From deficit crisis to surplus crisis

Surplus exacerbated by low demand due to rupee depreciation, coronavirus

ISLAMABAD: We are interesting people and an interesting country. Only a few years ago, there was power deficit and now we have so much surplus that we cannot cope with it - and more is in the pipeline.

Partly, the surplus has been exacerbated due to low demand in the wake of current account deficit crisis, rupee depreciation and now coronavirus. Even before these events, a surplus was being projected. Actually, we are a small economy with little space for making mistakes. The government is always in deficit with no money to subsidise and people are poor, except for a tiny minority.

Late, Dr Mahboobul Haq wondered if a 1% surplus was better or 1% deficit – he chose the deficit. His argument was that supply comes in lumps (Step function, mathematically speaking) while demand grows in geometrical terms. Thus, there would be periods of deficit and surplus around a demand slope.

The policy question is whether to be inside the demand curve or above it or be in between.

Secondly, it is not easy to predict demand, even long-term demand. It is linked with economic growth and one can only speculate as to what rates of gross domestic product (GDP) growth would be in different periods ahead. Thirdly, reasonable demand elasticity factors with respect to influencing factors have not yet been established.

Amateurs in power planning have been running data on popular software without a deep insight and exposure to econometric modelling. Abundant knowhow is available in the academia, which should be utilised, instead of going alone.

Demand projections

Four major studies have been done including the NTDC-IGCEP-2047 with respect to demand estimates and power planning.

The Indicative Generation Capacity Expansion Plan (IGCEP) figuratively proves 1:1 relationship between peak demand and GDP growth.

Japan International Cooperation Agency (Jica) and Energy Security Plan (ESP) have assumed very high GDP growth rates, resulting in very high demand projections. ESP has projected demand for 106,517 megawatts for 2030 whereas Jica projects 69,874MW for the same year.

The National Transmission and Despatch Company (NTDC) and IGCEP have made three projections based on low (4.5%), normal (5.5%) and high (6.5%) growth rates of GDP. IGCEP’s peak demand figure for 2030 is in the range of 43,820 to 48,718MW. Keeping in view the rupee depreciation and corona issues, it may be appropriate to assume low growth rates for the decade of 2020-30. According to this low growth assumption, peak electricity demand in 2030 would be 39,111MW.

Generation plan

We would restrict ourselves to the period of 2020-30 as technological change is very high and economic conditions may also vary.

A classic example is the result of ESP, which has proposed 83,760MW of gas-based (NGCC) power plant capacity, almost 50% of the total proposed capacity of 162,950MW.

Perhaps, shale was assumed to be a gas resource, but it did not emerge as a viable technology except for the US. Liquefied natural gas (LNG) came but could not be possibly supplied in proportion to the projections or anywhere closer.

Hence, it may be appropriate to restrict to a shorter time horizon up to 2030. Adding 11,000MW of plant retirement in this period and subtracting existing capacity of 36,000MW, the net capacity to be installed would be 14,111MW.

IGCEP has two sets of power plants – committed (36,895MW) and candidate or uncommitted (43,356MW). This does not include Bhasha Dam (4,500MW). Thus, it appears that there would be no need for introducing candidate power plants. Not only that, some more pruning may be required.

IGCEP did not include Bhasha Dam in light of political issues as it has been on board for a very long time but there has been no progress. However, engineering, procurement and construction (EPC) contracts have been signed and the dam portion is to be completed in five years. A solar capacity of 12,773MW has been proposed but 90% of which is non-committed, meaning that no investors have yet prepared any proposals.

Similarly, 10,279MW of wind power capacity has been allocated but almost 90% of it falls in the candidate category. Together, solar and wind power add up to 23,000MW.

An important attraction in solar and wind power is its cheap generation cost of 2-4 US cents, which may go further down. A significant base-load capacity is there and more is proposed to be added.

Solar and wind can play a good role in bringing down the average tariff. It is renewable and does not require any fuel - imported or local.

Even before the emergence of Bhasha Dam as a real project, there was scepticism about demand and paying capacity of both the government and the people.

Power demand is dismally low as it is 18,000MW in June, which is peak summer. In winter, peak demand was just 8,000MW. The installed capacity is 36,000MW. It appears, in the coming few years, if the demand is assumed to grow at a rate of 7%, it would not reach beyond 36,000MW by 2040.

It should be noted that as per National Electric Power Regulatory Authority (Nepra)’s State of Industry report, released recently, the load factor (capacity utilisation in ordinary language) was only 40.1% as opposed to the minimum requirement of 60-70%.

A power deficit crisis, it appears, will be converted to an excess power crisis. Capacity payments are to be paid, irrespective of whether power plants are used or not. This is like renting or leasing a car. One has to pay the agreed rent or lease. The worst has yet to come as 7,000MW of new capacity would be added in the next few years and all of which may remain under-utilised.

Despite a decrease in fuel prices, demand is not increasing. LNG is cheaper now. Due to lower capacity utilisation of LNG terminals, terminal tariff has doubled, although LNG itself is cheaper. The net effect is cheaper LNG.

Why has it happened?

There are many centres of powers which push their favourite projects – state-owned organisations as well as the private sector. Power planners such as the Private Power and Infrastructure Board (PPIB), NTDC, Nepra and Central Power Purchasing Agency (CPPA) face great difficulty in reconciling with the demand from all these sectors.

The tariff is so good and high that despite economic problems in Pakistan and difficulties in payments, there is a long line of investors. Nobody wants to go away.

In normal circumstances, companies’ risk departments may not allow such investments. Generation tariff reforms would not only bring down the electricity cost, it would also displace crowding.

Delaying timelines

Coronavirus may take a long time to disappear and the business and economic dislocation effect may last even longer. It is not easy to rebuild bankrupt small businesses, which are the backbone of economy.

A corona scenario should also be worked out by the NTDC. Such sensitivity analysis is desirable.

There are two types of power projects – those which are under construction at various stages and nothing can be done about them. They have capacity of 7,672MW.

There are other power plants which may have been committed and be close to signing agreements but their construction has not yet started. Negotiations should be held with promoters to move their timelines ahead ie delay the start of construction. Privatisation may not be a solution in such a situation. Who will buy when there is no demand, even though capacity payments may be assured? The government has already defaulted on payment of dues to the independent power producers (IPPs).

Assuming that demand will pick up, one could try promoting wheeling and freeing the market. There are many risks in that as well. It is a catch-22 situation. Delaying the project timelines may be the only option.

The writer is former member energy of the Planning Commission

 

Published in The Express Tribune, June 15^th, 2020.

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