POWER

Quality-quantity-price are the major concerns

By AMANULLAH BASHAR
May 24 - 30, 2004

The power sector is confronted with serious problems of quality, quantity and the price which are the main concerns both of the consumers as well of the utility companies in Pakistan.

As far as the quality of power was concerned, in fact it is related with generation capacity, and the quality of transmission and distribution network. Unfortunately, despite a heavy subsidy to the tune of about Rs40 billion extended by the federal government to WAPDA and the KESC every year besides huge funds provided for rehabilitation of the system, the power supply especially in Karachi, the hub of industrial and commercial activity, is highly vulnerable. The generation capacity of KESC which is not even half of the total requirement compels the utility company to borrow from different sources including WAPDA, Pakistan Steel, KANUPP and two small IPPs. This fragmented arrangement of power, supply to cater to the need of Karachi and adjoining villages was obviously insufficient which frequently poses problems of bre..

The KESC system has to heavily rely on WAPDA which supplies about 600MW to meet its shortfall. Whenever there is any break in supply from WAPDA, or any transmission problem between KESC and WAPDA's the transmission line trips down from national grid at Jamshoro which results in power failure over half of the city. For instance, on May 4 the entire industry had come to a close due to power shut down following a fault developed between KESC and WAPDA. According to Chairman SITE Industrial area, over 2500 units were forced to close down their production due to power failures.

The poor and unsustainable power supply and that is too at a high price has generated the feelings among the industrialists of having their own power generating plants. A number of large-scale manufacturing sectors have succeeded in setting up gas-fired captive power plants at their own premises. Currently, over 500 megawatt of power is self generated by the large-scale manufacturing units and more applications are pending for permission to set up power plants at least with a volume of another 500MW.

Since the permission for gas connections to run captive power plants is currently permissible only for export-oriented units whose 70-75 percent production is exported. However, those units having less than 70 percent or exports or running for domestic market are not allowed this facility. The units producing for the domestic market however have a strong plea that by meeting the local requirement they are producing import substitutes, hence they are saving the foreign exchange which could have been spent on the import of the items they are producing for the local market. They are of the view that they are equally important and eligible for the facility of gas connection for setting up of their own power plants.

The trade and industry, being the revenue provider to the government and also contributing to the economy, have access to the power corridors. They have the platforms of their respective trade to raise their voice to get resolved their problems. The worst hit segment of the situation is the domestic consumers because having no platform to raise their voice for their grievances. Unfortunately, the elected representative of the people have more concerns of their party interest or political issues such as LFO, Uniform, ministries etc instead of taking up the issue adding to the problems of the masses.

Since the present government as well as the past governments had a plan to private the KESC, the government under a policy had capped its generation capacity neither KESC was allowed to enhance its generation capacity nor was any new IPP allowed in the KESC's licensed area. While the enhancement of generation capacity was capped on one hand while the demand continued to grow during for over a decade in Karachi.

Currently, Karachi is passing through the most difficult times as far as the power supply was concerned. Besides suffering from torturous summer, the power shortage is also resulting acute shortage of water because the water is supplied through pumping stations. This double edge problem ignites the feelings of the consumers against the KESC as well as the government. People come out on streets in different parts of the city to demonstrate against the power failures and disrupted water supply.

The long time persistent situation creates a feeling among the people in Karachi that despite the biggest contributor to the economy in terms of revenue, skilled man power and exports, Karachi seems to be on the lowest priority of the government. Despite hue and cry raised by the trade and industry circles and people in general neither the generation capacity of the KESC was allowed to increase, nor any license was issued to new IPPs and above all the available enough electricity with HUBCO which is capable to entire shortfall in the KESC system, the approved project of direct transmission line between KESC-HUBCO exists only on the papers. Now recently, the WAPDA chairman has given a deadline of 18 months.

GENERATION CAPACITY

At present, the total power generation capacity contributed by different sources was estimated at about 17,664MW. Out of the total 9,949MW generated by WAPDA while 1,756MW owned by KESC, some 437MW is produced through nuclear technology while the private sector contributes about 5,522MW.

China which has come in a big way in the development of energy sector in Pakistan has recently signed an agreement for developing yet another nuclear power plant of 300mw at Chashma. It may be noted that China had already helped Pakistan in developing the first phase of Chashma nuclear power plant of 300mw.

