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Power sector: winds of change

November 21, 2016


Is the promised relief from power shortages by the next elections really around the corner? Will it also bring about any reduction in electricity bills?

The government claims to be on track for adding around 10,000MW of additional electricity by end 2018 or earlier, which is supposed to completely eliminate the need for any loadshedding.

The total generation capacity is to be more than doubled over the next five years from the current 23,000MW, raising nuclear power’s contribution to around 9pc of total generation by 2021. Hydel generation is supposed to add 2,500MW to the system over the next two years. An additional 3,000MW of hydel power is also being pursued and could contribute more over the next few years.

Any future fuel generation mix must be diversified, reliant on cheaper indigenous fuel resources and meet the criteria of reliability, affordability and safety in addition to its environmental impact

After many hiccups, we are finally getting imported Liquefied Natural Gas (LNG). Around 3,600MW of electricity is to be generated with LNG, while coal based generation, will add around 6,000MWs. Power generation capacity from early 2018 is expected to stay ahead of the peak demand for the next few years.

Apart from expanding generation capacity, more significantly, the future fuel mix for power generation is being diversified. A balanced fuel mix, apart from ensuring our energy security, will reduce the cost of electricity as well.

Last year, furnace oil and diesel accounted for 36pc and gas and hydel generation 29pc each in our power generation. The share of hydel power, which is the cheapest source, has drastically dropped from over two-third in the mid eighties to less than one third. The furnace oil and diesel based generation produces the most expensive electricity. In 2014, the cost of oil based electricity was Rs16 per unit compared to less than Rs5 for gas and just over Rs1.50 for hydel and nuclear based generation from the existing plants.

Our planners erroneously assumed unending supplies of cheap domestic natural gas. The shortages of gas and loadshedding over the last decade, however, did not deter the successive governments from freely allocating it, out of political expediency, for transport and domestic sectors at the cost of industry and power sectors. Such short-sighted policies resulted in a declining share of gas for the power sector.

Despite the clamour about its deleterious environmental impact, coal still produces 40pc of global electricity; its share in US, China and India’s power generation ranges from 39pc to 69pc.

Coal based power has been conspicuous by its almost total absence from Pakistan’s power generation despite the country having one of the largest coal reservoirs in the world. We have had to pay dearly for this omission. However, now, coal will contribute around 18pc to our power generation in the next three years. LNG, though not as cheap as domestic gas, is still a welcome addition and will remedy gas shortages.

Our past energy policies, while offering over-generous incentives to investors, failed to prioritise or incentivise fuel choice for them. Resultantly, furnace oil and diesel (HSD), the two most expensive fuels, accounted for 36pc of our electricity generation in 2015-16.

The International Energy Agency forecasts that global oil based power generation will be reduced to an insignificant share of 2pc within 25 years.

A major shift, both in developed and developing countries is currently under way whereby the use of renewable energy is growing at a much faster rate than fossil fuel energy. The inclusion of wind and solar power in Pakistan’s power mix is in line with global trends.

The country has the potential to generate 2.9mMW of solar energy and 60,000MW from wind energy. Any future fuel generation mix must be diversified, reliant on cheaper indigenous fuel resources and meet the criteria of reliability, affordability and safety in addition to its environmental impact.

The substitution of oil and diesel based electricity with cheaper sources will bring down the cost of electricity and, apart from providing some relief for the consumers, also improve the competitiveness of our exports.

Besides an uninterrupted power supply, electricity consumers look forward to benefiting from the reduced cost of electricity as well.

The Pakistan Power Policy 2013 had promised reducing the average cost from 12 to 10 cents per unit by 2017. It registered a decline from Rs10.59 per unit in 2014 to Rs9.84 in 2015. Moving forward, we should see a more significant and sustainable decline in electricity cost, not dependent only on international oil prices.

The reduced generation cost will benefit the end users only if the bleeding of the power sector due to poor governance and corruption is controlled.

The financial health of the sector cannot improve unless huge leakages through transmission and distribution losses and non-recovery of dues are plugged .Curbing the freedom of the power sector watchdog, Nepra, in the performance of its duty to safeguard consumer interest will be an ill-advised move and any temptations at ‘clipping the wings’ of the regulator will be a bad news for consumers.

While the winds of change are approaching, there is a need to have transparency and consistency in our policies to sustain investor confidence and maintain due regard for consumer interest.

Decisions like abandoning the Gadani Power Park Project, recent cancellation of 1,000MW of imported coal projects, failure to ensure expeditious commissioning of the ill-fated Nandipur power project and inexplicable delays in approvals for some already pending projects have reportedly disillusioned and discouraged domestic investors.

Such U turns raise doubts about the transparency of the process and can become serious hurdles in fulfilling the government’s promise of a loadshedding free Pakistan by 2018.

The author is ex-chairman, Nepra and currently heads, Energy Research Centre, COMSATS.

Published in Dawn, Business & Finance weekly, November 21st, 2016