CHRONIC ENERGY SHORTAGES

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

July 18 - 24, 2011

Pakistan is presently reeling under worst power crisis, which is inflaming public anger and stifling industry. The country generates 13,240 MWs against a peak demand of 18,065MWs. The power shortfall has now reached 5,050 megawatts. The main reason for the shortage is that past governments failed to anticipate growth in demand and delayed implementing power and dam projects that would have boosted output.

Power outages increased significantly due to the widening gap between supply and demand over the past three years. Pakistan actually suffers from an overall shortfall in production. The country's energy sector is facing an extreme shortage of natural gas and a massive inter-corporate circular debt problem that has debilitated the production capacity of power generation companies and refineries.

The country's electricity supply shortages result from distorted pricing, weak management, and the lack of a comprehensive plan. The power cuts have become acute because of underinvestment in power stations. A lack of investment in existing plants, outdated grids and rampant electricity theft reflect that some grid companies experience line losses of 30-40 percent.

The government has been forcing state-owned energy companies to pay dividends to fill its budget gaps rather than allowing them to reinvest their profits into expanding domestic energy production. The government has also cut funding for the electricity sector as it struggles to reduce its budget deficit.

Pakistan generates about 70 percent electricity through thermal and 30 percent electricity through hydel source. A major reason of electricity crisis is that the oil-operated power generating units in the country do not run on their full capacity due to lack of sufficient oil supply to these units.

Non-payments have almost become a routine in the energy sector, owing to an ever-deepening circular debt crisis. Non-payment by customers and non-payment of government subsidies to producers and generators have resulted in a large stock of outstanding private and public debt totalling over Rs156 billion or about three percent of the gross domestic product (GDP), which also prevents producers from purchasing sufficient fuel to operate at maximum rates.

The non-payment of dues has forced the independent power producers (IPPs) to initiate the legal and financial process to call sovereign guarantees of the government on its inability to make payment against the electricity it purchased. Under the power purchase deal, the government is committed to make payment of dues in less than 10 days after the IPPs' final notice or its sovereign guarantees will be encashed by the banks.

The ballooning inter-corporate circular debt reflects the difference between the higher power generation cost and relatively lower electricity bills.

Higher cost of furnace oil forced the government to raise power tariff in the last few months, but the consumer tariff is still believed about 20 percent less than the cost of power. Passing fuel price hike on to consumers has been a politically sensitive issue for the government, which faces criticism from political parties and domestic consumers already hit by high inflation.

The per unit production cost of electricity in the country is over 10 rupees , while 4 rupees up to 100 units and 6 rupees up to 200 units are charged from the consumers. Ironically, the rich and poor both avail the subsidy on up to 200 units.

The government provided subsidies worth Rs342 billion to the power sector against the total federal development spending of Rs280 billion in the current fiscal year, ended on June 30. Last year, the government had given an assurance to the International Monetary Fund (IMF) that it would increase the power tariff by 2.2 percent each month in the last eight months (November-June) to achieve its target of 17.6 percent increase by end of June 2011. Slow progress on the energy sector reforms has been a key reason that led IMF in May last year to halt $ 11.3 billion loan program the country agreed in 2008.

Elimination of power sector subsidy is a politically sensitive and unpopular decision for a democratic government, hence the gap in power production costs and the money paid by utility consumers could not be bridged.

The country still lacks a fully deregulated value chain from generation down to transmission and distribution. It direly needs a commercial capacity and regulatory framework to become a fully liberalized market where all private and public power producers could compete on an equal footing. International financial institutions abstain from providing loaning facility to the country to avoid risk involved in investment in the power sector. Ultimately, the government has decided to exploit immense hydropower potential in Azad Kashmir with the help of China. The government has already completed a feasibility study and detailed engineering of 7100 MW Bunji dam, 4320 MW Dassu.

The country has a hydropower potential of more than 40,000MW, while it has managed to tap only 6,500MW. The hydroelectric dams not only produce cheapest electricity but also provide water storage and flood control mechanism. Under Indus Basin Project, primarily two main dams were built- the Mangla Dam on the Jhelum River and the Tarbela Dam on the Indus River, together with their subsidiary dams. The 9,000 ft long and 470 ft high Tarbela Dam is located near Rawalpindi with an 80 kilometer long reservoir. Tarbela is the country's largest dam, which was completed in 1974. Mangla dam, the second largest dam after Tarbela was built in 1967 with funding from World Bank.

China has sought free hand for making investment of an estimated $15 billion in Pakistan hydro power sector. The state-owned China Three Gorges Project Corporation (CTGPC), operator of the world's largest dam, recently proposed a $15 billion hydro-power scheme to control the floods and tackle electricity shortage in the country.

Interestingly, what hinders Chinese investment in Pakistan power sector is not the issue of price of electricity and the cost of supplying power but legal bottlenecks, law and order problem and political reasons, which have so far delayed the launch of hydropower projects in the country. Chinese firm is not interested in following the Public Procurement Regulatory Agency (PPRA) rules or participating in international competitive bidding (ICB), instead it has demanded award of projects on single-bid basis.