Lahore School of Economics

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Tackling the Energy Crisis

Afia Malik*

1. Introduction

This chapter aims to discuss the crisis of the power sector in Pakistan—its origin and challenges—and, most importantly, to suggest strategies and possible solutions for coping with it. A sufficient energy supply is indispensible for all economic activity and for ensuring sustainable economic growth and development. Regrettably, Pakistan’s power sector is beset by a crisis with the demand–supply gap growing continuously to unmanageable proportions. The electric power deficit has crossed the 5,000 MW level many times during 2011 and 2012; in the second week of June 2012, this shortfall had surpassed 8,000 MW.

The main reason for this growing gap is not only the rising demand and high system losses, but also the declining generation capacity. Seasonal reductions in the availability of hydropower, reductions in indigenous gas resources, the country’s heavy reliance on imported fuel oil for power generation, and forced power outages due to capacity degradation or scheduled outages for the maintenance of existing power plants are all responsible for the declining generation capacity. The unavailability of oil—given the economy’s mounting circular debt as the government fails to adjust energy prices to reflect supply cost—has only accentuated the energy crisis.

Energy demand has increased significantly over the last ten years, but unfortunately, supply has failed to respond to this expansion in demand. As a result, economic growth has been severely affected. Not only has production been badly hit, consumers of all ages have lost patience, even resorting to violence and destruction of public property in many urban centers in the country. According to one estimate, power shortages have resulted in an annual loss of about 2 percent of gross domestic product (GDP) (Abbasi, 2011).

The poor economic management of the power sector in Pakistan has created serious problems for fiscal managers, given the limited available budgetary resources and the need to put aside a substantial portion of revenues in subsidies given to the power sector. As much as 7.6 percent of total revenues were used up in providing subsidies to the power sector in 2007/08. This share increased to almost 15 percent in 2010/11 because of an enormous slippage of 146 percent (i.e., an unpaid power tariff differential subsidy from previous years) adjusted for a one-off payment of PRs 120 billion. In 2011/12, this share jumped to almost 18 percent, again, due to a one-off payment of PRs 312.8 billion and PRs 78.2 against previous years’ unpaid power sector subsidies and commodity operations, respectively.

Since assuming power in 2008, the government then in office pledged not just to reduce power outages but, in the earlier years of its term, to eliminate them. Recognizing the magnitude of the crisis and its effect on the people and economy, the government initiated significant reforms, including tariff increases, to manage the crippling impact of the power sector crisis. Unfortunately, these reforms were not only inadequate, but the wrong priorities were set and many of the reforms were abandoned for lack of focus, perseverance, and most importantly, political will. Poor governance practices, including rampant corruption, have prevented progress in this vital sector. As a result, after more than four years, the problems in the system have been aggravated rather than being resolved.

It is generally believed that the present crisis is a self-imposed problem ensuing from years of bad management, lack of proper vision, and poor policies. Failure to formulate a coherent energy policy has affected the country’s economic performance. The stark truth is that Pakistan’s policymakers have always focused on short-term goals, followed inconsistent and disorganized financial strategies, and repeatedly made the wrong choices.

This chapter will highlight the genesis of this problem and suggest means for overcoming the energy crisis overall—specifically, the power sector crisis—to help bring the economy back on track and return to a sustainable economic growth path. The chapter is organized as follows: after an overview of the electricity sector in Section 2, Section 3 discusses the beginnings of the power sector crisis in Pakistan. Section 4 analyzes the challenges faced by the energy sector. Section 5 discusses various options to tackle these challenges and secure energy supplies in the short, medium, and long run. The final section lists the main conclusions.

2. The Electricity Sector: Demand and Supply Analysis

Over the past decade, supply has failed to keep up with demand. For instance, from 2000/01 to 2011/12, consumption grew by almost 50 percent, while supply, i.e., generation, increased by only 40 percent. However, the percentage increase in the total installed power generation capacity in this period was only 25 percent.

In 2011/12, the total installed power generation capacity was estimated to be 23,538 MW. Out of this, 16,035 MW was thermal (68.1 percent), 6,716 MW was hydroelectric (28.5 percent), and 787 MW was nuclear (3.4 percent). Since 2007/08, under the Pakistan Peoples Party (PPP) regime, installed capacity has grown at a rate of almost 4 percent, which is relatively high compared to 2 percent under the previous government’s tenure (2000/01 to 2006/07). The addition to installed capacity in the last four years (2007/08 to 2011/12) has occurred not only as a result of captive power plants (set up by business enterprises to meet their unmet demand, increasing their capacity from 239 MW to 324 MW), but also by independent power producers (IPPs) (increasing from 6,035 MW to 8,560 MW), which were commissioned under the previous regime. In addition, a second nuclear power plant with a capacity of 340 MW was added to the system at CHASNUPP.

On the generation side, however, the situation has been quite alarming in the last five years. The increase of 40 percent (as mentioned above) in actual generation from 2000/01 to 2011/12 can rightly be attributed to the growth in generation from 2000/01 to 2006/07 by almost 6 percent because of better utilization of the available capacity. However, in the last five years (2007/08 to 2011/12), the growth in generation has been only 0.33 percent. The main reasons for this depressing performance include the unavailability of fuel, weather-related water shortages, and the aging of thermal power plants in the public sector. For example, the shortage of gas, smaller water releases from the Indus River System Authority (IRSA), and the annual maintenance shutdown of thermal and nuclear power stations were the main reasons for the decrease in generation in 2008/09 (Pakistan, Planning Commission, 2009). Similarly, in 2010/11, total electricity generation declined by 5 percent compared to 2009/10, as generation from thermal sources—gas and furnace oil—declined by 18 percent and 11 percent, respectively, due to the lack of gas and furnace oil supplies (State Bank of Pakistan, 2011).

Table 5.1: Power sector performance: Some technical indicators

KESC = Karachi Electric Supply Corporation, PEPCO = Pakistan Electric Power Company.

Source: National Electric Power Regulatory Authority (State of industry report for various years) and National Transmission and Despatch Company (Power system statistics for various years).

3. The Roots of the Power Crisis in Pakistan

The country started with a power generation capacity of 60 MW at the time of its independence in 1947. In the first ten years, by the end of the 1950s, this had increased to 100 MW. In the 1960s, after the establishment of the Water and Power Development Authority (WAPDA), power infrastructure development gained momentum and by the end of the decade, generation capacity was almost 1,234 MW. In the 1970s and 1980s, it rose sharply and reached a level of 9,651 MW in 1993/94.

The overall performance of WAPDA and the Karachi Electric Supply Corporation (KESC), the two leading public sector utilities at the time, remained satisfactory till the mid-1980s. Heavy financial losses due to unwarranted political interference, the corrupt management of limited capital resources, overstaffing and bureaucratic delays in handling routine matters in these public utilities, inappropriate and costly investments, poor-quality services, high system losses, and the poor collection of bills from customers all negatively affected the industry’s financial health (Malik, Mahmood, & Ahmed, 2009).

In addition, severe constraints to the availability of capital did not allow the increase in supply of electricity to keep pace with demand during that period (the mid-1980s to early 1990s), which grew consistently at 9–10 percent per annum. On the demand side, there was a weak link between electricity price and demand, which resulted in poor demand management. As a result, the early 1990s witnessed an excessive shortage of electricity, especially for industrial and commercial consumers.

