Power plants are highly capital intensive and need large loan financing in addition to equity funds

Jan 31 - Feb 06, 2005

We need more of reliable electric power for economic and social development. Our existing generation capacity is short by international standards. Moreover, a large section of the population is not yet connected to the electricity. The deficit in generation capacity is expected to grow in the coming years if existing capacity is not revamped and the new capacity is not added speedily. Present per capita consumption of electricity, a measure for assessing the level of economic development, is very low in Pakistan, even lower than India. Less hydel generation during low water months makes things worse for the people as well as for the economy. It is heartening to know that to create new power generation capacity; the government on recommendation of the Task Force has substantially reduced processing time at PPIB both for the unsolicited and solicited proposals. In addition, both PPIB and NEPRA have been advised by the authorities to restructure their regulations and procedures for expediting installation of new generation capacity at various locations. The government is urged to formally notify the changes/improvements in policies or procedures and place them on the websites for public information.

The role of PPIB is particularly important in clearance to investors for setting up power generation capacity and operation thereof. The solicited proposals are sought from the investors by PPIB for projects of which the feasibility reports have already been completed by the public sector. The unsolicited proposals pertain to the raw sites for which the feasibility reports would be prepared by the private investors after they are issued the Letter of Interest (LoI) by PPIB. After due processing, the selected investors, whether of solicited or unsolicited proposal, are issued Letter of Support (LoS) by PPIB provided they submit the prescribed Performance Guarantee. After LoS, the investors are required to normally reach the Financial Close within 15-18 months. The Performance Guarantee is encashable on call by PPIB in terms of the Power Policy-2002. It is submitted that the quality of scrutiny at PPIB or at NEPRA might not be compromised merely for expediting some of the power generation proposals.

Availability of reliable electric power, essential for IT and quality exports, would increase if the existing thermal generation plants are fully revamped, are operated well and fuel is assured on long-term basis. Purchases of electricity from the IPPs have to be optimally efficient. Transmission and distribution networks might be well maintained and the T&D losses might be kept at the lowest possible. In case of audit of energy efficiency, it might be revealed that many industries and commercial enterprises are using electricity very inefficiently. With more efficient power motors, pumps, lighting, etc substantial electricity would be conserved and thus reducing the need for more new capacity. Hydel generation capacity might also be optimized keeping in view water needs for the agricultural crops. All these activities are very important and must not be ignored by diverting all attention to the setting up of new generation capacity. It is important that operational efficiency at generation, transmission and distribution stages is improved. All employees at their institutions must bring betterment in activities, which have the potential to drastically reduce the need for additional generation capacity and thus save the nation from costly additional indebtedness.

Besides hydel generation, electricity is produced in the thermal generation plants by using furnace oil, gas, coal, etc as fuel. Regular supply of fuels in requisite quantities and at reasonable prices is one important ingredient for operating the plants at high capacity. Some of the power generation plants are based on dual fuels. This gives flexibility but in many cases it adds to the generation costs. All fuels, when used with higher efficiency, reduce per unit generation cost and help keep the overall consumer tariff lower. Some of the plants of Wapda/KESC are old and need major revamp/re-engineering to raise conversion efficiency. This might require allocation of substantial loan and equity funds but this option might be relatively cheaper than setting up new generation capacity.

Power generated from hydel and thermal plants located in various parts of the country has to be transmitted to the load centres for utilization by the consumers. Transmission and distribution systems at places are weak and reliability is sometimes not of high standard. These networks require major improvements and up-gradation. Further, as new generation capacity is coming online, the transmission network might be extended in tandem and improved to efficiently carry electricity to the consumers in different parts of the country. More attention and finances might be provided on timely basis for improving efficiency of the networks and their extension.

Power plants are highly capital-intensive and need large loan financing in addition to equity funds. Funding is easier to arrange when most of the security package agreements including tariff and government approvals are in place. Long-Term Credit Fund (earlier known as Private Sector Energy Development Fund), currently managed by National Bank of Pakistan, might be in a position to meet part of the loan requirements. However, the funding needs for accelerated implementation of new power plants might require larger funds beyond the present capacity of the LTCF. There might be justification for restructuring and revamping of LTCF to meet the present day challenges of power and infrastructure finance. It may be mentioned that the State Bank of Pakistan has recently released draft guidelines for the Infrastructure Project Finance, including power generation, transmission and distribution facilities.

In due course these guidelines would be formally issued and the banks and DFIs in Pakistan would also start appraising and financing infrastructure projects. The banks and DFIs might have to take extra measures to train their staff and to arrange local and foreign funds in the time-frame compatible with the needs of the new power generation, transmission and distribution facilities.

