Technology optimism in the energy sector

Published: August 12, 2017
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The writer is a Fulbright scholar and currently serves as a consultant to the Asian Development Bank

The writer is a Fulbright scholar and currently serves as a consultant to the Asian Development Bank

For mankind the last 50 years have been truly breathtaking. The age of unmatched space exploration, giant leaps in telecommunications, revolutions in modern medicine, abundance in food production and affluence in energy resources is a testament to our progress. It has also given us an assurance that whatever challenges ahead of us will be faced, understood and eventually conquered upon — using technology.

Our technological progress has elevated our hopes manifold and we see the same harbinger of hope being applied to Pakistan’s energy sector today. Still an energy deficient country, we have pinned all our hopes on coal, RLNG and nuclear technology, calling them “game changers”, just like when we pinned all our hopes on short-term oil and diesel firing stations in the 1990s. For a brief period, we became energy surplus and the country in general reaped rewards. Slowly and gradually, however, the foreign exchange outflows became burdensome and the high revenue shortfalls permanently led us towards circular debt. So much so that circular debt is now a permanent feature of Pakistan’s energy economy. The last bailout happened just four years ago — for an amount as massive as Rs480 billion, and has ballooned up to more than Rs800 billion today. This is not all.

The tariffs have increased four times since 2008, surcharges have adversely affected our industrial base and our export competitiveness has hit an all-time low — coupled with an all-time high trade deficit. As it often happens with technology, those who are the early beneficiaries reap all the rewards, the latter just pay up the excessive price years later.

Now we are made to believe that coal, RLNG and nuclear energy will change our energy landscape and will make us energy surplus. This may be true. But the goal of a viable energy sector is not to become energy surplus for any given year but to provide reliable, affordable and clean energy to all on an ongoing basis. If the goal is just to become energy surplus, then we are not accounting for externalities down the road.

Let’s briefly analyse our new-found love for coal, RLNG and nuclear. Today we have an average generation of 12,000MW in the system, which accumulates circular debt to an extent of Rs100 billion per annum. Double the power generation, with everything else constant, and we will double the amount of circular debt accumulation, too. This implies that Rs400 billion accumulated in four years will now be accrued in two years. High circular debt will pose pressures on the fiscal books of the power sector, which will leave the government with two options: either (i) pick the additional costs as subsidies or (ii) recover high costs from consumers in the form of tariffs.

If we increase the subsidy, it will constraint government’s resources on more productive areas like health and education and will propel further inefficiencies in the system. If we increase tariffs, industrial performance will suffer. We are already a witness to dwindling export numbers — which have come down to $17 billion only as compared to Bangladesh’s $34 billion today, primarily because electricity surcharges have been imposed on industrial and commercial users to cross-subsidise more vulnerable residential and agricultural consumers.

This obviously does not consider the story our policymakers continue to tell us. Their version of the story tells us that the transition to coal, RLNG and nuclear energy will bring down our cost of generation, which will expand our economy, turn the wheels around, and will make Pakistan a competitive industrial region, which will create employment opportunities and foster economic growth.

But this is the same story told to us when the 1994 power policy was announced, then again when the 2001 power policy became operational and now again with the latest rounds of infrastructure initiatives. However, if the past is any guide-book, then this is not going to happen. Our industry has not become competitive in the last 20 years by relying on fossil fuels. We have paid subsidies of more than Rs2,000 billion in the last seven years alone. And we have bailed ourselves out from circular debt every time without any permanent solution.

Surely, the cost of generation will go down and will benefit us in the interim. But what about the high interest and profit repatriation payments starting FY2018-19? We have promised roughly 17% project IRRs to all energy projects which essentially means that almost all the capacity payments will flow outside Pakistan along with the fuel import price. The IMF already estimates our balance of payment impact of $4.5 billion per annum due to CPEC projects –a hefty price tag in the long run.

We also need to be mindful of another facet of technological optimism — the irreversibility of technology deployment. Like industrial revolution where immediate benefits were immense, the threats posed by climate change were only realised later. Similarly, our transition to coal, RLNG and nuclear power seems very intuitive today. But once installed, they will not be easy to let go. We see the resistance to move away from diesel- and oil-based power generation, because there are entrenched interests linked with fuel and tanker mafias. The irreversibility of technology also brings irreversibility to correction and cure and may also put a lid on issues such as environmental emission standards, climate change threats, population safety values and water availability and scarcity issues that no one considers relevant today.

Last, there is a zero-infinity characteristic of technological optimism, which refers to risks that are extraordinarily unlikely to occur, but are catastrophic if they do. Japan never thought of nuclear power risks until Fukushima happened in 2011. After that, it had to take painful and expensive decisions to revert to an alternative. Pakistan is also in the process of adopting nuclear technology. Though we have an impeccable record in nuclear energy till today, the risk will always loom that any unfortunate incident can put life and property in jeopardy in case we suffer from a nuclear power calamity.

In our energy policy scenario, all technological options need evaluation on merit. No one set of technology should be embraced wholeheartedly and none should be called a “game changer”. The only real game changer is a predictive policy making, combined with a strong regulatory authority which sets the tone for the sector. Where decisions are evaluated on merit, where irreversibility is challenged early and where giant leap of faith technologies are largely avoided.

Good technological choices will give long-term energy security at affordable prices to the masses. False technological steps will teach lasting lessons — mostly because they will cost us the future, tell us too much about those at the helm of decision-making at the time and will be too little, too late to take corrective actions early.

Published in The Express Tribune, August 12th, 2017.

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