The new plant with a capacity of 300MW will fill in the slot already provided for in the master plan for the Chashma nuclear power project. It will be located on the left bank of river Indus near Mianwali. It will be the third nuclear power plant in Pakistan after KANUPP and Chashma-I. Like the KANUPP and Chashma-I, the new project will also be under the safeguards of International Atomic Energy Authority (IAEA) which monitors such plants internationally and helps in providing safety procedures.

Pakistan being the signatory to the International convention on nuclear.

Pakistan's first nuclear power plant at Karachi which is known as KANUPP has been generating electricity safely and reliably for more than 3 decades. This is a significant achievement, considering that the supplier country withdrew technical support as early as 1976. Recently, through overhauling, up-gradation and refurbishment carried out at KANUPP, the plant has been successfully re-started and extension of its design life by about 15 years. The IAEA provided safety-related assistance in this re-licensing activity.

In the design and installation of Chashma-II, Pakistan Atomic Energy Commission (PAEC) will have available with it the operating experience of Chashma-I. The design and manufacture of various components of the new plant will be reflective of the latest codes and standards and the technical improvements made in the last decade. PAEC has now developed an infrastructure of well-equipped workshops for inspection and fabrication of components and equipments for conventional as well as nuclear power plants. With this infrastructure, PAEC will be able to enhance local contribution in Chashma-II.

Power generation through nuclear power plants is the genuine use of the technology for peaceful purpose for the benefit of the masses. Since power produced through nuclear technology is much cheaper as compared to other sources, Pakistan essentially needs more nuclear power plants to overcome acute shortage of electricity as well as to reduce the price of electricity which is beyond the purchase power of the majority of the people in this country.

LINE LOSSES

Actually, the term of line losses is generally used to indicate the incidence of power theft which is more or less 40 percent in WAPDA and KESC systems. The volume of power theft at such a massive scale through out the country brings two things in mind. First that it's a society of thieves or the price is unaffordable to the majority of the consumers. The later concept seems close to the reality because the percentage of line losses in this very society was almost nominal prior to the implementation of power policy 1994. It was the power policy of 1994 which consequently pushed electricity prices beyond the reach of the consumers. It is said that behind the power purchase agreement with the IPPs which allowed electricity prices to shoot up to the level of Rs6.5 per unit. While the then government entered into power purchase agreements with the IPPs in conformity to the international prices of electricity, it ignored the average income.

Though the present economic manager realize the exorbitant price of electricity and have tried to reduce electricity charges, however, whatever the reduction was allowed in Paisa does redress the sufferings of the people. It is the government levy which is the real cause for sharp increase in electricity bills. The government, instead of using electricity as a source of revenue collection should use it as the engine for economic growth and a booster for investment. It is the firm opinion of the economic experts that unless the cost of utilities especially the electricity was reduced to an affordable, the desired level of investment would never come a reality.

SALIANT FEATURES OF THE NEW POWER POLICY

Unlike the previous power policy of 1994 which through added over 5000MW through private sector investment, yet it entirely misbalance the tariff structure in Pakistan. Keeping the experience of the past, the new policy has been carefully evolved to ensure that the tariffs are kept within the limit and affordable.

President Pervez Musharraf who is also taking keen interest in the power sector has issued directives to avoid oil fired power plants to avoid price escalation.

The policy has a long-term target of producing about 34,885MW additional power by the year 2020. The long-term plan envisages production of 15,633MW from hydel resources, 3,600MW coal based plants, 2,060MW coal-based projects all in Sindh, 1200MW of nuclear power and 1000MW from renewable resources.

In the face of the growing need of power, the present team of the government frames a new power policy 2002. Under this policy, concession of policy available to all sectors i.e. Private, Public and Private-Public sectors. The policy emphasis of new power projects is based on indigenous resources and fuels especially coal and renewable.

The basis for selection of the successful bidder in each case will be minimum levelized tariff, either through international competitive bidding or solicited proposals or through negotiations/ICB for proposals on raw sites i.e. locations whereof no feasibility study has been initiated. Variable tariffs over the life of the project will be permitted under the terms specified in the request for proposals. The process of selection will involve pre-qualification, issuance of the Request For Proposals (RFP) and bidding and evaluation in accordance with the bid criteria clearly laid down in the RFP.

It is recognized that without a proper feasibility study for a particular site-specific hydel or indigenous fuel-based/renewable resource-based project. It will not be possible to invite competitive bids and receive firm offers. Thus detailed feasibility studies for such projects will be carried out by the public/private sector before bids are invited and the Letter of support (LOS) issued. The feasibility study may be conducted by the private sector only on raw sites, provided the proposal for the project on raw site has been reviewed/accepted and a Letter of Interest (LOI) issued after submission of the required bank guarantee.

