand in the meantime had risen to 8,611 MW (7,522 MW for Wapda system and 1,347 MW for KESC) showing a growth rate of 7.94 per cent per year.

Power shortages led to load-shedding which caused serious concern and the government directed Wapda to minimize it through better load management. Wapda took a number of steps to remove the constraints of the system including transmission. Measures were also undertaken to improve the reliability and availability of power plants. During the first six months of 1994 load-shedding hovered around 2,300 MW whereas during corresponding months of 1995, load-shedding of 1,810 MW was experienced in January, 164 MW in May and 249 MW in June. Load-shedding in 1994 varied from five to seven hours whereas there was only limited load-shedding in 1995.

A detailed policy for induction of private sector in power generation had already been announced, of which some of the salient features were: (i) guarantee of purchase of electricity at 60 % plant factor; (ii) establishment of Private Power Board, under the Ministry of Water and Power, for one window operation; (iii) appointment of NDFC to administer the GoP's Private Sector Energy Development Fund, for providing subordinate loans, up to 30 % of the project cost, having longer maturities, (iv) recommendation by the GoP to the State Bank of Pakistan for modification of Prudential Regulations to allow 80:20 debt equity ratio; and (v) Setting up of National Electricity Regulatory Authority, NEPRA. Load-shedding had been one of the reasons for the government offering to the private sector IPPs the tariff of 6.5 cents per unit under the 1994 Power Policy.

The installed capacity during the 8th Plan was planned to increase from 9,786 MW to 16,422 MW, an increase of 6,636 MW. As against this, the maximum demand was placed at 11,173 MW. Growth in maximum demand was estimated at 5.35 per cent per year. Measures were also provided for energy conservation, improvement of energy efficiency, encouragement of co-generation and self-generation, and reduction of energy losses. For the reduction of peak demand, proposed steps included: (i) shifting of load to off-peak by creating differential between peak and off-peak energy charges; (ii) seasonal tariffs to promote maintenance outages by industry in non-critical months; (iii) installation of time-of-the-day metering devices at industrial and large institutions and price incentives to shift loads to off-peak hours; and (iv) staggering of industrial holidays to reduce system peaks in critical periods.

In 1997-98, the terminal year of the 8th Plan (1993-98), total installed capacity reached 15,618 MW, showing an actual increase of 5,832 MW against the target of 6,636 MW. For the first time 88 % of the target capacity addition was achieved. Combined installed capacity at the end June 1998 comprised 4,826 MW hydel, 10,655 MW thermal and 137 MW nuclear. In percentage terms capacity mix was 31 % hydel, 68 % steam and 1 % nuclear.

With the execution of public and private sectors power generation projects, the installed capacity has continued rising during the period 1998-99 to 2002-03. Capacity for March 2003 is 17,728 MW. Of the total capacity Wapda owns 9,694 MW (55%); the IPPs have 5,816 MW (33%), PAEC 462 MW (3%) and KESC 1,756 MW (10%). The increase in capacity in the period has been largely due to completion of on-going public sector projects as well as execution of a number of the private sector IPPs. Power generation capacity during the past twenty years has increased nearly four times and also has changed the capacity mix in favour of thermal. The share of hydel has declined. In 1982-83, the capacity mix was 53% hydel, 44% thermal and 3% nuclear, which presently stands at 28% hydel, 69% thermal and 3% nuclear.

Wapda, with the normal growth rate, is estimated to face shortage of 55 MW in the year 2005-06, rising to 5,529 MW by the year 2010. To fill the upcoming shortfall, and to attain the desired capacity mix, the government has announced Policy for Power Generation Projects-2002, the main thrust of which is on the exploitation of indigenous resources. Some of the salient features are: (i) policy is applicable to projects in private sector, public sector and through public-private partnership; (ii) Hydel projects are to be implemented on BOOT and thermal projects on BOO or BOOT basis; (iii) the government will guarantee the terms of executed agreements including payment terms; (iv) availability of standardized security agreements; (v) Exemption from income tax including turnover tax and withholding tax on imports; provided that no exemption from these taxes will be available in case of oil-fired power projects; and (vi) Maximum indigenization shall be promoted in accordance with GoP policy.

There has been claims that the investors' response to the Policy has been encouraging and twelve companies have shown interest in setting-up power plants, having cumulative generating capacity of 1,915 MW promising investment for more than $2 billion. This might be so but on the basis of past experience we should take all these with a pinch of salt. Power system in the country has many shortcomings. Wapda and KESC have financial problems. Energy losses are high and so is the electricity tariff to be paid to the utilities by the consumers. Load-shedding are not uncommon even at a time when we have excess generation capacity. A big segment of the population is still without electricity connection. Per capita consumption of electricity is very low as compared to the countries in the region. There are cross-subsidies among different consumer groups as well as different regions. Effective January, 2005 many provisions under the WTO arrangements would become effective and to stay competitive our industry, agriculture and commercial undertaking shall required cheap and reliable electricity. There is urgent need to examine the Power Policy 2002 to see if it would adequately address all these issues within time in addition to attracting investors for setting-up additional generation capacity within the time frame envisaged. It might be better if we continuously remain on our toes and take remedial steps well before time.