The sector’s overall operational inefficiency created a need for restructuring. Thus, under pressure from international financial institutions (the International Monetary Fund, World Bank, and Asian Development Bank), the government started a reform process in the sector. The power policy of 1994 helped to overcome load shedding in the country. It also resulted in surplus power since the actual load growth was far smaller than projected and the projects were contracted beyond what was required.

However, the policy’s major drawback was that it attracted only thermal power projects, resulting in a larger share of thermal power in the overall generation mix. The share of hydropower in the national electricity supply mix fell—its contribution to the total electricity generation mix decreased from 60 percent in 1962/63 to less than 29 percent in 2011/12. Although the policy encouraged private sector participation, the generation mix has not been managed sensibly. IPPs entered the market, increasing the generation capacity but predominantly through furnace oil. This trend has continued over the past decade as additional incentives were provided to the power sector under the 2002 policy.

Until 2002, this policy worked reasonably well because oil prices in the international market remained low, ranging between USD 10 and USD 25 per barrel. After the United States’ invasion of Iraq in 2003, however, the international price of oil started rising and so did the cost of generation through thermal power plants (A. H. Khan, 2012). In 2011, almost 55 percent of the country’s thermal plants were operating on furnace oil, while the remaining plants required natural gas to generate electricity. Consequently, the generation cost of electricity is now exposed to fluctuations in global oil prices since the dependence on imported furnace oil has increased over time (State Bank of Pakistan, 2011).

The second significant reason for the current crisis in the power sector has been the rising demand for power. After a moderate growth rate of around 4 percent per annum in the second half of the 1990s, growth in the demand for electricity during the first seven years of the 2000s was around 7 percent. Electricity demand grew by 3 to 4 percent annually up to 2003/04, increasing sharply in subsequent years and reaching 10 percent in 2007/08. The increase in demand, however, reflected the economy’s expansion. Growth in demand requires substantial investment to maintain the continuity of supply, which in this case did not, unfortunately, happen. According to one estimate, every 1 percent of GDP growth in Pakistan requires an increase of 1.25 percent in electricity supply. Thus, GDP growth of 7 percent (as in 2002–07) would have required an increase of 8.8 percent (Merril Lynch, 2007; cited in United States Agency for International Development, 2007). However, in that period the installed capacity grew at a rate of only 2 percent, despite 6 percent growth in electricity supply. The slow growth in installed capacity in this period led to the decline in the supply of electricity (generation) in subsequent years.

Unfortunately, the growth in demand during this decade was clearly not fully anticipated, and there was insufficient investment to accommodate the increased demand. Moreover, the presence of surplus power in the first half of the decade made the government complacent rather than inclined to take serious policy initiatives. Not only was the new capacity slow to grow, power plants were as slow in being upgraded—a task that could have been accomplished at one third of the cost of expansion. The power sector’s share in public sector development programs fell to less than 3 percent of GDP during this decade, although it used to be higher (Pasha, 2010). Moreover, the public sector was not allowed to add any new capacity (thermal), meaning that there were no capacity additions in this decade.

Another important issue that had a negative impact on the electricity supply chain was the lack of timely and essential maintenance of existing plants, specifically in the public sector. This neglect on the part of the authorities significantly reduced the efficiency of existing plants. The capacity of state-owned thermal generation plants has since fallen regularly due to lack of proper maintenance. There was no significant investment in the 2000s in the existing generation companies (GENCOs), affecting the operational performance of their power plants and their ability to supply power to the grid. As a result, of the old plants’ total installed capacity (522 MW)—in GENCOs commissioned in the 1960s or early 1970s—the available capacity fell to 256 MW (National Electric Power Regulatory Authority [NEPRA], 2011).

Thus, the power sector in Pakistan has not only failed to add to the generation capacity, it has also been unable to use the existing power plants to their full potential. Table 5.2 shows that the fuel cost per unit is substantially high in the public sector (GENCOs). In 2000/01, the fuel cost was lowest for GENCOs, but in 2007/08 it was highest compared to the private sector, indicating the inefficiency of power plants used in public sector GENCOs.

Table 5.2: Fuel cost in public and private utilities (paisas/kWh)

Source: Hydrocarbon Development Institute of Pakistan (Pakistan energy yearbook for various years).

Clearly, greater investment is required in response to a continuous increase in electricity demand, directly linked to economic growth. The starting point for this should be correctly priced power consumption. The basic consideration for investment decisions by the private sector in any country is the price of electricity that generates sufficient profits to supply power in a cost-effective manner. Unfortunately, appropriate tariff reforms were not introduced in Pakistan in this period (2000–07). The notified electricity tariffs were below cost-recovery level.

The previous military government did not allow electricity prices to rise in line with the steep increase in international oil prices for political reasons. In fact, tariffs were frozen between 2003 and 2007 at a very low level. The cost of electricity generation rose (as discussed above, due to the rising price of oil in the international market) but, unfortunately, the notified tariffs were not sufficient to cover the higher cost. The high commercial and technical losses suffered by distribution companies (DISCOs) also added to the cost of service. It is interesting to note that system losses (including transmission and distribution [T&D] losses, and auxiliary consumption) were also very high in the same period that the country had surplus electricity. This indicates the low level of managerial focus in utilities on operational efficiency when there was surplus production.

Since there was a huge gap between the cost of service and the government-notified uniform tariff across all DISCOs, the government had to provide a tariff differential subsidy to power companies to bridge the gap. However, it did not compensate the latter accordingly against the provision of increasingly subsidized electricity at the consumer end. This left the power companies unable to make payments to the oil companies; the oil companies, in turn, were left unable to import the oil needed for thermal power plants.

The problem of circular debt arose in 2006 as a consequence of below-cost tariffs. Had cost-effective electricity tariffs been introduced at the right time, they might have suppressed the growth in domestic demand to some extent and helped attract new investment. Additionally, cost-effective prices might have protected the power sector from the inter-corporate circular debt problem it now faces.

4. Present Challenges

At present, the power sector in Pakistan faces a number of very serious issues, which need to be resolved for the sector to progress. This section analyzes these issues in detail.

4.1. Circular Debt

The electricity sector has been seriously affected by inter-corporate debt. Besides creating budgetary problems, this has badly affected the power sector. As indicated earlier, the problem of circular debt emerged in 2006 but was aggravated in 2010 and power outages increased to an alarming level. The failure of the Pakistan Electric Power Company (PEPCO) and KESC to clear their dues to fuel suppliers and IPPs is a result of their (DISCOs’) inefficiency in collecting revenues, T&D losses, and below-cost power tariffs (issues discussed in detail in the later subsections). As a consequence, most thermal power plants are forced to operate at a very low ‘capacity factor’, thus causing a massive increase in power load-shedding. The country has lost between 2,000 and 2,500 MW of potential thermal power generated by private power companies that have remained off-grid due to the nonavailability of fuel supply, coupled with the lack of funds brought about by swelling dues (Asian Development Bank [ADB], 2010; Bhutta, 2011). This debt issue has had serious consequences for downstream energy sector companies.

Since the problem arose, the amount of circular debt has continued to fluctuate between PRs 100 billion and over PRs 400 billion, owing to reductions in recovery and the failure to retrieve fines from power thieves. Till April 2011, the net circular debt was PRs 258.5 billion, compared to PRs 103.9 billion in April 2009, indicating an increase of almost 147 percent. Only 86.5 percent was recovered in the fiscal year 2010/11 compared to 104.3 percent in 2009/10. In May 2012, the overall circular debt amount stood at more than PRs 420 billion.

