ENERGY CRISIS & ENERGY OPTIONS
Aug 06 - 12, 2007
Pakistan's economy has grown strongly over the past 3 years, at an average pace of 7%. Over the last 3 years, improved business confidence and rising inflows of foreign direct investment (FDI) have buoyed private investment. Pakistan is currently facing electricity shortfall of around 1000 MW. Everyone agrees that an essential precondition for industrial development is an uninterrupted supply of power. Although the installed capacity for generation of electricity in the country is 19439 megawatt, the actual production does not exceed 14000 megawatt as against the peak demand of 15000 megawatt. The demand for power will increase by 16548 MW by 2007 and 20584 MW by 2010, according to PPIB sources.
Pakistan needs to sustain an annual economic growth rate of at least 6/7 percent to alleviate poverty and realize desirable socio-economic and human development. To achieve the growth target of GDP, it is absolutely essential that the minimum electricity growth rate is maintained. The provision of adequate and reliable supply of electricity at a reasonable cost is a prerequisite to attain this goal. Power is the prime mover. Any big push of the economy would need accelerated power development. But there is a likelihood that Pakistan's current economic growth might not sustain in the absence of consistent and continuous development of new power projects.
Since long we have been witnessing signing of MOUs with foreign and local investors while PPIB and AEDB keep on issuing letter of interest but we have not yet seen any serious development in power sector. This raises serious concerns among economic circles as going forward we will be facing huge shortfall of electricity.
We often hear that making Saturday another gazetted holiday or changing office timing to utilize day light can be probable solutions of current shortfall. These wouldn't be called solutions but are like deceiving oneself. The Ministry of Water and Power must realize that we have to install power plants at a minimum in order to overcome electricity shortage.
Pakistan is fortunate enough to have two cheap indigenous resources for power generation i.e. water and coal. But it is sheer bad luck that we have not been able to use both of these resources effectively. Estimated coal reserves of Pakistan are around 185,175 million tons (PPIB source) which is one of the largest coal reserves of the world whereas their utilization for electricity generation is barely one percent. Sindh accounts for 99.7% of Pakistan's 185,175 million tons of coal deposits, of which 175,506 million tons are located in Thar. Coal deposits in Thar were discovered in 1991, since then it is evident that Pakistan's electricity future lies in indigenous coal as well. But since then for some 'unknown' reasons no progress has been made for the development of the Thar coal mines.
Currently about 30% of Pakistan's power supply is based on natural gas, 33% on imported oil,, 33% on hydro and remaining on coal, nuclear and renewable electricity. Keeping in view the current power mix, it is essential to concentrate on indigenous and cost effective sources for power generation.
Our first choice should be hydro power and then indigenous coal for power production but the biggest irony of Pakistan is that we have made our best hydro projects controversial without realizing what we have done with our country only because of little or almost no knowledge about those hydro projects. Down the road, we would be facing water crises as well and then time will not allow us to go back to rectify. Thus this leaves coal, which Pakistan has in abundance, as a safe, cheap and reliable source to meet the power needs of the country for the foreseeable future.
The discovery of sizable coal deposits in the province of Sindh is of significance. Since long an integrated coal based power plant is approved in the area. Needless to say, abundant supply of coal at home will greatly reduce pressure on imported oil. This is the time, when we have to decide how we would like to see the future of Pakistan. The government has embarked on a well planned policy to generate more power through private investment. It wouldn't be wrong to say that 2002 power policy along with its amendments is one of the best power policies whereas it is fundamentally wrong to compare it with 1994 power policy. Various power sector experts believe that under current circumstances this policy provides best possible incentives to investors. If we had taken a national decision of making indigenous power resources the prime source of the country's power generation program, we would have got the international investor and by now we would have developed the coal mines as well.
It was speculation till 2004-05 but in early 2005-06 became obvious that Pakistan would be facing shortage of natural gas in years ahead which will certainly make it difficult to supply gas smoothly to new power plants and even would not be available for existing power plants. In this situation, it was decided by Economic Co-ordination Committee of Government of Pakistan that only dual fuel plants i.e. using natural gas and furnace oil simultaneously, would be allowed to be installed for power generation.
Looking at the power portfolio of Pakistan it looks as if we are living in an oil rich country. Presently, Pakistan has lot of oil fired power plants and with the passage of time their efficiency is decreasing even though certain deficiencies are restored after annual outages or major overhauls. Besides permanent deficiency, which can't be restored, along with the continuous hike in furnace oil prices which will make them unviable in near future.
Such an unbalanced power profile carries serious repercussions. A balanced power portfolio would require a fair balance among various sources of power with no excessive reliance on any single source. One of the few matters which must be considered in establishing the power portfolio is that excessive reliance on any single source especially foreign source on which we have no control over supply and price can make things miserable any time.
We are living in a highly volatile region of the world and under current US ñ Iran crises, which seems to have no early solution, no one is sure where oil prices will reach. World has witnessed that oil prices reached new heights in recent UK sailors' crises with Iran. Whatever be the US strategy for the Middle East and Central Asia, we should seriously understand our needs and must have to decline our reliance on imported expensive fuel. During the last fiscal year, Pakistan used billions of dollars its prestigious tax payers' money for import of furnace oil for these power plants. Oil prices have been seesawing between US$ 60 and US$ 70 per barrel while it is hard to forecast how international oil market reacts if US ñ Iran relations get worse. But the point of concern for Pakistan is that how its economy would absorb at least US$ 100 per barrel.