There are a number of issues or 'bottlenecks' due to which progress is somewhat slow in setting up of new power generation capacity and for the development of fuel sources for that purpose. The government is urged to consider/resolve these issues for increased availability of reliable electricity in the coming years. Some of these issues as gathered from the press reports are mentioned below:

1- All provincial governments are short of resources for development work. With a view to increase funds at their disposal they tenaciously negotiate for a larger award under the National Finance Commission. They keep on asking the federal government for special grants. These governments are also asking for higher rates of royalty on the minerals like oil, gas and coal, and for hydel generation. The issue of royalty between WAPDA and the government of NWFP has been lingering on for quite some time. It is suggested that the royalty issue might be looked into with more compassion. With expectation of bigger royalty, employment opportunities and participation in development projects, the provincial governments are expected to help accelerate exploration for oil, gas, coal and hydel power generation, etc and facilitate their production by improving law and order situation.

2- Recognizing importance of exploiting indigenous coal, the government has rightly encouraged development of coal-based power plants in the country. Work on exploring Thar Coal Mine is continuing. This mine would eventually be developed to provide coal for operation of Thar Power Plants initially of 600MW capacity. Recently a delegation from Pakistan visited China and held meetings there to move forward the project to the next stage. Matters regarding tariff for coal-based power are under discussion. For popularizing use of indigenous coal for power generation, PPIB has recently extended the pre-qualification submission deadline for the 450MW coal-fired power project at Lakhra, from October 31 to December 31, 2004. The extension in time has been presumably allowed for attracting more investors. All these proposals might be pursued diligently.

3- Gas is a preferred fuel for power generation. There are newspaper reports that now the government might not be able to consider sanction of new power generation projects based on natural gas in the private sector until availability of additional indigenous natural gas or imports of gas under long-term firm arrangements. This might presumably be due to fast depletion of gas reserves in the country and new discoveries of gas not fully replenishing the reserves. It is felt that gas situation might not become so dismal suddenly. Perhaps the entire gas scenario including gas discoveries awaiting exploitation, existing gas reserves, gas committed to the existing as well as proposed power generation plants, fertilizer factories, other industries, large commercial houses, captive power plants, etc might be reviewed in a planned manner. Remedial measures, such as making more efficient use of gas and accelerating gas exploration/development, might be adopted in the light of such an exercise. Different options for import of gas or CNG from neighbouring countries might also be re-assessed.

4- PPIB so far has reportedly issued LoIs to 11 power projects of 2,696MW based on gas, hydel and coal, with possible commissioning during 2007 to 2012. These projects together with other projects to be cleared by PPIB in the coming days might be carefully monitored for smooth progress. Development of hydel power, being cheaper and based on indigenous resource, deserves more attention. The authorities and the people are urged to pave way for development and installation of larger hydel power plants. There is need to support the hydel projects included in WAPDA Vision 2025. Hydel power helps stabilize the tariff and keeps the overall tariff within affordable limits. Moreover, generation of electricity from nuclear power plants as well as the renewable sources can provide big relief and therefore might be factored in the over power situation.

5- According to press reports, there are a few fast track power generation proposals for different areas of the country. Sometimes such proposals are accompanied by promises of large foreign currency loans. The government is urged to carefully look into all such proposals vis-a-vis the electricity needs of different regions and the revamp or other projects/options under consideration for meeting their increased electricity needs. It might be pointed out that any attempt to bypass the prescribed procedures/legal requirement in the interest of expediency might cause overlooking of important requirements and thus lead to unpleasant outcomes for the nation. The government might consider allocating some funds out of its reserves for preparing feasibility reports or for ascertaining viability of the projects by engaging reputed foreign consultants. This might strengthen PPIB and other institutions and help improve energy situation.

6- The IPPs are presently exempt from income or other taxes. Further, there are some talks as to the payment of the Workers' Welfare Fund and the Workers' Participation Fund by the IPPs to the labour. The government is urged to remove all distortions in the tariff in a phased manner so that the true tariff per unit of electricity is reflected. Further, the Power Policy-2002 might also be reviewed with full participation of all stakeholders in the light of recent policy changes allowed by the government as well as developments regarding different fuels and within the comprehensive framework of long-term energy plan.

The Prime Minister, perhaps apprehending the fall in hydel power generation, had asked the Planning Commission to prepare by 15th December 2004, a long-term comprehensive energy plan encompassing energy potential, including electricity, gas and alternate energy resources vis-a-vis energy requirements for projected socioeconomic developments. The points discussed in this piece in the context of electric power might be useful in the preparation of such a comprehensive long-term energy plan.