The government has attempted to address the issue of circular debt but on an ad hoc basis by pumping in money up to fivefold (PRs 1,122 billion in the last four years) to rescue the system from total collapse, but it has not been successful in clearing the total debt stock. So far, it has failed to work out a mechanism to permanently curtail the accumulation of debt, and it has not been strict with defaulters. Instead, the continual injection of money has meant that the government borrows billions of rupees from commercial banks through various instruments to make partial payments against the debt to reduce it to a manageable limit. Generally, the default amount is larger than the government’s capacity to pay at a given time, with the result that circular debt continues to build up.

Circular debt not only affects the available capacity, the creditworthiness of the country/sector in investors’ eyes is also badly affected, as reflected in the higher security demanded for rental power plant (RPP) payments (ADB, 2010). This deep-rooted problem demands that not only the government but also consumers and power (generation and distribution) companies take serious initiatives to resolve it completely.

4.2. Pricing Policy

One of the main factors to have aggravated the circular debt problem is the inability of DISCOs to pass on the cost of electricity to consumers. Given that 68 percent of our electricity generation is thermal-based—where 99.8 percent relied on imported oil and gas —the impact of almost frozen tariffs (from 2003/04 to 2006/07) was so large that the increase in tariffs in subsequent years could not make up for the cost price deficit. Even after 2007, government-notified tariffs remained below those determined by NEPRA (on the basis of cost) (Table 5.3)—i.e., too low to cover the average costs of the power companies. As a result, the companies started to incur losses that eventually reached unmanageable levels. In 2011/12, the gap between NEPRA-determined tariffs and government-notified tariffs crossed PRs 3 per unit (Table 5.3), which has added to the subsidy responsibilities of the government.

In addition to inefficient and below-cost recovery tariffs, the system of electricity subsidies is a major source of inter-corporate circular debt, that is, not only the inability of the DISCOs to pass on the cost of electricity to customers, but also the inability of the government to pay the tariff differential subsidy (the difference between the applied tariff and the determined tariff) in a timely manner. In the absence of extremely heavy subsidies, PEPCO has delayed payments both to the IPPs and the oil companies. The lack of funds with which to purchase oil has meant that the IPPs are producing electricity far below capacity (low plant factor).

Table 5.3: Average electricity tariffs (PRs/kWh)

Source: National Electric Power Regulatory Authority (2010, 2012) and Trimble, Yoshida, and Saqib (2011).

The current mechanism for determining tariffs operates on the basis of the minimum cost of generation. Further, the presence of a tariff differential subsidy serves as a disincentive to DISCOs, which continue their inefficient practices. To avoid provoking a political reaction in the smaller provinces, the government has followed the uniform tariff principle despite the fact that some DISCOs incur line losses above 30 percent. If different DISCOs were charged different tariffs, profitable DISCOs would be in a position to buy more power for their consumers.

Determining the appropriate tariff appears to be a simple matter of demand and supply, which could be easily resolved. However, given the nature of this particular product, it has become a complex issue. Appropriate policy decisions by the government in this area would help improve tariff imbalances and resolve the implicit subsidy issue for the benefit of most stakeholders including consumers (Trimble, Yoshida, & Saqib, 2011).

Further, the major drawback of tariff differential subsidies is that they are not appropriately targeted. Poor customers (small users) have benefited the least from this subsidy. This is because the majority of rural customers are lifeline customers (extremely small users) and experience load shedding for up to 20 hours, but the allocation of the tariff differential subsidy to them is only 0.42 percent of the total. More than 60 percent of the subsidy is allocated to consumers of more than 100 kWh (Friends of Democratic Pakistan [FODP], 2010).

The PPP government (2008–13) deserves some credit for taking the hard decision to regularly revise power tariffs in line with international oil prices on a quarterly basis to recover the cost of power despite political compulsions and severe criticism. Yet, and importantly, this increase is insufficient as the government is still paying subsidies to cover the cost. Moreover, to accommodate the changes in oil prices more frequently, the government has decided that monthly fuel adjustments should be passed on to the DISCOs. Meanwhile NEPRA is to determine consumer-end tariffs on a quarterly basis.

In the last two years (2010/11 and 2011/12), a significant increase in tariffs has taken place. One change to the tariff structure includes the imposition of general sales tax (GST) on the consumption of more than 100 units of electricity. Another significant step has been the elimination of cross-subsidies to a certain extent from commercial and industrial consumers to agricultural and domestic consumers, as the domestic tariff is now greater than the industrial tariff. This is important because domestic customers consume more than 45 percent of electricity. Additionally, the tariff structure has generally become more progressive—at higher levels of consumption, it is more expensive. For domestic consumers, the price of electricity is now greater than the cost of supply in the two highest slabs. However, this does not significantly reduce the fiscal burden since only a low volume (4 percent) is consumed in the higher slabs (Trimble et al., 2011).

The International Monetary Fund has demanded an end to the subsidy to the power sector to make it financially viable. However, this is only a partial solution—it is argued that merely increasing the power tariff has not worked, is not working, and will not work in the future, unless the inefficiencies in the power system are removed. Relying solely on tariff increases will just lead to more inefficiencies, and to theft and corruption (A. H. Khan, 2011). The reason is that a large part of this subsidy is rooted in the corruption and incompetence of the management in the collection of bills, no real effort to control power theft, poor fuel choice, and complete apathy in facing the problems of a degraded generation and T&D system (Umar, 2011).

4.3. T&D Losses

Consumer-end tariffs are highly sensitive to losses in T&D systems. With every percentage increase in losses, the tariff increases exponentially as the cost of production goes up. The safe and reliable T&D of electricity remains a major problem in Pakistan. The situation of huge power losses from T&D networks and auxiliary consumption over the years has hardly improved. In fact, it deteriorated in the early half of the 2000s (Table 5.4).

Table 5.4: T&D losses in DISCOs (%)

Note: * SEPCO data was included in HESCO prior to 2010/11.

IESCO = Islamabad Electric Supply Distribution Company, LESCO = Lahore Electric Supply Distribution Company, GEPCO = Gujranwala Electric Supply Distribution Company, FESCO = Faisalabad Electric Supply Distribution Company, MEPCO = Multan Electric Supply Distribution Company, PESCO = Peshawar Electric Supply Distribution Company, HESCO = Hyderabad Electric Supply Distribution Company, QESCO = Quetta Electric Supply Distribution Company, KESC = Karachi Electric Supply Corporation.

Source: National Electric Power Regulatory Authority (2010, 2011, 2012).

In comparison to other Asian countries, these losses are extremely high. For instance, in the Republic of Korea, T&D losses are only 3.6 percent; in China, they are 8 percent; while in the OECD countries, T&D losses are just 7 percent. Of the total T&D losses, distribution losses account for almost 68 percent while the remaining are transmission losses. Of the 68 percent of distribution losses, a significant portion occurs through electricity theft. During 1985/86 to 1994/95, the units of electricity supplied that were also billed grew at a rate of 9.8 percent, while during 1994/95 to 2006/07, the units billed grew at 5.4 percent. Over the period 2007/08 to 2009/10, the units billed increased at a rate of less than 2 percent, thus, indicating the inability to curtail power theft.

