Stimulating decentralised markets in the energy sector

Govt does not need to take responsibility of energy production, rather it should only focus on designing energy policy

The persistent load-shedding crisis in Pakistan has severely crippled economic and social development in the country. While there is no dearth of energy policy reform proposals, here are some practical policy actions that the federal government can readily implement to resolve operational and strategic challenges.

Among operational challenges, enforcement against the theft of electricity and non-payment of electricity bills is perhaps, the greatest challenge faced in Pakistan. This issue could be resolved by decentralising the utility industry in the country to district or even to the tehsil level. The current centralised energy governance system incentivises electricity theft. Political patronage of electricity thieves will be relatively difficult to sustain in a market-based governance system of decentralised and privatised utility companies at the local levels. Centralised institutions (e.g. Wapda) can rather be empowered to focus on improving the efficiency of the energy transmission system, reducing line losses, and above all, bridging the supply and demand gap. The federal government must, therefore, set up a task force to evaluate all feasible policy actions for reducing electricity theft, including but not limited to utility market reform and assessing the supply-demand gap. The greatest major operational challenge concerns the shortage in energy supply compared with the anticipated demand. According to some credible analysts, this gap hovers between 55 per cent to 65 per cent of the total energy needed, which translates into a shortfall of about 5.5-6.5 gigawatts in a 10-gigawatt energy demand system. While reductions in thefts through utility reforms could narrow this gap to 40 per cent, both short-term and long-term policy actions must be initiated to completely eliminate the gap in energy supply and demand. Pakistan can sign electricity supply agreements with its neighbours (in particular China, Iran and/or India) to narrow the supply-demand gap in the short run.

For the medium term, independent bids from energy providers at the global scale could be invited and implemented within six-month to five-year time-scales. This would require the settlement of the existing $1.3 billion dues to independent power producers that can be settled through a long-term agreement with the Aid to Pakistan consortium. The prime minister must call an emergency meeting of all Aid to Pakistan consortium members with a one-point agenda of settling this outstanding payment. Strategically, the potential of energy generation in Pakistan is very high. However, this potential cannot be harnessed under the current institutional and governance system. The lack of funding for energy generation is perhaps, the greatest challenge. The vast hydropower potential aside, there are a mix of fossil fuel (e.g. natural gas) and renewable energy resources that Pakistan is blessed with, but the lack of political leadership and bureaucratic short-sightedness have led to the current frustrating situation. Instead of developing mega-scale hydropower projects, the government can pass comprehensive energy policy reform legislation that can stimulate the development of decentralised energy production technologies. Tariffs on renewable energy systems must be completely eliminated. Special trade agreements with China and other neighbours could be signed to facilitate the import and local production of solar, wind, biomass and other renewable energy technologies in Pakistan.

Furthermore, to balance the renewable portfolio with secure and stable sources of energy supply, new natural gas and (small- to medium-scale) hydropower projects must be prepared and implemented within the next one year. The government does not need to take the responsibility of energy production, rather it should only focus on designing the energy policy, providing a stable transmission grid system and correcting the inequities. The remaining goals could be met through stimulating private markets and establishing decentralised governance systems. One common argument against privatising and decentralising energy production and provision systems in Pakistan is that this will raise the electricity tariffs too high and make it impossible for relatively poor consumers to afford electricity. I do not buy this argument. All across Pakistan, people have different levels of willingness and capacity to pay their electricity consumption costs. In the common trade-off between reliability and cost of energy supply, many people will choose reliability. Many analysts have shown that consumer demand is very elastic in the energy sectors of developing countries. While upper and upper to middle income families will adjust to the increasing prices, the government could subsidise energy provision for poor and low to middle income families. These subsidies could be coupled with subsidies for decentralised renewable energy technologies. The revenue for these subsidies could be generated through taxing the fossil fuel-intensive utility firms.

There are many other pathways possible to compensate and reduce the burden of increased energy prices for low income families, but the upshot is that there could be no load-shedding in such a decentralised and privatised system. The stimulation of local scale energy markets would also create new firms and new jobs, an important co-benefit that is not possible under the current system.

Simultaneous policy actions at both operational and strategic levels could transition the system out of the current persistent load-shedding. Reducing approximately six gigawatts of energy shortage is not going to be an easy task, but the policy steps proposed here could be immediately taken to reduce it. There are many developing countries in the world that have successfully overcome challenges pertaining to energy supply shortages through market-based, decentralised and balanced energy policy reforms. The vision presented here is doable and practical if the political leadership is sincere about resolving the energy crisis in Pakistan.

Published in The Express Tribune, January 25^th, 2015.

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