ENERGY CRISIS POSES MANIFOLD ECONOMIC CHALLENGES
May 21 - 27, 2012
The electricity and gas crises have not only posed manifold challenges to the country's economy but these are also hitting hard to the fellow citizens badly. The recent electricity crisis led to widespread protests across the Punjab province inviting the attention of policymakers to re-devise their priorities.
On one side, the country has been facing poor investment climate both from internal and external fronts while high electricity tariff and load shedding are posing serious challenges ahead on the other. The government is not facilitating the investors. Cost of doing business is escalating in the country.
The economy of Pakistan is the 27th largest in absolute dollar terms. Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. The economy has suffered in the past due to fast growing population, high inflation rate, increasing poverty level and low quality of education, terrorism etc.
Ironically, the signs for the looming crisis were visible for the last several years, but unfortunately, no positive steps have so far been taken to rectify the situation.
The main cause of electricity crisis is the extremely high cost of generation primarily due to the fuel mix being used to produce electricity. At present, the total generation installed capacity is 21,000 MW. The peak demand is 15,000-17,000 MW, but the production is only 12,000 - 14,000 MW, resulting in 12 - 16 hours of load shedding.
The root cause of the fuel mix is the use of furnace oil as the main fuel to produce thermal electricity. The months of January to May have very low hydropower available since reservoirs are empty and snowmelt will not start until June. The Tarbela reservoir receives about 95 percent of its water through snowmelt.
The natural gas is in short supply and available only to produce 29 per cent MW of electricity. As over 50 per cent of current generation is dependent on furnace oil, it is not viable for the government to purchase and provide oil at such high price; therefore, many plants are either shut or producing much below their capacity.
The price of furnace oil was about Rs2000 per ton in the nineties. It started increasing in 1999 and went up to Rs10,000 per ton in 2001. It rose sharply in 2006 to Rs20,000 per ton, and in 2008 it touched Rs30,000 per ton. There was a short duration drop in 2009, but then onwards it kept on rising very sharply. In 2010, it went up to Rs40,000 per ton and at present its price is almost Rs70,000 per ton. The price of furnace oil has thus risen 30 times since 1990 and seven times since 2005. There were plenty of warnings, and if an appropriate action were taken in years 2006 - 2008 by arranging alternative fuel, the present crisis could have been avoided. The alternative fuel is coal that could have been initially imported and subsequently obtained by developing huge deposit of Thar coal.
We have been hearing about Thar coal since last eight years, but no coal has been obtained from this source up till now. Many proposals have come from foreign investors, but no body has been allowed to touch this coal. It is a great national tragedy.
The cost of producing electricity from furnace oil is about Rs16 per kwh. This is only the fuel cost; total cost to the consumer for such electricity is about Rs22 - 25/kwh, which includes fixed cost and transmission/distribution losses.
The supply of furnace oil to the IPPs and rental plants is the responsibility of the government, since fuel cost under the agreement signed is a pass through item. The government is unable to pay the fuel cost to the generating companies with the result the plants are shut or running at a very low capacity. The generating companies are thus unable to pay to the oil companies and a high circular debt is created. Unless this debt is cleared, there will be no immediate improvement in electricity supply. Every body now seems to accept that alternative fuel to furnace oil is a must but nothing has so far been done.
Even if today the import of coal is started, it will take about three years before the coal can be obtained and some power plants are modified to use different boilers etc. Then again, only those plants can be converted to coal which are near the coast. The availability of additional gas will take some time plus the quantity of gas may not be sufficient to totally replace furnace oil. Similarly, the open pit mining arrangement for Thar coal will take minimum of three years.
The supporters of alternative power production believe, "Our top priority for the power sector should be to concentrate in opening the Thar coal mines as soon as possible. Experiments for gasification of coal may continue, but open pit mining is the tried and known solution. In the meantime, the existing furnace oil plants should be converted as much as possible to use coal, initially imported and then Thar coal. Additional gas should be extracted from the existing fields to help replace the furnace oil. All new thermal plants should be based on coal, these plants be located near the Thar deposits, so that transportation cost of coal is avoided."