Except for IESCO, LESCO, GEPCO, and FESCO, the other DISCOs (MEPCO, PESCO, HESCO, QESCO, and KESC with a combined 30 percent consumption of the total) have extremely high losses, ranging from 18 to 37 percent. The major portion of these losses is due to theft. Over the years, there has been no progress in minimizing power theft or overcoming technical constraints. Companies with high system losses also suffer from low recoveries of the billed amount. For instance, in 2011/12, PESCO’s losses were almost 36 percent and its recovery 82 percent; HESCO had losses of 29 percent and its recovery ratio stood at 69 percent; SEPCO with losses of almost 40 percent recovered only 51 percent of the billed amount; QESCO recovered only 36 percent of the billed amount; and IESCO, LESCO, GEPCO, FESCO, and MEPCO recovered between 95 and 98 percent. These inefficiencies in the DISCOs have not only affected their financial position but led to an additional unjustified cost to those consumers who pay their bills regularly or to the government in the form of a tariff differential subsidy.

The difference of roughly around PRs 2/kWh between the NEPRA-approved average tariff and the average tariff charged to consumers is because of system losses. According to the Ministry of Finance, successive cash injections by the government have impeded power companies’ efforts to improve their governance and efficiency, and reduce their losses. Whenever power companies face problems, the federal government extends financial help out of the national budget or by increasing tariffs, resulting in more inefficiencies and system losses. Given that a 1 percent system loss translates into PRs 6.5 billion, all DISCOs (excluding KESC) are losing roughly PRs 130 billion a year through system losses alone despite the increase in consumer tariffs. Therefore, genuine efforts must be made to reduce these losses. If losses are reduced by even 5 percent, over PRs 30 billion will be saved.

4.4. Fuel Mix in the Power Sector: Shift from Low-Cost Generation to High-Cost Generation

At present, of the total installed generating capacity, about a third is accounted for by hydropower and two thirds is thermal-based (nuclear power has a minor share). Over the last three decades, a sluggish approach toward building large dams together with the 1994 Power Policy (as discussed earlier) that attracted only thermal power plants has caused the share of hydropower in the national electricity supply mix to fall. This has increased the overall cost of generation in Pakistan.

Hydroelectric power stations are classified as the most efficient power plants because they can have an operational efficiency of up to 90 percent given the availability of water. This source of energy is environment-friendly and is the cheapest source of producing electricity (Table 5.5).

Table 5.5: Average cost of units delivered to DISCOs, 2011/12

Source: National Electric Power Regulatory Authority (State of industry report for 2012).

Pakistan has the potential to produce more than 40,000 MW of hydropower, but unfortunately, the installed capacity is only 6,716 MW, that is, roughly 16 percent of the total potential. Moreover, the 6,716 MW is only available provided the hydro-generating units work to their full potential. It is unfortunate that, after the construction of the Mangla and Tarbela dams, political differences have prevented the construction of large dams. Ghazi Barotha is the only exception.

Among the fuels used in thermal power plants, oil is the most heavily used with a share of more than 50 percent in 2011/12 (Table 5.6). There was a shortage of more than 8,000 MW of electricity in June 2012. This figure keeps changing not only because of changes in peak demand (seasonal variations) but more so because of variations in supply, given the availability of furnace oil.

At present, almost a third of the country’s total imports comprise oil. Of the total oil consumption of over 20 million tonnes, furnace oil consumption stands at about 10 million tonnes. Currently, the price of furnace oil has increased to PRs 75,000 per tonne and the cost of electricity based on furnace oil plants has crossed PRs 15 per unit. Almost 5,000 MW of oil-based power projects are currently in the pipeline, which, combined with existing oil-based projects will place an unrealistic burden on the national economy. Oil-based plants at present require 36,000 tonnes per day. Between 3,000 and 4,000 tonnes per day are produced locally. While the port capacity for handling oil imports is less than 25,000 tonnes, even this much oil could not be imported because of circular debt issues, resulting in higher electricity shortfalls (Kiani, 2011b).

Table 5.6: Electricity generation (thermal) by fuel type (GWh)

Note: Oil includes furnace oil and diesel oil.

Source: Hydrocarbon Development Institute of Pakistan (Pakistan energy yearbook for various years) and National Electric Power Regulatory Authority (2011, 2012).

The shift from hydropower to thermal power implies that the country now depends on imports to meet its energy requirements, thus placing considerable strain on the economy by raising the external account deficit and worsening the country’s balance of payments (Trimble et al., 2011). Moreover, the increased dependence on imported fuels has greatly undermined the government’s efforts to overcome its corporate debt.

The share of electricity generation based on natural gas is decreasing drastically given the country’s depleted gas resources. Gas tends to be reserved for domestic consumers and industry; its availability for power generation is minimal. Power generation based on natural gas costs PRs 4.24 per kWh (in 2011/12), which is much lower than the generation cost of using furnace oil (PRs 15.94 per kWh) or high-speed diesel (PRs 18.89/kWh) (Table 5.5). To generate electricity using gas would require that new gas reserves be discovered. Although newspapers and development forums often report that there are still many unexplored and unexploited gas reserves—far more than presently known—in the country, no serious efforts to explore new gas reserves have been made.

Efforts to find alternatives, such as the import of liquefied natural gas (LNG) have remained slow. The idea of LNG imports was first envisioned in the National Energy Plan 2005, which focused on importing LNG for short- and medium-term needs and on transnational gas pipelines, such as the Pakistan-Iran and Turkmenistan-Afghanistan-Pakistan-India (TAPI) lines for long term needs. The Sui Southern Gas Company (SSGC) initiated the Mashal LNG Import Project, but regrettably, this was cancelled because of bureaucratic mismanagement (for details, see Ahmad, 2010). It is crucial that infrastructural, transportation, and pricing issues be resolved immediately to allow the import of LNG.

The Oil and Gas Regulatory Authority (OGRA), however, has rejected the LNG option in its recommendations to the Economic Coordination Committee on the grounds that it will cost four times as much. People are already opposed to the proposed 14 percent increase in the existing gas tariff, and the Supreme Court’s interference in the price-fixing of compressed natural gas (CNG) has caused a further crisis in its closure and nonsupply. The situation will become worse with the arrival of LNG, which will be as expensive as oil (Zaidi, 2012).

As far as the Pakistan-Iran gas pipeline is concerned, despite strong opposition from the West, the Presidents of the two countries officially inaugurated construction work on the delayed USD 7.5 billion gas pipeline from Iran to Pakistan on 11 March 2013. The pipeline will facilitate the export of 21.5 million cubic meters of Iranian natural gas to Pakistan on a daily basis. Iran has already constructed more than 900 km of the pipeline on its soil. It is expected that the cooperation of state-owned companies—Tadbir of Iran and Inter State Gas Systems of Pakistan—will bring the project on-stream by January 2014. However, there are apprehensions (see, for example, Ahmad, 2010) that this gas will only be sufficient to cover the existing gas shortage rather than providing gas for new power generation projects that are in the pipeline. Therefore, other options also need to be pursued seriously, such as the TAPI gas pipeline project, for instance.

Given the shortage of gas, our dependence on furnace oil imports for electricity generation has made the electricity supply chain quite vulnerable. Any fluctuation in the international oil market directly affects the average cost of electricity generation. Similarly, any interruption in oil supplies may result in power supply interruptions. Therefore, it is essential that power generation sources be diversified to include more indigenous resources such as hydropower, coal, and renewable energy resources, including wind and solar power, which are known to be abundantly available in Pakistan.

Coal is the cheapest source of fuel used in thermal production (PRs 3.12 per kWh in 2011/12). At the same time, it is the source least used to generate electricity and its use is declining, given the lack of adequate maintenance (Table 5.6). Like water, the country has enormous coal reserves, with an estimated 185 billion tonnes in Thar. It is estimated that, by using only 2 percent of these reserves, Pakistan could generate around 20,000 MW of electricity for almost 40 years (Ghani, 2009) . The contribution of coal to the total electricity supply in a number of developed economies such as the UK, US, and Australia, is between 60 and 70 percent. India has increased its reliance on coal and at present, 54 percent of its total electricity production is from coal-based thermal power stations with only 1 percent of its total thermal capacity running on fuel oil.

