The energy sector’s success and challenges
Containing generation tariff, indigenisation, technology absorption among issues.
PHOTO: REUTERS
ISLAMABAD:
The second turbine of 660MW was commissioned a few days back. While it is highly commendable that the energy crisis situation is about to end with the completion of many projects that are under implementation, there are challenges that remain and would have to be sorted out.
We will mention only some of them, a detailed account has been provided in my forth coming book (Pakistan’s Energy Sector: Success and Challenges).
Firstly, with the increase in supplies, subsidy and circular debt may increase, unless theft is brought under control and hopefully generation cost is brought down with the advent of new projects. Nepra had to play a major role in containing generation tariff in which it has shown only a mixed success.
'Sindh can make the entire country self-sufficient in energy'
In some cases (HVDC), it has succeeded in putting its foot down and resisted undue demands of higher tariff and in case of renewables, it has finally issued its edict on compulsory competitive bidding (for which I have been fighting for years now) against the wishes of vested interest. In case of RLNG power plants, the tariff is almost right, but that is as a result of competitive bidding under GOP financing.
In other cases, it has been swayed by vendor supplied data and could not undertake rigorous scrutiny. The case in point is of coal tariff, both of Thar and imported coal power plants. There is quite some controversy on coal tariff being too high. And the lack of installation of sulphur controls has made it even more controversial. No respectable vendor or agency today installs coal power plants without sulphur control hiding behind the utilisation of low sulphur coal.
In China, all new coal power plants have to install SOx and NOx controls; one would have expected that at least SOx controls would be installed as per requirement of the generation license issued by Nepra. However, Nepra is probably not bothered that the requirements of generation license have been met. It probably does not know that it has provided for such controls in the tariff or not. Both Nepra and provincial EPAs have responsibility in this respect jointly; Nepra from tariff and generation license point of view and EPAs from EIA compliance point of view.
We cannot blame outsiders when our own national agencies are derelict about their functions. Environmental agencies are too weak and disorganised to take cognizance of it. On this subject, we have written in this space earlier, and the reader is referred to it for details.
While environmental issues pertain to more than one agency, it is hoped that Nepra would take a corrective step and issue a new tariff, which is due, and apply the new tariff on all those projects that have not yet been implemented.
Apart from accepting high CAPEX, there are quite a few issues that Nepra may have to attend. The present practice of inviting comments and objections from the stakeholders and holding a public hearing is not enough. Nepra should spend some money in getting the projects scrutinised by hiring foreign experts. Its own staff and semi-local-experts cannot do the job well as special expertise is required and the latter in most cases have a vested interest.
Vendor supplied data is highly suspect, adding and subtracting in and around their data cannot lead to the right decision. Also there are some other aspects on which Nepra has to promote a consensus around. Hatim Tai-type ROEs are being awarded from 15 to 20% under the pressure of lobbies or foolhardy and enthusiastic.
Renewable energy (solar and wind) are competing on their own cost efficiency and do not need any support. Thar coal is already initiated and should not need further support any longer, besides public support for coal is waning. There is no case for a differentiated ROE system and all sources should be allowed to compete under their own attractiveness.
There are other miscellaneous factors on which less rigorous care is given by Nepra, which adds up to a significant proportion of tariff. On debt terms, the risk margin allowed are unnecessarily high, especially, where there are various kinds of guarantees available and hefty credit insurance is being charged by the lender banks.
Solar and wind power have tremendously improved their competitiveness; their cost of generation have almost become 50% of the fossil energy based power. In Pakistan, their induction has been partly obstructed by unreasonable demands of the investor lobby. Hopefully, competitive bidding will break that circular situation and solar and wind power would be available at its true cost and prices.
A fresh thinking is to be given for a large scale induction of these resources to be able to bring down the cost of generation. There is resentment in the solar and wind power circles that while competitive bidding has been announced, no practical steps are being taken towards arranging it. The renewable energy investors also complain that RLNG plants are being approved one after the other, and the recent one has been done for Jhang of a capacity of 1100MW, while renewable energy projects are being put on the backburner under the excuse of impending capacity glut or trap. Since many of such projects are to be located in Sindh, the issue assumes a political dimension and creates tension within the federation.
