Public, private sectors moving together to bridge supply-demand gap
Feb 26 - Mar 04, 2007
ECONOMIC OUTLOOK OF PAKISTAN
The economy of Pakistan is based on agriculture, which constitutes around 21.6% of GDP. Textiles are a major constituent of the total exports from Pakistan (over 60%).
MARKET GROWTH OF POWER SECTOR
Pakistan currently has over 19,389 MW of installed generation capacity. Thermal plants encompass about 65% of this capacity, with the rest is composed of hydroelectricity (33%) and nuclear power (2%). Pakistan's total generation capacity has amplified rapidly in the past few years mainly due to investments in IPPs, resulting in a partial improvement of the power shortages formerly experienced in the country. Rotating blackouts (load-shedding), however, are sometimes indispensable in some areas. Total transmission and distribution system losses, however, continue to be high (about 25%), with a significant level of power theft. Seasonal reductions also influence the availability of Pakistan's hydropower capacity. With much of the country's rural areas lacking electrification, and only 60% of the population connected to the national grid, a significant power demand growth is expected in the long-term, although there may be some excess generation capacity in the short run.
INTRODUCTION OF IPPS
As mentioned earlier, the primary increase or growth in power generation has been due to the introduction of IPPs. IPPs are the independent power producers. These are generally financed by foreign investors, as well as from a few WAPDA hydroelectric dam projects. The ability to exert a pull on private capital to the sector was reduced, however, following the previous government's dispute with the country's 12 IPPs, which impacted Pakistan's image abroad and consequently its investment climate. The new government inherited this poor relationship with the private sector, but managed within a year to resolve all disputes with the IPPs. HUBCO, the last and the largest IPP, reached an agreement with the government in December 2000. A new 235 MW IPP, backed by Tenaga Nasional of Malaysia, began operating in August 2001. Consumption of electricity has grown at an average of 6% since 2000-01, rising sharply from an average of 4% in FY01-02 and FY02-03 to 9.2% in FY03-04 and 10.7% in FY04-05. The acceleration in the growth of energy consumption reflects the substantive growth of 15.4% in large scale manufacturing and an 8.4% increase in real GDP, reflecting the higher level of economic activity in the country.
ABOUT ELECTRICITY SECTOR
Pakistan's electricity sector was historically served by two power entities - the Pakistan Water and Power Development Authority (WAPDA) and the Karachi Electric Supply Corporation (KESC) - the former covers most of the country while the latter serves the city of Karachi and its adjoining areas. Recent reforms led to the unbundling of WAPDA's power wing into separate generation, transmission, and distribution companies. Together, the newly created companies accounted for an installed generation capacity of more than 19,389 MW and a customer base of about 14.7 million in 2004-2005.
ELECTRICITY SECTOR REFORMS
In order to meet the country's substantial power needs and improve the performance of the sector, the government has been pursuing an extensive privatization and reform program since the approval of a strategic plan in 1992. As part of this program, WAPDA's power assets were unbundled into 12 separate companies, consisting of:
Three generation companies
The National Transmission & Dispatch Company (NTDC); and
Eight distribution companies
The WAPDA restructuring program and the transformation of power assets into autonomous corporative entities were led by the Pakistan Electric Power Company (PEPCO), which was established for the purpose of completing the above restructuring. While all the 12 corporative companies continue to function in an integrated manner, PEPCO is aggressively pursuing a plan to establish its autonomy by completing the transfer of employees, registration of titles, and transfer of liabilities.
PRIVATE SECTOR'S PARTICIPATION
The government is seeking the private sector participation in both the generation and distribution facilities to promote competition in the power sector. In contrast, the state-owned NTDC would remain responsible for national dispatch, transmission, and system planning as a single buyer. While the strategic plan envisions a fully functioning competitive market in generation, a single-buyer model is being proposed as an interim measure during the next few years.
