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Costs of power

Published Aug 01, 2013 07:14am


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LAST week I pointed out that the forthcoming power policy gives the cost of generating electricity as Rs12 per unit. I pointed out that in previous on-record comments, high officials from the power bureaucracy and the ministry have said the figure is Rs15.

I pointed out that this Rs3 discrepancy is too large to be some sort of rounding error, and too important to just be shrugged off. After all, if 90 billion units of electricity are sold in the country every year, then a Rs3 discrepancy in the per unit cost adds up to Rs270 billion per year, almost half the total bill for projected power sector subsidies if tariff and entity reforms are not advanced urgently.

I concluded by speculating on the reasons behind this discrepancy, and left off saying that we are owed an explanation.

Subsequently I received a call from Mr Musadik Malik, special adviser to the prime minister, offering this explanation.

“I have done the working on these numbers myself,” said the adviser, “and presented them to the prime minister.”

The adviser was kind enough to share the presentation that was given to the prime minister on the power policy, and offered this explanation for the discrepancy I had pointed out.

He said the cost of generating one unit of electricity is indeed Rs12 at the power plant. But when that unit of electricity travels down the transmission line, then enters the network of the distribution company, and gets routed to the relevant grid station, and is finally sent out to the final consumer, it picks up an additional Rs3 in costs in this long voyage.

So the Rs15 figure that we have been given in the past, is not just the ‘cost of generation’ but includes the costs of transmission and distribution along the way.

The adviser further said that the electric power regulator Nepra calculates the final cost of generating electricity and delivering it to the end consumer as Rs14.6. “But there is an important assumption beneath this number,” he said.

“Nepra assumes 100pc recovery, whereas average recovery rates in our system are closer to 86pc,” he said. So if you include the unrecovered amount in the cost build-up, then the cost rises by another rupee to Rs15.6.

And that is the real cost of generating a unit of electricity and delivering it to the end consumer in Pakistan, as calculated by data provided by the power bureaucracy and verified by independent experts like Mr Malik.

Fair enough I say. A perfectly reasonable explanation has been furnished for a very important number.

Now the problems.

The presentation kindly shared by the adviser contains a little graph at the very top on page 6 titled “generation cost”. It’s a bar graph, and gives a visual indication of how much it costs to generate a unit of electricity using various fuels. The longest bar in the graphic is the most expensive fuel, with other bars that tell the cost of generation associated with other fuels.

The tallest bar is on the left, representing the most expensive electricity in our system, generated from diesel, with the cost per unit coming in around Rs23. Next to it is furnace oil at Rs16 or just above. Then wind, at Rs13 or so and so on.

And here’s the kick: the average generation cost, across all classes of fuels, given in the graphic is Rs8.81 per kilowatt hour.

Then a little further down, on page 9 of the presentation, there is another interesting graphic which shows what the “target aspiration” is in various areas.

So the shortfall in the supply of electricity is shown as 5000MW currently, and the “target aspiration” is shown as zero. Likewise with transmission and distribution losses that are shown as 23pc currently with a “target aspiration” of below 16pc. And then the “average commercial cost” is shown as Rs12, with a “target aspiration” of Rs9.99.

So now I’m left a little confused. I’m no expert so perhaps I’m getting something wrong, but from the presentation given to the prime minister it would appear that the cost of generation has been shown as Rs8.81, which rises to Rs12 by the time that unit completes its voyage to the end consumer. What else do the terms “generation cost” and “average commercial cost” mean if not this?

The statement of intent, and many of the steps outlined in the presentation are to be lauded, and if this government is able to implement this agenda, then we all have serious grounds to be hopeful.

But considering that the generation cost is our starting point, it’s worth our while to have as much clarity on that number as is possible, since all other steps follow from this.

It reminds one of that Persian saying about how a building whose first foundation stone has been laid wrong will never seem right to the eye.

The costs we are talking about here are the foundation stone of the power sector and its reforms. They lie at the very heart of the power crisis. You cannot calculate theft and losses and tariffs and subsidies and growth of demand and peak load and factor efficiencies or anything else nearly as fancy if you’ve got the cost of generation wrong.

I’m not suggesting that they’ve got this cost wrong, I hasten to add. All I’m saying is I’m not convinced that they’ve got it right, or that they’ve got it at all. Not yet anyway. But the attempt to clarify, from the top levels of government, is appreciated nonetheless.

The writer is a Karachi-based journalist covering business and economic policy.

Twitter: @khurramhusain


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The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (3) Closed

Pasha Aug 01, 2013 02:38pm

"from the presentation given to the prime minister it would appear that the cost of generation has been shown as Rs8.81, which rises to Rs12 by the time that unit completes its voyage to the end consumer" I guess you need to take weighted avrage instead of taking simple average.

Muhammad Akram Khan Aug 01, 2013 02:51pm

In year ending on June 30, 2012 PEPCO purchased 89.8 billion kWh electricity at cost of Rs835.9 billion which is equal to Rs9.3 per kWh average cost of generation.

Faisal Aug 02, 2013 06:55am

It seems that the number 8.81 is perhaps average of all the costs associated with power sources (diesel, furnace oil, etc.) mentioned on that slide 6. Quick check: add 23, 16, 13 and so on for all sources, divide by the number of sources, and does it come out as 8.81? This "average" has nothing to do with the actual cost, which can be 12, for example.

If the two numbers (calculated average and the reported figure of 8.81) did not match, then it indeed requires an explanation.