Secondly, indigenisation has suffered due to the fast tracking dictates of the energy crisis. Now that the crisis is about to end, some stress and emphasis should revert to it. Local engineering industry is heavily underutilised and its human resource base is contracting due to low market demand.
Incentives to local industry and disincentives to imports in the form tariff and non-tariff barriers would have to be created. Chinese have played a major role in building our engineering industry in days when they were not commercialised. However, they can still be persuaded to rebuild our local engineering industry when tremendous demand is building up in the sector.
JVs and buy-outs in the engineering sector may have to be promoted. Energy tariffs and incentives may have to be tied together and deletion programmes put in place ala automotive industry, for which some standardisation of energy equipment may have to be undertaken.
In the current style of things, we are behaving like our Arab brothers, who place orders and foreigners provide it all from EPC and O&M contractors to IPPs. Iran and Turkey have done otherwise and are reaping the benefits of their policies. They are increasingly getting active in export markets including Pakistan, although Iran has other problems due to which it cannot sell abroad.
Thirdly, power sector, if not the oil and gas sector, is fast losing technology absorption and accumulation capability due to lack of appropriate organisational structure under the garb and slogan of de-bureaucratisation. PEPCO has been dismembered and the sector is being micromanaged from Islamabad by non-technical people. Power sector has to be reorganised with a technology orientation: either MoWP has to induct technical resource persons under an appropriate organisational structure or separate organisations have to be created. Utopia of independent boards and Nepra tutelage has not delivered. Nepra can only issue edicts and orders and may be fine but cannot improve organisations and control them.
Finally, the most important item that should be on our national agenda is the construction of Bhasha dam. Kalabagh dam could not be built due to internal political differences and Bhasha dam could not be built because of external factors. We should go on our own.
Ethiopia has built a very large dam out of its own internal resources without resorting to borrowings from IFIs. The dam will be able to store 79 km3 of water and produce 6000 MW of electricity. For comparison sake, Tarbela had a storage of 13.69 KM3 which has come down to 7.993 km3 due to silting. The proposed Bhasha and KalaBagh dams are almost equal with 7.52-7.9 km3.Infact, as would be evident from the adjoining table, even if we build all the dams proposed, it would total to 42.3 km3 which would be only half of this dam.
Comparison
Ethiopia is much poorer and smaller than Pakistan having a GDP 25% of Pakistan. It has suffered famines and civil wars. I have visited Ethiopia several times doing my professional consulting services for building parts of the power house locally in Ethiopia. River Nile springs from its Lake Tana, which flows through Egypt and ten other countries including Sudan and falls into the Mediterranean Sea. The erstwhile General Nasser built ASWAN dam on it. Egypt is largely dependent on Nile water and is worried over the consequence of the GERD dam, with a storage capacity as large that it may require 15 years to fill it entirely.
Ethiopia faced almost the same problem as Pakistan is facing to construct GERD.IFIs and others wouldn’t finance it due to potential and real objections and concerns of its big neighbour, as IFIs require NOC of India as a precondition for financing.
China advised to expand investment in power sector
Ethiopia had no option but to rely on its own resources. It floated internal bonds and made deduction from salaries as loans and financed a $6.43 billion project. It started construction in 1911 and is about to be completed and commissioned. We cannot do exactly what they did. But we need not.
Our national and private banks have become quite big. Instead of financing sundry projects, they can be made to finance Bhasha. In fact, they have offered to do it to Wapda, which has proposed a phased strategy for going local. Chinese have offered to build it too. But they have proposed a very ambitious proposal to buy-out the whole Indus cascade which may attract a lot of concerns and in turn cause delays.
Let us go alone in financing. Eventually, others would join. It is hoped that the Pakistan government proceeds as promised that it would start construction next year, which is the current year.
