Pakistan’s power sector reforms

Pakistan’s power and energy issues are interlinked and require structural reforms

Raashid Wali Janjua November 01, 2022
The writer is heading IPRI and a PhD scholar at NUST. He can be reached at [email protected]

Pakistan’s power and energy issues are interlinked and require structural reforms. The problems are interdisciplinary and multidimensional and not amenable to placebo solutions. It is time the anodyne prescriptions gave way to the strong nostrums to yield sustainable solutions. Starting with energy mix of the country that is heavily tilted in favour of fossil fuel sources with 64% fossil fuels, 27% hydropower and 9% other renewables and nuclear power the problems abound when it translates into expensive power cost for the consumers and commercial units alike. Pakistan is suffering from power and gas sector circular debt due to inefficiencies of the system and a basic structural issue i.e. inability to reform and indigenise.

Nature has endowed Pakistan with hydropower potential of 60,000 megawatts out of which only 7,320 MW has been exploited. India that at the partition had 300 large dams has taken that number to 4,000 whereas we after large reservoirs and 23 barrages started plumping for costly fossil fuel power production. Due to our failure to develop large dams and small hydel projects when the power needs of the country reached a crisis proportion the harried political governments fell for short term yet costly Independent Power Projects (IPPs) with atrociously profligate ‘Take or Pay’ and capacity power payment provisions saddling power sector with a perennial debt issue.

Pakistan is blessed with a wind potential of 50,000 MW just in Jhimpir corridor with average wind velocities to the tune of 7 meters per second. The potential capacity for wind energy is estimated at 122.6 GW per year, twice the country’s current power generation. The solar potential of the country is tremendous due to high solar irradiance i.e. 5.3 kwh/sq meters but despite that God given gift only 568 MW (AC) has been installed so far. The government has the desire to take the solar production to 4 Gigawatt level but the present renewable power policy does not inspire the potential investors. Despite the intermittency issue of renewable power resources such as wind and solar their value in lowering the overall cost and reducing the import bill of costly fuel for power production is tremendous.

According to a study of LUMS Energy Institute (LEI) Pakistan’s power sector is beset with four major issues i.e. weak demand management, transmission and distribution losses, capacity payments and reluctance for structural reforms. The utilisation of scarce power for non-productive activities like domestic heating and cooling instead of productive industrial activity is causing unsustainable burden on the national exchequer. The national architectural practices have also departed from climate adaptation practices of the past with airy houses having natural roof and verandah insulation to beat the heat. Now veritable heat boxes are being built in imitation of the West (cool climate regions), putting avoidable burden of air conditioning on national power grid.

Pakistan needs serious reforms on demand management side as a study of LEI shows that even in peak summers the demand for productive activities is far too less than what the spike in demand curves indicates in terms of domestic air conditioning demand, jacking up the demand figures. If the country has to reduce its heavy import bill it has to institute reforms in power conservation through reduced dependence on air conditioning and other non-productive usages and concentrate on managing the demand primarily for productive use of this precious resource. The snowballing capacity payments are another issue that needs attention. The capacity payments that stood at Rs500 billion in 2018 are expected to swell to Rs1.6 trillion in 2023 burdening the consumers further with this unsustainable inflationary spiral.

Pakistan’s power sector circular debt is Rs2.46 trillion while the gas circular debt stands at Rs1.5 trillion making it a whopping Rs4 trillion. The transmission and distribution losses of Pakistan’s power sector were Rs473 billion in 2021 whereas distribution losses alone contributed 31% towards total circular debt. Demand management through national conservancy policy, upgradation of transmission and distribution system, and balancing of national energy mix with an ideal mix of 50% hydel, 30% thermal (including coal based), 10% nuclear and 10% wind and solar. The same demand management and structural reforms are needed in gas sector, an important component of energy sector.

The energy sector is highly capital-intensive and any future investment therefore needs to be done after careful need analysis. IGEP analysis of gas generation projects alone is $50 billion. Due to the dwindling natural gas resources of our country, there is an urgent need for fresh gas exploration. With the current reserve replacement ratio of 30%, Pakistan is likely to run out of gas in a decade unless a major find is made. The gas circular debt being accumulated is due to our uneconomic gas usage and pricing which is not based on principles of scarcity and optimal utilisation due to inflated demand, misallocation and gas thefts. The country is selling costly gas costing $18/MMBTU at $0.5/ MMBTU to gas addicted domestic consumers by importing LNG gas worth $2.6 billion annually, a figure that could go as high as $32 billion by 2030.

The unaccounted-for gas losses (UfG) stand at 120 billion cubic feet per annum while delayed tariff determination, and failure to collect bills from consumers is continually adding to the circular debt. The delayed payment from Ministry of Finance for Tariff Differential Subsidies (TDS) is another cause of the mounting circular debt. In simple terms the costly gas is being burnt in stoves and heaters on heavy subsidy to domestic consumers instead of being spent for industrial activity that could contribute to our GDP growth.

Pakistan needs to fast-track solar and wind energy, develop indigenous energy and fuel resources, and improve energy governance through restructuring of the bureaucratic energy planning and governance system. Demand management through changing of commercial habits, change in building architecture, and bringing subsidies within acceptable limits is a prerequisite of a meaningful power and energy sector reforms.

Published in The Express Tribune, November 1st, 2022.

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