When it comes to the energy sector reforms, the Nawaz Administration appears to be making relatively sensible choices. What makes the administration’s plan particularly impressive is that it seeks to balance what is politically possible with what is technically and financially necessary. So, for instance, the government is seeking to pay off the energy sector’s circular debt in one go in order to significantly reduce power cuts and win the public’s confidence before tackling the harder bits of the problem, like raising tariffs and forcing electricity thieves to pay their bills. We also admire the government’s commitment to reduce the weighted average cost of producing electricity for the national grid by moving towards cheaper fuel sources. We worry, however, that some of these moves are being made without a more thorough analysis of the future costs.
Take, for instance, the government’s agreement with the independent power producers (IPPs) to switch their expensive oil-fired power plants to a cheaper fuel source, coal. This apparently seems like a sensible policy. Coal-fired power generation costs approximately Rs10 per kilowatt-hour, even when running on imported coal, compared with the Rs18 a unit or higher that oil-fired power plants cost. A sensible saving that would have the added advantage of reducing the cost of power generation to just under the upper limit set by the prime minister for how high the government is willing to let retail electricity tariffs rise to.
We applaud the effort, but we would encourage the government to take a little more time to study the long-term implications of converting from oil to coal. According to the National Electric Power Regulatory Authority’s 2012 state of industry report, oil-fired power plants account for over 8,000 megawatts of installed capacity. Converting all of those to coal is an effort likely to cost several billion dollars. The government of Pakistan has a tendency to make energy policy by simply going for the latest fads. That is how we got into the trouble of having too many oil-fired power plants in the first place. We set them up in the mid to late-1990s, when oil prices were at historic lows in inflation-adjusted terms, and it seemed to make all the sense in the world to build power plants for something that we could fuel either through our own indigenous resources or through imports from friendly regional countries. As we now know, that turned out to be a disastrous idea.
When in the mid-2000s, the prices of oil started going up, we started converting many power plants to natural gas, under the assumption that the country had abundant gas reserves, not realising that much of those had been depleted due to a half-century policy of horribly mispricing the commodity and incentivising its waste. And so, just under a decade later, we are once again talking about changing the fuel source for our power plants.
The government would do well to realise that a thermal power plant has an operating life of about 30 years. That means that any plan that only takes into account fuel prices this year, and not how they might fluctuate over, at least, the next decade is likely to come up short-sighted. Pakistan has tried several different iterations of this strategy at least twice now and is looking set to repeat the same mistake a third time. Have we learnt nothing from our mistakes?
We are not opposed to the idea of switching to coal-fired power plants, though there is something to be said for the environmental hazards of doing so. However, we do urge the government to take the trouble to figure out whether or not the mathematics that currently make the option so attractive are likely to hold true for the next few years. Otherwise, we will be back to square one in another decade.
Pakistan cannot afford another lost decade. We understand the prime minister’s urgency to get things done. But taking just a little more time to get them right is likely to be an investment worth making.
Published in The Express Tribune, June 30th, 2013.
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