Businesspersons are of the view that the country has huge potential to produce hydropower, but this potential is not capitalized due to reasons best known to the policymakers. A number of medium size hydropower projects are ready to be launched on the Jhelum River, Kunhar River, and Swat River, as well as in Dir and Chitral.
For the immediate solution of power crisis, there seems no option except to fund the circular debt for the next three years. The present available generation capacity is sufficient to meet the peak demand provided the fuel required is provided to the operating units. Furthermore, serious steps need to be taken to develop coalmines and gas fields immediately, cut the non-developmental expenditures during the next three years to accommodate this essential subsidy for restoring the economy and use indigenous resources, which are plentiful.
In an attempt to rein in the runaway inter-corporate debt and tackle the power crisis, the government has decided to raise Rs70 billion from the reserves of oil and gas development company (OGDC) by issuing term finance certificates (TFCs).
Under the plan, the central power purchasing agency (CPPA) will purchase TFCs at Karachi interbank offered rate (Kibor) plus five per cent for a period of three years to control the circular debt.
According to the sources, the TFCs will be transferred to OGDC's reserves and the amount of Rs70 billion be paid to Pakistan state oil (PSO) and IPPs. PSO will then release the money to refineries to reduce its dues. Later, the refineries will clear the dues of OGDC. "This plan will settle the Rs450 billion outstanding dues of different enterprises," the sources claimed.
The Pakistan Economy Watch (PEW) has castigated statement of member energy planning commission, Shahid Sattar, regarding the economic non-viability of the Thar coal gasification project and termed it an unfortunate result of continued campaign of powerful petroleum mafia.
"How come a project becomes unfeasible in which federal and provincial government had invested a lot while dozens of foreign companies and multinationals had been showing interest in it, Dr Murtaza Mughal President PEW said.
He said earlier the incumbent government had dumped the strategic Kalabagh dam project in the name of provincial harmony and now Thar coal treasures seen as a key to energy self-reliance for decades are being compromised.
Dr Mughal apprehended that abandoning the Thar coal gasification project could be part of an international conspiracy to keep Pakistan dependent on foreign aid and ensure Indian hegemony in the region.
Experts are of the opinion that energy crisis, tax collections and mismanagement have been engineered to please foreign masters who want to see Pakistan as a consumer market state.
Dr Mughal alleged that no steps were undertaken to tax the influential sectors enjoying unjust exemptions, like rich landlords and agriculturists while tax evasion was encouraged systematically.
He said that the inefficient government has brought the situation to an extent where it will have no option but to carry a begging bowl and knock the door of IMF to arrange external payment for the next fiscal deficit estimated to be around US$10 billion.
Other major donors are already fed up of broken promises to introduce reforms and reduce expenditure while IMF will be in no hurry to help Pakistan avoid crisis, he opined.
Pakistan Muslim League-Nawaz senior leader Muhammad Pervez Malik said that massive load shedding is a preplanned conspiracy, not only to destroy the economy but to demoralize the people of Punjab. "Discrimination in electricity load shedding and 16 hours power outages have unmasked the real faces of so-called poor friendly government," he said.
According to PML-N leader, load shedding has badly damaged the economy of Punjab. The PPP government was clearly targeting the people of Punjab for giving mandate to the Pakistan Muslim League-N that is unbearable.
He said that national economy of the country depended on the economy of Punjab and that was why load shedding was not only affecting the only Punjab's economy but that of the entire country.
Malik said that a large number of industrial units have closed down their operation, rendered thousands of industrial workers and daily wagers jobless while thousands industrial units were on the verge of closure.
He said that atrocious behavior of the government and 16 hours load shedding should be an eye-opener for the nation and people should identify the real faces of those who are hoodwinking the masses and looting the hard-earned money of the masses.
He demanded of the government to provide uninterrupted electricity to the Punjab as industrialists, traders and masses are not demanding electricity in charity, they are paying heavy electricity bills.