SUMMER OF 2008

ALL THE STAKEHOLDERS MUST JOIN HANDS IN RESOLVING THE WORST EMERGING POWER CRISIS

SHABBIR H. KAZMI
Apr 07 - 13, 2008

Most probably for the first time in history Pakistan has endured the worst energy crisis in winter. Duration of electricity and gas load shedding stretched from eight to sixteen hours per day and it continues to linger on, though with less intensity. The simultaneous outage of electricity and gas had the most discernible impact on industries resulting in delays and/or non-compliance of export orders.

It is feared that summer of 2008 could also be the worst because electricity providers do not have the capacity to meet the enhanced demand. The country could face as high as 4,000MW shortfall. All the generation companies put together would not be able to meet the demand even if all the generators are made to run without any rest. However, such an adventure could only result in breakdown and outages for longer duration. In such a scenario the distribution companies will have to resort to extensive load shedding, though they would continue to call it "load management" as usual.

Be it PEPCO/WAPDA or KESC, they have been failing miserably in discharging their responsibility effectively and efficiently. At an average these utilities suffer from huge transmission and distribution (T&D) losses, often exceeding 45%. In order to cover up this criminal negligence they have been penalizing those who care to pay their bills. They have been persistently increasing the tariff to improve cash flow but each hike in tariff has proliferated pilferage. The T&D losses mostly comprise of theft, which is being done in connivance with staff of electricity companies.

The second contentious issue is non-payment of dues by the consumers, particularly civic authorities, government and semi government establishments. For example the outstanding amount in the name of KW&SB has been increasing because it has not paid electricity bills due to non-receipt of its dues from the consumers. Such default results in circular debt. Consumers do not pay water bills of KW&SB, which in turn does not pay KESC. As KESC suffers from liquidity crunch payments to fuel suppliers are withheld or delayed. Non-payment to OMCs and gas marketing companies impair cash flow of refineries and they are forced to skip payment to E&P companies. It is estimated that currently the circular debt exceeds 200 billion rupees.

Ironically, the most sought after solution is extension of soft-term credit by banks to utility companies. This was possible in the past because both the utility companies and the banks were under state control. However, with the privatization of banks this option is no longer available. On top of this fuel suppliers decline to accept this offer on the grounds "why should we pay the interest? It is our money and it should be released in full and without any delay".

The successive governments have failed in increasing power generation in the country. While electricity demand in the country has been growing at an average of 10% per annum there has not been corresponding increase in generation capacity. There has been an embargo on state owned utilities and they were not allowed to add generation capacity. The only major project in the private sector was HUBCO and since then no other large-scale project has been established. Minor IPPs having 50 t0 100MW capacities have been added but these are of the size of captive units established by a number of industrial units.

In the public sector Ghazi Brotha and Chasma nuclear power units have been established but demand has far exceeded supply. Almost all the major industrial units and many commercial buildings have their own power generation facilities. The government has encouraged the private sector to generate its own power and most of these units consume gas to run the generators.

According to some of the sector experts, this policy may have eased pressure on electricity providers but most of these generators consume much higher gas as compared to commercial power plants. The in-house power generation capacity is estimated around 5,000MW in the county. Had these power generation facilities not been added the shortfall would have been to the tune of 10,000MW or might be more.

However, most of the generators installed by the private sector come under the category of "stand-by" facilities. Such generators could not run for long hours continuously and have to be shutdown else wear and tear is at a much faster rate needing frequent overhauls / refurbishing and operating cost also goes up. This phenomenon is common because industries are forced to run these generators for long hours due to prolonged load shedding.

HYDEL POWER

The country has the potential to produce more than 40,000MW hydro electricity. However, the installed capacity has remained confined to around 20,000MW. The last major hydro electricity project, Tarbella Dam commenced commercial operation in seventies and since then no other dam has been constructed. It was only recently that work on Diameer Basha dam started but it will take long time to commence generation. Work on Kalabagh dam could start despite preparation of its first feasibility in early sixties due to apprehensions expressed by Sindh and NWFP provinces. Instead of helping the government, politicians fueled controversy to achieve political mileage. According to some experts the amount spent on revised feasibilities is double/triple the cost of project but all in vain.

Pakistan is also a victim of changing policies of international donors and financial institutions. At one time they propagate a policy but after a short while their policy stance changes. At one time these institutions lent money for establishing hydro electric power plants i.e. Warsak, Mangla and Tarbella but latter on the same institutions became the biggest opponents of mega hydro electric projects.