The writer has been Member Energy Planning Commission until recently
Published in The Express Tribune, July 10th, 2017.
The second turbine of 660MW was commissioned a few days back. While it is highly commendable that the energy crisis situation is about to end with the completion of many projects that are under implementation, there are challenges that remain and would have to be sorted out.
We will mention only some of them, a detailed account has been provided in my forth coming book (Pakistan’s Energy Sector: Success and Challenges).
Firstly, with the increase in supplies, subsidy and circular debt may increase, unless theft is brought under control and hopefully generation cost is brought down with the advent of new projects. Nepra had to play a major role in containing generation tariff in which it has shown only a mixed success.
'Sindh can make the entire country self-sufficient in energy'
In some cases (HVDC), it has succeeded in putting its foot down and resisted undue demands of higher tariff and in case of renewables, it has finally issued its edict on compulsory competitive bidding (for which I have been fighting for years now) against the wishes of vested interest. In case of RLNG power plants, the tariff is almost right, but that is as a result of competitive bidding under GOP financing.
In other cases, it has been swayed by vendor supplied data and could not undertake rigorous scrutiny. The case in point is of coal tariff, both of Thar and imported coal power plants. There is quite some controversy on coal tariff being too high. And the lack of installation of sulphur controls has made it even more controversial. No respectable vendor or agency today installs coal power plants without sulphur control hiding behind the utilisation of low sulphur coal.
In China, all new coal power plants have to install SOx and NOx controls; one would have expected that at least SOx controls would be installed as per requirement of the generation license issued by Nepra. However, Nepra is probably not bothered that the requirements of generation license have been met. It probably does not know that it has provided for such controls in the tariff or not. Both Nepra and provincial EPAs have responsibility in this respect jointly; Nepra from tariff and generation license point of view and EPAs from EIA compliance point of view.
We cannot blame outsiders when our own national agencies are derelict about their functions. Environmental agencies are too weak and disorganised to take cognizance of it. On this subject, we have written in this space earlier, and the reader is referred to it for details.
While environmental issues pertain to more than one agency, it is hoped that Nepra would take a corrective step and issue a new tariff, which is due, and apply the new tariff on all those projects that have not yet been implemented.
Apart from accepting high CAPEX, there are quite a few issues that Nepra may have to attend. The present practice of inviting comments and objections from the stakeholders and holding a public hearing is not enough. Nepra should spend some money in getting the projects scrutinised by hiring foreign experts. Its own staff and semi-local-experts cannot do the job well as special expertise is required and the latter in most cases have a vested interest.
Vendor supplied data is highly suspect, adding and subtracting in and around their data cannot lead to the right decision. Also there are some other aspects on which Nepra has to promote a consensus around. Hatim Tai-type ROEs are being awarded from 15 to 20% under the pressure of lobbies or foolhardy and enthusiastic.
Renewable energy (solar and wind) are competing on their own cost efficiency and do not need any support. Thar coal is already initiated and should not need further support any longer, besides public support for coal is waning. There is no case for a differentiated ROE system and all sources should be allowed to compete under their own attractiveness.
There are other miscellaneous factors on which less rigorous care is given by Nepra, which adds up to a significant proportion of tariff. On debt terms, the risk margin allowed are unnecessarily high, especially, where there are various kinds of guarantees available and hefty credit insurance is being charged by the lender banks.
Solar and wind power have tremendously improved their competitiveness; their cost of generation have almost become 50% of the fossil energy based power. In Pakistan, their induction has been partly obstructed by unreasonable demands of the investor lobby. Hopefully, competitive bidding will break that circular situation and solar and wind power would be available at its true cost and prices.
A fresh thinking is to be given for a large scale induction of these resources to be able to bring down the cost of generation. There is resentment in the solar and wind power circles that while competitive bidding has been announced, no practical steps are being taken towards arranging it. The renewable energy investors also complain that RLNG plants are being approved one after the other, and the recent one has been done for Jhang of a capacity of 1100MW, while renewable energy projects are being put on the backburner under the excuse of impending capacity glut or trap. Since many of such projects are to be located in Sindh, the issue assumes a political dimension and creates tension within the federation.