Hydel projects in the private sector will be implemented on Build-Own-Operate-Transfer (BOOT) basis. Thermal projects in the private sector, however, will be established either on BOOT or Build-own-Operate (BOO) basis.

Decision in the matter would be made on a case to case basis. The projects based on BOOT shall be transferred at the end of concession period to government of Pakistan.

Competitive tariffs will comprise an Energy Purchase Price (EPP) and a Capacity Purchase Price (CPP) with adequate provision for escalation. The CPP in case of hydel projects will be approximately 60 percent to 66 percent of the levelized tariff, because of the relatively low EPP.

The government will guarantee that the terms and conditions of executed agreements i.e. the Implementation Agreement (IA), Power Purchase Agreement (PPA), Fuel Supply Agreement (FSA), Gas Supply Agreement (GSA), Coal Supply Agreement (CSA) and Water Use license (WUL), including payment terms, are maintained during the term of the agreements for projects above 50MW.

Power companies will be allowed to import plant and equipment and manufactured locally (for hydel and thermal projects including projects based jupon renewable resources) at concessionary rates. Companies will also be completely exempted from the payment of income tax, including turnover rate tax, and withholding tax on imports. However, there will be no exemption from payment of income tax on oil-fired power plants.

To promote indigenization, the local engineering industry will be encouraged to form joint ventures with foreign companies in order to develop power projects with a cumulative capacity of at least 2000MW by the year 2015.

INCENTIVES ON INVESTMENT IN POWER SECTOR

Customs duty at the rate of 5 percent on the import of plant and equipment not manufactured locally is available. No levy of sales tax, exemptions from income tax including turnover rate tax and withholding tax on import and no exemption from income for oil-fired plants.

ESCALATION

Escalation for dollar components to cover dollar inflation will not be provided. However, bidders many include components in the EPP and CPP, which are scalable for Pakistan Rupee inflation. Such Pakistan Rupee escalation will be effected from the bid submission date by the Pakistan Wholesale Price Index (WPI) for manufacturing. The reference value of the WPI for manufacturing will be the most recent value.

All sponsors would be required to submit yearly tariff profiles in real terms at the time of bidding.

The power generation companies would be permitted to issue corporate registered bonds. They will also be eligible to issue shares of discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk. Foreign banks will have permission to underwrite the issue of shares and bonds by the private power companies to the extent allowed under the laws of the country. Non residents will be allowed to purchase securities issued by Pakistani companies without the State Bank of Pakistan's permission and subject to the prescribed rules and regulations.

PRICE

The Federal Minister for Water and Power Aftab Ahmed Khan Sherpao has recently indicated that power tariff would be reduced shortly. He said that arrangements for construction of Monda dam have been finalized and an agreement has also been signed with an American firm.

The construction of Monda dam would generate 740MW of electricity besides irrigating 29,000 acres of agriculture land. Feasibility studies on Bhasha and Akhori dams were also close to completion. Akhora dam is designed to generate 600MW electricity.

In respect of reduction in electricity tariff, Sherpao says that the matter has already been discussed in the inter-ministerial meeting. Most probably the decision regarding cut in power rates may be announced in the budget speech of the finance minister on June 5, 2004. Earlier, the increase in power rates and other sectors of the economy used to be made on the recommendations of the international donor agencies, especially the IMF because the weaker economies have no choice but to take dictations.

Now the economic situation in Pakistan has taken a turn around. We are no more a beggar; we have put the begging bowl in the deep freezer, as remarked by Finance minister Shaukat Aziz. Hopefully, the decision regarding cut in power rates would be taken in line with the hopes and aspirations of the people.

OUTLOOK

In the backdrop of prevailing situation in the power sector where quality-quantity and the price factor feature prominently and a source of concern for the consumers, the situation calls for concrete corrective measures to address these issues.

KESC which has to cater to power requirement of 10 million plus population in Karachi, it has become a gigantic task to deal with single handedly, especially with outdated power generators, transmission lines and above all the highly vulnerable distribution system where sub-standard material has made the situation even worst.

The situation calls that KESC can be split into four companies so that over 1.8 million legal and a large number of illegal power consumers could be provided services to their satisfaction. This would ease the situation especially to attend the frequent faults, sustainable supply as the smaller area of service would be easy to manage for the utility companies. Splitting KESC into four entities would help its privatization also, as it will make the situation manageable effectively.