4.5. Limited Capacity Addition

Growth in demand suggests that substantial investment will be needed to maintain continuity of supplies. Apart from generation, which is the most capital-intensive segment in the sector, the T&D segment needs investment to overcome the huge losses it has suffered in the last few years. Providing adequate supply requires mobilizing far more private investment. Besides correct pricing, the quality of the regulatory environment along with transparent and efficient public sector management is crucial for investor confidence.

A substantial increase in the share of private investment after 1994/95 can be attributed to the restructuring process started in the mid-1990s. IPPs started their operations in Pakistan in 1994, but their involvement became controversial in the initial stages (for details, see Malik et al., 2009). Although the dispute with IPPs were later resolved, it had an adverse impact on the future expansion of private participation. Furthermore, as Fraser (2004) has pointed out, until the expected efficiency improvements are achieved, fresh private capital in the power sector in general and for new generating capacity in particular, is not possible.

Seven new IPPs were inducted into the system in 2010/11 under the 2002 Power Policy with a capacity addition of 1,604 MW to the national grid system, but none of them has a capacity of more than 300 MW. All these projects were initiated under the previous military government (1999–2007). Another addition was also made to nuclear installed capacity—the Chashma nuclear power plant II, started in 2005, was completed by the Pakistan Atomic Energy Commission in collaboration with the China National Nuclear Company. However, the PPP government’s (2008–13) efforts to meet the energy shortfall on an emergency basis by inviting RPPs have failed for the reasons given below. The installed capacity of thermal plants under public sector GENCOs’ control was reduced by almost 600 MW due to the exclusion of RPPs from the system during 2012.

One of the basic problems in Pakistan is that governments (not only the PPP but also its predecessors) have failed to implement long-term and low-cost projects that could have helped increase the country’s energy supply. Undoubtedly, many projects were conceptualized and discussed, but bureaucratic wrangling or occasionally international pressure have led to projects being delayed, failing to materialize, and even being canceled at the final stage (Ali, 2012b). For instance, in 2008/09, a memorandum of understanding (MOU) for the construction of the Kohala hydropower project (1,100 MW) was signed with a Chinese company, but owing to the controversies surrounding the project, it failed to take off even after three years.

Many planned hydropower projects (in the public sector as well as in the private sector) have been delayed. The main reason for the significant delay in most cases is the absence of any coherent and comprehensive energy policy—development planning in the hydropower sector by the federal government was essentially left to WAPDA for the public sector and to the Private Power and Infrastructure Board for the private sector after the 2002 Power Policy. Although both organizations work under the same ministry, there is no link between their respective priorities, resulting in a lack of complementary development plans.

Most of these hydropower projects are planned on the Indus River. Their implementation requires political will, without which they will continue to be delayed. The sharing of water resources has also been a major source of contention among the provinces. The availability of sufficient financial resources is another major hurdle in the completion of both public and private sector hydropower projects. Commercial banks are involved in the IPP market, and the shortage of liquidity has restricted their capacity to finance large hydropower projects. International project financing has also fallen due to the recent global financial crisis. Political and economic instability has discouraged commercial lenders from entering large project finance agreements (FODP, 2010). The Diamer-Bhasha Dam (4,500 MW), inaugurated in October 2011, is expected to be completed in eight years, but the truth is that its completion depends on the availability of the required financial resources.

The government’s most well-known and controversial step was to include RPPs in the power system as a quick-fix solution. Despite criticism from different quarters, it approved the induction of 14 rental projects (most of them oil-based) with a capacity of up to 2,250 MW to ensure an end to the power deficit. The objection raised to the rental power program concerned its financial viability given its below-par efficiency and high tariff structure.

In September 2009, the government through the Ministry of Finance asked ADB to carry out a third-party audit of the power sector, including RPPs. ADB also declared these plants to be expensive and ineffective. In the end, the proposed 14-RPP program had no significant impact on reducing load shedding in 2009/10 and onward because none of the RPPs became functional before 31 December 2009 as initially declared by the government.

The effectiveness of RPPs depends on the sufficient availability of fuel, something that has not happened in the last few years. Even the existing thermal power generation (both in the public and private sectors) has not been fully utilized due to the shortage of gas or unavailability of furnace oil because of the circular debt problem. In these circumstances, it seems absurd on the part of policymakers to opt for expensive RPPs, which are 100 percent thermal-based. Instead of launching RPPs, the government could have supported the existing IPPs, which are not generating at full capacity. Second, the government should have expedited the process of initiating those IPPs and small hydropower projects that were in the pipeline and likely to commence generation in 2009/10 and later.

The electronic and print media also raised serious reservations about behind-the-scenes nepotism and corruption, for instance, in the RPP deals (Asif, 2011). In March 2012, the Supreme Court finally cancelled the RPP contracts and ordered civil and criminal action in accordance with the law against all responsible persons.

4.6. Energy Conservation

Efficiency in the use of energy can generate substantial gains in supply, thus reducing the supply–demand gap. Pakistan’s total energy savings potential is estimated to be 11.16 MTOE. Savings from energy efficiency could reach 18 percent of the total energy consumed, corresponding to a 51 percent reduction in net oil imports. Pakistan is highly energy-intensive as a consequence of large energy losses, wastage throughout the supply chain, and insufficient investment in replacing obsolete infrastructure (FODP, 2010). The 23 percent in T&D losses is not a small amount; it has a significant impact on the cost of electricity and contributes to power shortages. Therefore, it is essential that, apart from setting up new power generation plants, the conservation of energy be given serious attention.

5. Tackling the Energy Crisis

5.1. Short- and Medium-Term Measures

First, and most importantly, the available capacity needs to be used more effectively to conserve energy. This demand-side strategy has proved to be quite successful in the short term in many countries. There is a savings margin of over 20 percent in electricity consumption across all sectors, but unfortunately, proper management, such as steps to improve energy efficiency, and loss reduction programs with the least incremental cost are not prioritized as new supply-side initiatives. The energy saved by the proposed compact fluorescent lamp program would have reduced electricity demand by over 1,280 MW countrywide and by 1,133 MW in the PEPCO system. Similar programs have been successfully implemented in other countries (ADB, 2010)

Generally speaking, the legislative framework for energy conservation in Pakistan is weak. Even the small effort of avoiding unnecessary consumption can reduce energy use by more than 10 percent. For instance, controlling cooling or heating by 1C can reduce the heating or cooling load by around 7 percent. Switching off lights and other appliances when not in use is not difficult. Similarly, unnecessarily lit shops could easily reduce their consumption; incorporating motion sensors could reduce the idle running time of production lines and machines in industrial applications. A further saving of 10 to 15 percent could be achieved by introducing the second and third levels of energy conservation practices (for details, see Asif, 2011). When Brazil experienced an energy crisis in 2001/2, its first step was to implement strict demand-reduction programs and achieve the goal of reducing consumption by 20 percent.