At one time even the developed countries preferred to keep power generation, transmission and distribution companies under the state control. However, privatization of these entities in UK under the regime of Margaret Thracher prompted the international financial institutions (IFIs) to stop lending to public sector entities for establishing power generation, transmission and distribution companies. There was pressure on the governments of the developing countries to privatize such entities and Pakistan could not remain an exception.

The shift in the policies of donors and IFIs led establishing of IPPs, including HUBCO and privatization of Kot Addu power plant of WAPDA. Privatization of KESC was also the part of this policy but corporative entities, previously part of WAPDA's Power wing, has not been possible as yet.

Pakistan Electric Power Company (PEPCO) was established in nineties to oversee the transformation of WAPDA's power wing into National Transmission and Dispatch Company, gencos and discos and their ultimate privatization. However, these corporative entities have not been privatized as yet, partly because of some administrative issues and partly because of lack of buyers for acquiring ownership and management control of these entities.

The Government of Pakistan, under the pressure of donors and IFIs came up with the policy of shifting power generation to the private sector but transmission and distribution remaining with the public sector. This policy has put the cart before the horse, because IPPs get the payment for every unit dispatched to NTDC or KESC but distribution companies have to take the brunt of T&D losses.

KESC PRIVATIZATION

There are two views regarding privatization of the Karachi Electric Supply Company (KESC). Some of the critics believe that KESC management control has been given in the hands of those who had no experience of managing an integrated utility at a through away price. The other group believes that a virtually bankrupt entity suffering from gross mismanagement, inefficiency and rampant corruption just cannot be improved and foreign buyers are being maligned due to the acts of corrupt officials and workers.

It is also being said that the government has not fully discharged its obligation i.e. settlement of outstanding dues and retrenchment of staff (voluntary retirement program). The two most contentious issues for the poor financial health of KESC are huge T&D losses and delinquent receivables. Both these issues cannot be resolved without government support.

Even if the KESC staff wants to remove kundas, they can't because of resistance posed by the pressures groups of various areas. It is often said that even the personnel of law enforcing agencies cannot enter into these areas, what to talk of KESC staff trying to remove the kundas.

On top of these is lamination on the national and religious occasions. Be it a wedding or the Independence Day consumption of cost-free electricity is a norm. On top of this are the "official kundas" or temporary connections. The load drawn is many times higher than the load sanctioned.

The reason for rampant power theft and huge T&D losses is overhead lines and highly depleted transmission and distribution network. Placement of new meters outside the compound cannot help in containing power theft. Identifying power theft is very simple. Metering of grid and/or substations can help in identifying the consumers indulging in power theft as well as the quantum of electricity pilfered.

The KESC has to follow two-pronged strategy to enhance its in-house power generation capacity and revamp its transmission and distribution network. However, determination of demand is prerequisite for undertaking both the jobs. According to some experts now Karachi's peak electricity demand exceeds 3,500MW in summer and the total demand is expected to touch 5,000MW by year 2010.

Tough, the new management of KESC is busy in adding new generation capacity but it is too small to meet the demand. One of the possible ways to improve supply can be achieved by diverting the entire power produce by HUBCO to KESC. This is not an outrageous demand because HUBCO was establish to meet Karachi's demand, though subsequently the power purchase agreement was signed with WAPDA. As such HUBCO enjoys proximity with Karachi, which could also help in containing technical or line losses.

The new management of KESC had signed an operation and maintenance (O&M) contract with Siemens, which didn't work and has to be cancelled. International Power of UK is not only the shareholder in HUBCO and KAPCO but also has O&M contracts with these entities. The KESC should also hire the services of International Power for operating its existing power plants. This will help in improving in-house power generation as well as optimizing power generation cost.

It is also suggested that strategic investors of KESC should also convince International Power to take a stake in KESC. This will help in adding new power generation capacity.

The federal, provincial and district government should also contribute towards mobilizing capital for adding new generation capacity as well as revamping T&D network. To begin with these authorities should start releasing overdue amounts and also extend credit at KIBOR plus two percent because these authorities will be the biggest beneficiaries of a financially strong and professionally efficient KESC.

Since Sindh has emerged as the largest producer of gas, the KESC should be supplied gas at discounted price equivalent to the royalty it deserves. If NWFP can get royalty on hydel power, Sindh should also get royalty on gas. In exchange for this KESC's franchised areas should be extended gradually to include lower Sindh and part of Balochistan.

It is expected that the new elected government will consider these proposals and take immediate corrective steps. Karachi is the hub of economic and commercial activities of Pakistan. Ensuring uninterrupted electricity supply at affordable price can help the city and the province a bigger role. Act now and don't look at others for help.