In addition to the huge financial burden on the economy and on the people, the situation also raises some new issues of the security of supplies. Secondly, expensive fuel is not the only issue; fuel handling capacity in Pakistan is also an emerging issue. Fuel handling capacity in Karachi is reaching its maximum and with the construction and operation of new sea port at Gwadar, the problem doesn't seem to resolve as since long fuel has been transporting from Karachi to the rest of the country but now onward it might also be coming from Gwadar. The transportation system from this area needs a time test. As of now, there are few reservations on this which can only be resolved with the passage of time. As 33% of the power generation is based on oil therefore any hindrance in the transportation of oil can cause severe damage to the economy. In short, time has proved that the best solution for all such problems is encouragement and development of indigenous resource. The more we rely on foreign expensive source the more we would be inviting complications and difficulties for ourselves.
Many countries, including the developed and emerging economies, have adopted extensive programs for increasing coal based power into their power portfolios whereas we don't have even a single MW power plant under construction on coal. Shouldn't we call it irony of Pakistan? China is increasing its coal based power by over 30,000 MWs. Japan nearly generates 20% of its electricity from imported coal though they don't have coal reserves. India has been working on Mega Projects on coal. Most of the coal rich countries are either using coal for their power requirements or exporting the same. Pakistan's coal is of lignite type which is not very cost efficient for export thus can best be used internally.
It wouldn't be wrong if we say that continuous negligence of indigenous resource has made Pakistan's power policy directionless. This negligence, absence of priorities and focusing on expensive foreign fuel has made cheap electricity and self reliance a day dream. On top of that, Government has recently issued two LOIs to two foreign companies for conducting two parallel feasibility studies for 1000-1200 MW each power plant on imported coal. Pakistan has estimated coal reserves of around 185,175 million tons and are one of the largest coal reserves of the world, yet we are planning to import coal for power generation is like an oil rich country importing oil for its usage. There are various arguments in favor of imported coal like diversification of fuel, lesser dependence on middle east oil, cost effectiveness as compared to furnace oil, quick solution to current power crises etc.... One should not be against this new development but certainly not at the cost of non-development of Thar. If Thar coal mines are not being developed just because of development in imported coal option then there is no need to have a power plant on imported coal. The prices of international coal would be linked with oil and end of the day the price differential between furnace oil and imported coal would remain constant. In other words imported coal prices will increase with the increase in the prices of furnace oil. Whereas cost of development of Thar coal mine would be higher initially but with the passage of time it will keep on decreasing. It is understandable that Ministry of Water and Power is under pressure due to power crises but the way PPIB handled the imported coal issue clearly shows that the policy makers are getting panic and want overnight solution. In short, we have to concentrate on developing our indigenous resource as well while keep on working on imported coal option. By doing this we will end up with saving in time as well.
COAL-BASED POWER GENERATION
Essentially indigenous coal-based power will bring various benefits for Pakistan; first and foremost benefit would be immense savings in foreign exchange on import of expensive oil. Coal based power plants are labor intensive and will create thousand of new jobs and various other new business opportunities at plant site in particular and in Pakistan in general. It will also provide power security and protection from a wide range of external risks. In order to compete Pakistani goods in international market, it is fundamental that the cost of electricity should be decreased otherwise going forward Pakistan's goods would not be market competitive. Non-development of indigenous resources and lack of interest have made these things quite miserable.
Investment in coal mine with integrated power project is a measure of long term commitment by investors. It is significantly different from investment in stock exchange or from importing consumer products. It is seriously wrong to compare imported oil tariff with indigenous coal as the capital cost and fuel cost are different and above all indigenous coal has lot more inherent benefits.
These integrated projects are heavily capital intensive and no small or local investor can mobilize the required resources on its own. Ministry has to market this project on an international forum and should conduct various road shows in America, Europe and Middle East. There are lot many American and European companies investing in Gulf and Middle East at much lower IRR and return on equity against as offered by Government of Pakistan. Whatever be the strategy of the Ministry, one thing they must ensure that they have consensus among all of their stakeholders. Presently it is common to raise fingers on each other like PPIB blames NEPRA whereas NEPRA in turns blames WAPDA. Shenhua of China is the prime example of this, where almost every one blamed WAPDA for not accommodating them on tariff whereas no one ever effectively tried to really figure out the exact reasons of investor's back out.
It's not very long that we heard about the establishment of the Alternative Energy Development Board by Ministry of Water and Power in Pakistan. We should realize our means, resources and above all needs and then evaluate these fancy ideas of wind, solar and biogas power which even the developed countries are still experimenting with. These should be explored, but they are far away from offering real solutions to the Pakistan's current power problems.
Although there have been several announcements from the Government circles about the development of the coal based power plants through utilization of indigenous coal reserves, but one does not see any serious investment having actually been made in this area. Recently government has established a company to develop Thar coal mines which is indeed a good step towards self reliance but who knows how long it will take to come into reality. There is hardly any project in the world which doesn't encounter difficulties and have hurdles but in Pakistan the story is different, instead of removing the hurdles and solving the issues our decision makers prefer to abandon the project regardless of its importance to the country and the resources being used on the project.
The prime focus should be on the construction of large dams in the country but as those have been disputed therefore the policy makers should keep on trying to make consensus of construction of large dams and on parallel basis focus should also be equally placed on the development of the indigenous coal resource before any 'hidden hand' makes it controversial too.
The government hopes that Pakistan is now among the fastest growing economies of Asia. But growth requires power, and high growth rates require high levels of consumption of cheap and abundant power.
The only solution for sustainable economic growth in medium and long term is to give indigenous coal based power generation a major role in the country's power portfolio. Delay in the development of indigenous resource will only keep on pushing back the opportunity for Pakistan to develop its abundant coal resources at Thar.
It is therefore relevant to ask the policy makers: how they correlated the probable economic growth at the time when our economy was effectively started turning around with smooth and continuous power supply; why this fundamental correlation issue was neglected, who is going to take the responsibility?