Second, there are thermal power plants in both the public and private sectors with substantial capacity that are producing far below capacity because of their inability to purchase fuel to run the plants. In order to fully utilize the available capacity, it is essential that the fiscal management of the energy sector be improved as a priority. This requires engaging professionals on the basis of their experience and qualifications rather than political affiliation (discussed in detail in the subsequent suggestions). Moreover, maintaining existing plants, specifically in the public sector, is less expensive and less time-consuming than setting up RPPs and will improve the former’s efficiency and capacity quite significantly. The government must identify inefficient power plants and then invest in them to improve their efficiency. The number of plants in GENCOs could be upgraded/renovated to produce around 3,000–4,000 MW of electricity more quickly and cheaply (Asif, 2011).

Third, the politics of pricing is such that it is difficult to ask people to pay more for a product that is undersupplied. Therefore, instead of further increasing the price, line and theft losses—which are as high as 37 percent in certain areas—should be brought down to a level comparable to other countries. This will automatically bring down the cost of producing electricity. This is neither very difficult nor expensive and only requires determination on the government’s part to ensure improvement in the operational performance of the DISCOs. The government should update the system gradually and make every effort to reduce the system’s losses. Power theft can easily be controlled if there is the will to do so (in the short term), while technical losses can also be improved gradually through appropriate investment (in the medium term). When the inefficiencies in the system are removed and the due amount recovered from defaulters, the problem of circular debt will be resolved automatically in the medium if not short term.

The government must restructure the whole system of bill collection (perhaps through incentives in the form of easy installments or through tough decisions, such as disconnections, depending on the situation) to recover outstanding bills from all defaulters—whether in the public sector or from private consumers, provincial or federal governments, or the military —as quickly as possible to effectively resolve financial issues. Roughly 1,500–2,000 MW of additional capacity can be made available by reducing T&D losses, which, ideally, should be in the range of 6–7 percent.

The implementation of the above three recommendations depends on strengthening the governance and regulation of the energy sector. Therefore, our fourth suggestion is that the process of restructuring be re-examined in the light of ground realities. A new wave of power sector reforms is badly needed in the medium term, but what must be understood is that successful power sector reforms depend on a wider group of reforms—not only power sector reforms but also judicial reforms that will empower regulators to make reliable and justifiable decisions, and financial reforms that will allow power generators to pay the real cost of capital and that are subject to hard budget constraints (Victor & Heller, 2007).

The strategic plan for restructuring the country’s power sector, which was developed in 1992 and formally implemented in 1994/95, has not been successful. Although more than 15 years have passed, it has failed to achieve its objectives of improving operational or financial efficiency. The status of the power sector in terms of technical, economic, and financial efficiency has deteriorated. Institutional weaknesses and governance issues, which used to be the main hurdle in the sector’s development, persist.

Though unbundled to a certain level, the power system as an outcome of first-generation reforms has once again become centralized under PEPCO, which continues to hold sway in financial management, power purchase and sales, and the appointment of senior management over the operating companies (GENCOs and DISCOs). These companies lack the technical and managerial skills to operate independently, and their structure on the basis of corporate governance principles has not been established in the true sense (FODP, 2010).

Apart from their inferior operational performance, DISCOs are not aware of their role and need for good governance as corporate entities. Despite being corporate entities, their attitude is still that of a public sector organization. Not only are they overstaffed, their power purchase contracts are not in place, and defaults and delays are considered routine. They remain unable to recover dues from the public sector and provincial government departments due to a bureaucratic style of governance, causing high losses in the distribution system. This may be because they are staffed by the same workforce and professionals as the previous public entity or have inherited its behavior and are unwilling to change.

As DISCOs, they were expected to introduce efficiency into the system and quality to the service, but they have failed to do so and now seek support from the government. The single-buyer model accompanied by the delay in payment of subsidies by the government and the lack of discipline in these DISCOs have forced them to default; significant arrears in payments to the GENCOs have resulted in the upsurge of the circular debt problem. The resolution of circular debt depends on the self-sustainability of the DISCOs, for which public sector presence may need to be gradually phased out.

Low production and lack of any effort to reduce theft from line losses are both due to institutional weakness. Therefore, the thrust of any policy change or reform process should be on institutional issues to tackle efficiency, affordability, cost minimization, losses, and theft. Unless all DISCOs are made accountable for all their decisions and finances, it will not be possible to make the power sector efficient because inefficient DISCOs—such as Quetta, Hyderabad, and Peshawar—are indirectly subsidized by profit-making DISCOs—such as Lahore, Islamabad, and Faisalabad. Therefore, a complete corporate structure for all DISCOs with a professional and honest management, and tariffs for each DISCO based on its efficiency, is crucial if the sector is to progress.

Fifth, following on from the previous suggestion, there is a need to overcome the institutional and organizational weaknesses of the energy sector as a whole, which no government has so far done. Generally speaking, vested interests in these governments have stalled the due level of competence and commitment that are prerequisites for its progress. They have not only lacked the capacity to foresee emerging challenges but also failed to respond efficiently. Energy offices are considered the most lucrative and desirable slots in any cabinet (Asif, 2011).

As a result of these problems, tariffs, investment, and the appointment of senior management and staff have largely been politicized. Lack of expertise in financial and commercial skills is a serious impediment to accountability, quick decision-making, and commercial orientation. It is generally believed that policymakers have caused enormous damage to this sector either by approving and sanctioning public investment in inappropriate projects or by endangering essential projects for their personal interests, which include corruption, political motives, or other agendas. The sector has always remained in the limelight because of financial corruption, whether in IPP programs, the privatization of KESC, the curtailment of the 1,000 MW thermal power project that was supposed to have started in 2005 (see Asif, 2011), or the initiation of RPPs. The unnecessary involvement of politicians, therefore, needs to be curtailed.

Sixth, an effective institutional framework is needed to ensure sustained and efficient output growth and to avoid unnecessary delays in decision-making. Cumbersome bureaucratic procedures and administrative inefficiency cause enormous delays in decision-making in Pakistan and also discourage the private sector. Having multiple agencies involved in the energy sector in general and in the power sector in particular is a certain recipe for delays as well as lack of coordination because it becomes necessary to acquire the overall commitment or approval for any required changes. For example, delays in the transfer of responsibilities from the government to the private sector or to the power regulator means ministers and civil servants giving up responsibilities they have exercised for many years.

International experience has shown that there is often resistance from interest groups benefiting from market distortions or enjoying special privileges in the form of bribes or other prerequisites. For the success of reforms, a committed government must engage with all stakeholders to gain public support and provide some form of compensation to those who are unhappy with the change in the state of affairs. For effective decision-making, integrated energy planning and policy formulation can be a viable option since it would allow the restructuring of policy institutions in order to check the unnecessary fragmentation that has occurred over the years (Allahdad, 2012). A single energy ministry responsible for all energy offices is a possible solution. It would then be responsible for the development and implementation of integrated policies, plans, and strategies for the energy sector based on good governance and operational efficiency (FODP, 2010).

The current state of affairs (under the PPP government from 2008–2013) as cited in different documents is not very different from that of previous regimes. Hardly any deal or project is undertaken in a fair and transparent manner and free of controversy. For instance, the compact fluorescent lamps project worth PRs 6.7 billion reportedly suffered from serious irregularities; the RPP and IPP programs also became controversial; and the Kohala (1,100 MW) hydropower project was shelved amid accusations that decision makers had violated the Pakistan Power Regulatory Authority rules, ignored the need for transparency, and evaded international competitive bidding (Mughal, 2011). The appointment of inappropriate and incompetent personnel to the highest possible energy offices has not improved matters (Asif, 2011).

Delays in decision-making and implementation are also common. For example, the privately managed Central Power Purchasing Agency was supposed to be replaced by PEPCO as planned in the power sector reforms package approved by the Cabinet Committee on Restructuring (set up in December 2009); so far, this has not been done.