Secondly, indigenisation has suffered due to the fast tracking dictates of the energy crisis. Now that the crisis is about to end, some stress and emphasis should revert to it. Local engineering industry is heavily underutilised and its human resource base is contracting due to low market demand.
Incentives to local industry and disincentives to imports in the form tariff and non-tariff barriers would have to be created. Chinese have played a major role in building our engineering industry in days when they were not commercialised. However, they can still be persuaded to rebuild our local engineering industry when tremendous demand is building up in the sector.
JVs and buy-outs in the engineering sector may have to be promoted. Energy tariffs and incentives may have to be tied together and deletion programmes put in place ala automotive industry, for which some standardisation of energy equipment may have to be undertaken.
In the current style of things, we are behaving like our Arab brothers, who place orders and foreigners provide it all from EPC and O&M contractors to IPPs. Iran and Turkey have done otherwise and are reaping the benefits of their policies. They are increasingly getting active in export markets including Pakistan, although Iran has other problems due to which it cannot sell abroad.
Thirdly, power sector, if not the oil and gas sector, is fast losing technology absorption and accumulation capability due to lack of appropriate organisational structure under the garb and slogan of de-bureaucratisation. PEPCO has been dismembered and the sector is being micromanaged from Islamabad by non-technical people. Power sector has to be reorganised with a technology orientation: either MoWP has to induct technical resource persons under an appropriate organisational structure or separate organisations have to be created. Utopia of independent boards and Nepra tutelage has not delivered. Nepra can only issue edicts and orders and may be fine but cannot improve organisations and control them.
Finally, the most important item that should be on our national agenda is the construction of Bhasha dam. Kalabagh dam could not be built due to internal political differences and Bhasha dam could not be built because of external factors. We should go on our own.
Ethiopia has built a very large dam out of its own internal resources without resorting to borrowings from IFIs. The dam will be able to store 79 km3 of water and produce 6000 MW of electricity. For comparison sake, Tarbela had a storage of 13.69 KM3 which has come down to 7.993 km3 due to silting. The proposed Bhasha and KalaBagh dams are almost equal with 7.52-7.9 km3.Infact, as would be evident from the adjoining table, even if we build all the dams proposed, it would total to 42.3 km3 which would be only half of this dam.
Comparison
Ethiopia is much poorer and smaller than Pakistan having a GDP 25% of Pakistan. It has suffered famines and civil wars. I have visited Ethiopia several times doing my professional consulting services for building parts of the power house locally in Ethiopia. River Nile springs from its Lake Tana, which flows through Egypt and ten other countries including Sudan and falls into the Mediterranean Sea. The erstwhile General Nasser built ASWAN dam on it. Egypt is largely dependent on Nile water and is worried over the consequence of the GERD dam, with a storage capacity as large that it may require 15 years to fill it entirely.
Ethiopia faced almost the same problem as Pakistan is facing to construct GERD.IFIs and others wouldn’t finance it due to potential and real objections and concerns of its big neighbour, as IFIs require NOC of India as a precondition for financing.
China advised to expand investment in power sector
Ethiopia had no option but to rely on its own resources. It floated internal bonds and made deduction from salaries as loans and financed a $6.43 billion project. It started construction in 1911 and is about to be completed and commissioned. We cannot do exactly what they did. But we need not.
Our national and private banks have become quite big. Instead of financing sundry projects, they can be made to finance Bhasha. In fact, they have offered to do it to Wapda, which has proposed a phased strategy for going local. Chinese have offered to build it too. But they have proposed a very ambitious proposal to buy-out the whole Indus cascade which may attract a lot of concerns and in turn cause delays.
Let us go alone in financing. Eventually, others would join. It is hoped that the Pakistan government proceeds as promised that it would start construction next year, which is the current year.
The writer has been Member Energy Planning Commission until recently
Published in The Express Tribune, July 10th, 2017.