The government has established the National Energy and Power Regulatory Authority (NEPRA) as an independent regulator for Pakistan's power sector to protect the interests of the investors, operators, and consumers. NEPRA's scope of regulation covers licensing, investment programs, performance standards and tariff setting.
TARIFFS END-USER TARIFFS
The average end-user tariff in Pakistan for fiscal year 2005 is estimated to be around Rs.3.93/ kWh, or US 6.55 cents/ kWh. The current tariff structure was created by WAPDA for its own use as an integrated utility. In general, the residential tariffs are cross-subsidized by the industrial and commercial tariffs. The current tariff structure is uniform throughout the country, but distinguishes between residential, commercial, industrial, agriculture tube-well, and other customer categories, which are further divided by consumption level (tariff slabs). For certain categories, the tariff consists of a fixed and energy component; for day-time industrial customers, the energy tariff is further divided into peak and off-peak charges. The table below lists estimated average tariffs for fiscal year 2005 for the main categories of customers.
The unbundling of the sector and the creation of more than one distribution companies has precipitated the need to adopt a different tariff principle that would take into account the cost structures of the individual distribution companies. NEPRA has issued the new Tariff Standards and Procedure Rules (1998), which envisions the recovery of all relevant costs, including depreciation charges and a rate of return on capital investment, with some incentive mechanism for cost efficiencies. Since March 2001, an Automatic Tariff Adjustment mechanism for fuel cost variations has also been adopted and applied every three months. NEPRA is examining the possibility of adjusting the tariff levels on a more economic basis, and is open to tariff mechanisms proposed by the investor.
During the transition phase towards the full corporation of the former WAPDA companies, the bulk tariffs charged for the electricity purchased by the distribution companies have been determined at the discretion of NTDC. As the process of transfer to corporation becomes completed, however, these bulk tariffs will be regulated by NEPRA as well. Until 2000, a uniform bulk tariff was charged to all distribution companies (Rs 2.50 in 1999 and 2000) for their purchase of electricity. In 2001, a new pricing methodology was established, through which each distribution company would retain a margin that reflects its cash expenses, debt services, and line losses (but not capital expenditures or non-cash expenses). This methodology can be expected to change once the bulk tariffs become part of NEPRA's scope of regulation.
EXISTING TARIFF ISSUES
The existing tariff regime has several problems:
There is no clear coordination between the end-user tariff set by NEPRA and the unregulated price charged by NTDC for electricity purchases.
The current end-user tariffs for some customer categories are inadequate for cost recovery. However, as a better tariff-setting mechanism develops with the progress of the corporatization process, the profitability of this sector can be expected to improve significantly.
A WORD ON DEMAND & SUPPLY IMBALANCE RECENT DEVELOPMENTS
There is a definite imbalance between demand and supply of electricity in Pakistan. In one of the most recent developments to reduce the imbalance, an additional 500 MW electricity generation would take place through the thermal power plants by redeployment of gas supply within the power sector. According to the Minister for Water and Power, in a meeting with the Prime Minister earlier in January, he stated that this step would reduce the existing gap between demand and supply of electricity and load-shedding will be averted to a great extent. KESC is also set to have additional capacity of 360 MW by June this year, as a result of various steps taken by the company.
GDP (USD billion)
GDP per Capita (USD)
Real GDP Growth (%)
Consumer Price Inflation (%)
RETAIL TARIFFS OF FORMER WAPDA COMPANIES (JUNE 2005)
EST. AVERAGE TARIFF (RS/KWH)
EST. AVERAGE TARIFF* (US¢/KWH)
Agriculture Tube Well
*Converted using an exchange rate of Rs.60/USD
NAME OF PROJECT
DETAILS OF PROJECTS PRESENTLY BEING PROCESSED BY PPIB
NO OF PROJECTS
ESTIMATED COST (US $ MILLION)
PIPELINE QUALITY GAS/DUAL-FUEL
DEDICATED GAS FIELDS
SOURCES: Private Power and Infrastructure Board