Seventh, there is a need for a strong regulatory environment. NEPRA’s weak administrative governance takes the form of a lack of autonomy, resulting in its overall institutional inability to carry out the desired functions effectively. In addition, NEPRA lacks the professional expertise to supervise and control the power sector and establish a rational and equitable pricing regime (Malik, 2007).

NEPRA is often blamed for most of the problems in the power sector, including load shedding, system losses, and high tariffs. It has been unsuccessful in developing and pursuing a regulatory framework to guarantee reliable, efficient, and affordable electricity to consumers. NEPRA is mandated to attract investment in the power sector but, except for thermal power plants, no significant addition has been made to projects generating electricity from renewable sources (see Kiani, 2011a). Its role has so far been limited to determining tariffs and issuing licenses, that too, under the influence of the government. Moreover, its weak capacity to formulate market rules has delayed the implementation process and formation of the independent Central Power Purchasing Agency.

The lack of uniform regulation in the energy sector as a whole creates distortions between the gas and electricity sectors. Inconsistent regulation between NEPRA and OGRA sends confused signals to investors and creates disharmony in pricing strategies between gas and electricity (FODP, 2010). This issue can be resolved either with the formation of a single regulatory authority or through regular coordination between NEPRA and OGRA.

The most serious challenge, that of circular debt, can be resolved very easily if the appropriate steps (as mentioned above) are taken. All these measures, including the improved corporate and operational governance of power sector companies, the elimination of inefficiencies in the system, and cost-effective pricing (not dependent on government subsidies) are important for the sustainability of the sector and can easily be achieved in the short to medium term.

5.2. Long-Term Measures

In the last ten years or so, any additions made to installed capacity have been mostly thermal, and these too have relied on an expensive fuel option. From an economic point of view, it is very important that the full cost of generation be passed on to the consumer. At the same time, however, it is equally important to keep the cost of generation low. The dependence on imported oil and gas should be minimized, given the fluctuating prices of the former and the latter’s depleted resources. This is not possible in the short term. Therefore, in the long term, the focus should only be on indigenous resources such as coal, hydropower, and other renewables.

All the hydropower projects under construction should be completed in time to enhance cheap electricity generation capacity. The emphasis should be on exploiting more hydropower resources, not only in public sector but also in the private sector. The government needs to concentrate on those issues—for instance, the availability of credit and a comprehensive hydropower policy—that have discouraged the private sector from becoming involved in hydropower projects. There are many countries in the world where hydropower has a predominant share in the electricity supply mix. For example, Norway produces 99 percent of its electricity from hydropower while Brazil produces 92 percent, Iceland 83 percent, Austria 67 percent, and Canada 70 percent (Asif, 2011). Similarly, coal gasification projects should be seriously pursued. These could effectively contribute to meeting Pakistan’s ever-increasing demand for electricity in a cost-effective way.

The mistake of relying on an expensive fuel option to add to installed capacity—an outcome of the 1994 Power Policy—needs to be corrected. The country has ended up with a subsidy of roughly PRs 3 per unit. The key to good governance is the realization that every citizen is entitled to equitable dividends out of any system. This will only be possible when all efforts are made to minimize the cost of generation.

That Pakistan relies on expensive fuels for thermal generation reflects not only the lack of incentive to minimize costs, but also a lack of vision on the part of our decision makers who have failed to explore cheaper options. As a result, no power project has been set up in the last ten years or so. In our planning strategies for the last eight or nine years—not only under the present government but also previous governments—the utilization of indigenous resources has always been at the forefront, but unfortunately these plans have not been implemented. Until we stop relying on oil- and gas-based thermal power generation and focus on cheaper sources of producing electricity, the financial problems of the power sector will not be resolved.

6. Conclusion

Improving the process of decision-making and its timely implementation, and holding all stakeholders accountable for their actions is an important ingredient in working toward a fair and sustainable electricity sector. The issues of the power sector can only be addressed if the management of the energy sector becomes more professional and competitive. The challenge for policymakers is to build the sector’s organizational and institutional capacities and make them compatible with its actual environment.

The power sector in Pakistan is affected by a number of institutional and organizational weaknesses, with inefficient generation and distribution systems, dependence on expensive fuels, nonoptimal tariffs, financial mismanagement, and high levels of corruption and incompetence. Poor governance and the misdirection of adopted policies are responsible for the energy sector’s current crisis.

The energy sector has been the victim of bad decisions and policies, and a serious inability to make and implement appropriate decisions in time, coupled with the public sector’s lack of incentive to be efficient. These issues can only be addressed if the management of the energy sector becomes more professional, competitive, honest, and free of political influence and pressure.

Furthermore, the resolution of circular debt requires that an efficient administrative system be put in place—one capable of ensuring that the problem of circular debt will not recur once resolved. All power companies should be made accountable for all their decisions and finances in order to improve the system in the medium term. A sound business environment—free of administrative and institutional hurdles, and of issues such as circular debt—is necessary to encourage private investors in the power sector. As suggested by FODP (2010), there is a need to eliminate untargeted energy subsidies. In addition, electricity pricing on a full-cost recovery basis is necessary to restore the financial sustainability of the energy sector, but at the same time, costs need to be minimized. Further, efforts must be made to liberalize the energy sector and encourage private sector investment in the development and production of indigenous resources (i.e., gas, coal, hydropower, and other renewable resources).

It is high time that we learnt from experience. Power sector utilities need to be reorganized and managed along commercial lines to tackle issues of efficiency, availability, and affordability. In short, the focus should be on improving government capabilities to effectively manage the state of affairs.

* The author is a senior research economist at the Pakistan Institute of Development Economics (PIDE) in Islamabad.
1. This chapter is based on the author’s previous publication: A. Malik. (2012). Power sector crisis: A crisis in governance? (PIDE Monograph Series). Islamabad, Pakistan: Pakistan Institute of Development Economics.
2. The supply deficit of natural gas to KESC and a number of IPPs affected generation during the winter of 2010/11, while financial problems hindered the import of furnace oil, thus disturbing power generation at the beginning of summer.
3. Load shedding of up to 30 percent of peak demand (National Electric Power Regulatory Authority, 2001).
4. Even in 1990/91, the share of hydropower in the total generation mix was 45 percent. After IPPs were introduced into the system, the share of hydropower declined drastically since there was no substantial addition to its potential after the initiation of power sector reforms in the mid-1990s.
5. In 1987, a one-page notification barred WAPDA from initiating thermal generation.
6. The government allows IPPs to charge PRs 0.45 per unit as operation and maintenance charges, while GENCOs are allowed to charge only PRs 0.08 per unit (Ali, 2012a).
7. GENCOs’ present ability to produce power is almost 20 percent less than their installed capacity, mainly due to the aging factor and use of furnace oil (WAPDA, 2007).
8. The price of imported furnace oil, which represents about a third of the fuel mix for power generation, increased by 76 percent from 2003/04 to 2007/08. Similarly, global gas prices also rose considerably in that period.
9. More than 25 percent—the average for the whole country.
10. Extremely low collection compared to what DISCOs require has increased the amount of receivables by almost PRs 100 billion from PRs 285.846 billion in 2010/11 to PRs 385.619 billion in 2011/12.
11. In 2011/12, despite fiscal constraints, the government paid PRs 391 billion for the unpaid tariff differential subsidy of previous years.
12. A 7 percent mobilization advance was envisaged for RPP sponsors with a supporting standby letter of credit (SBLC). However, given the financial crisis, it was difficult to open confirmed SBLCs due to high confirmation charges, which were between 6 and 8 percent, and additional expenditure for each year of currency. Thus, the Ministry of Finance allowed the mobilization advance to be raised to 14 percent with a guarantee from the Government of Pakistan in lieu of a confirmed SBLC (for details, see ADB, 2010).
13. Domestic gas resources are being depleted and, therefore, reliance on imported oil is increasing.
14. The government provided subsidies worth PRs 342 billion to the power sector against total federal development spending of PRs 280 billion in the outgoing fiscal year.
15. For instance, on 8 August 2011, the IPPs warned they would shut down power plants within ten days unless the government injected PRs 150 billion into the companies that had stock left for a maximum of three days.
16. At present, the IPPs and GENCOs are averaging about a 50 percent plant factor, which means that they are not being used to their potential level. A higher plant factor in these power stations could provide 20 to 30 percent more energy, which would circumvent the present shortages to a certain extent. Improving the plant factor is far more economical than setting up new plants. The plant load factor in India has increased continuously and reached almost 78 percent.
17. The government issues consumer-end tariffs where the minimum consumer-end tariff for a particular consumer category among eight DISCOs is adopted for application across the board to all DISCOs. NEPRA determines consumer-end tariffs for each DISCO on the basis of its consumer mix, losses, and operational cost. The tariff so determined is different for each DISCO because of its peculiar conditions.
18. For instance, ownership and control of utilities, technology, and fuel used for power generation, government taxes on different fuels, and on electricity.
19. From March 2010 to September 2011, a 125 percent increase in the power tariff, in addition to the transfer of fuel costs to consumers every month.
20. Although in neighboring India, the situation is more or less similar to Pakistan as T&D losses are close to 27 percent.
21. This means that DISCOs with high system losses are so inefficient that not only are they unable to curtail theft/leakages in electricity transportation from grids to end-consumers, they are also unable to collect what is documented in the bills. There is also the apprehension that DISCOs sometimes resort to excessive billing to give a better impression of their losses. NEPRA has thus advised them to introduce an automated meter reading system so that their losses are better accounted for (NEPRA, 2012).
22. According to an unofficial estimate, the government failed to collect PRs 495 billion in electricity bills between July 2011 and May 2012, taking the recovery ratio to 47 percent—one of the lowest ever in the country’s history.
23. Import price effective on 1 January 2013.
24. Limited port capacity is a serious constraint to meeting domestic demand.
25. With limited oil production and low refining capacity, the import of crude oil and oil products accounted for 83 percent of oil supplies in 2009/10.
26. Gas reserves are being fast depleted because of the extremely inefficient pipeline system subject to theft in the Third World (The Express Tribune, 9 December 2012).
27. Not only do new discoveries of natural gas fail to keep pace with consumption, exploration activity is slow, given unfavorable gas producer prices.
28. The agreement was signed in March 2010.
29. A number of projects based on Thar coal resources have been identified in the power plan for 2010/11. All these are in the private sector except for one coal gasification project (100 MW) in the public sector. Work on this underground gasification pilot project, supervised by the renowned nuclear scientist Dr Samar Mubarakmand, is underway and it is expected that the first burn will be connected to power turbines and that generation of the planned 100 MW electricity will start by December 2013. The Sindh Engro Coal Mining Company in collaboration with the government of Sindh performed the groundbreaking ceremony in March 2013.
30. Circular debt and fuel availability, the time and cost involved in tariff determination by the regulator and below-cost tariffs, the lack of exploitation of indigenous coal reserves, and the critical security situation are all factors that have hampered foreign private investment in Pakistan.
31. This provided extra tax incentives as well as assurances to investors, such as protection from political force majeure, payment of compensation in case of termination due to government default, tariff adjustments for variations in currency exchange rates and fuel prices, ensuring the conversion of Pakistani rupees, and the remittance of foreign exchange for project-related payments, etc.
32. WAPDA accused decision makers of violating the Pakistan Power Regulatory Authority rules, neglecting to ensure transparency, and evading international competitive bidding. However, documentary evidence revealed that WAPDA had signed an MOU with China International Water and Electric Corporation (CWE) for the construction of the project in 2008. Now, WAPDA has raised several provocative issues that were not discussed earlier at any level. WAPDA wants to execute the whole project itself or alternatively become a partner with a 51 percent share in a joint venture with CWE while the latter has opted for a build, own, operate, and transfer (BOOT) option under which the project would be handed over to the Azad Jammu and Kashmir government after 30 years. The company will construct the project from its own funds as an IPP in accordance with the 2002 Power Policy (for details, see Mughal, 2011)
33. The provincial (Khyber Pakhtunkhwa) government took the position that the Power Policy 2002 was beyond the powers of the Constitution and, hence, any letter of interest issued under the policy had no legal value. As a result, regulatory approval for two major private sector hydropower projects has been delayed until the legal issues are resolved (for details, see FODP, 2010)
34. Out of 2,250 MW, only 453 MW from RPPs came on-stream by 2010/11.
35. The government approved the RPP program without evaluating its financial implications. After being approved, the program went to ADB for its evaluation.
36. The project efficiency committed to by the RPP sponsors was only 32–35 percent but the government would be legally bound to make payments for 90 percent capacity utilization (Kiani, 2010).
37. According to one independent estimate, 2,250 MW of rental power would have incurred a net deficit of PRs 135 billion for the country, given the furnace oil price of PRs 26,000/tonne, and offered a tariff to RPPs of US cent 13.5/kWh (claimed by the minister at the time) (for details, see Asif, 2011). One can imagine the real loss to the economy as the current price of furnace oil is PRs 64,000/tonne.
38. In terms of reducing the electricity shortfall.
39. ADB also pointed out to the government that the contracts with the RPPs lacked a sound clause in case of nonperformance (by the RPPs).
40. The Supreme Court took serious notice of all the observations (as mentioned above) against RPPs and why government functionaries had opted for this expensive and inefficient option when other cheaper and more effective choices were available.
41. The government established a quota system based on historical and target consumption levels, and a corresponding bonus and penalty scheme whereby consumers were rewarded or penalized according to whether they remained within or exceeded their quota.
42. The government has injected five times the money but the problem of circular debt persists.
43. It is a misconception that the public sector is the main defaulter in payments due to DISCOs; payments due from the private sector are almost equal to those of the public sector.
44. However, the judiciary should avoid unnecessarily interfering in pricing decisions if they are made on justifiable grounds.
45. Under the single-buyer model, no direct contractual links exist between GENCOs and DISCOs. Generators sell electricity at regulated prices, which is supplied to DISCOs at pooled average power purchase prices.
46. The government has delayed the announcement of separate tariffs for all corporate DISCOs despite separate determinations made by NEPRA—a tough decision to implement politically. It has found it difficult to defend higher tariffs in Balochistan, Sindh, and Khyber Pakhtunkhwa, where DISCOs are making losses.
47. Whether it is the post of minister, the chief executive of a power company, or chairperson of NEPRA—all are appointed under political influence and not on the basis of professional expertise and merit.
48. For example, the delay in determining separate tariffs for all DISCOs.
49. The Ministry of Water and Power along with NEPRA have been blamed for the delay (for details, see A. F. Khan, 2011a).
50. The chairperson and members of NEPRA are appointed not on the basis of their competence and merit, but under political influence.

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posted by S A J Shirazi @ 12/16/2013 04:28:00 PM,

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