Pakistan will begin 2018 with expensive energy prices and breakeven supplies. While the year is estimated to conclude with a bit of electricity surplus after 13 years, gas shortages are unlikely to end by December 2018.
The decade of darkness is likely to come to an end during the year, though at a cost. The consumer is set to pay a remarkably higher price for the inability of the policy makers to reform any of the electricity, gas and oil sectors. With induction of fresh gas and electricity supplies, the major constraint of industrial and business sectors would stand removed.
While the input prices would walk a downward curve because of expansion in global renewable energy sector and the United States entering Liquefied Natural Gas (LNG) market with a bang in 2018; the PML-N government would enter the new year, and an election year on top, with a decision for an almost 25-30pc increase in average consumer-end electricity tariff.
While the consumer is set to pay a remarkably higher price for the inability of the policy makers to reform the energy sector; with induction of fresh supplies, a major industrial and business sector constraint will stand removed
In fact, the electricity regulator — National Electric Power Regulatory Authority (Nepra) —only recently gave in to government demands, after five years of resistance, to allow building higher system losses and lower recoveries in the tariff, besides a quantum jump in Net Hydel Profit payments to provinces — from around Rs1.10 per unit to almost Rs5 per unit (kwh).
And the pattern will go on with average gas rates, oil prices and electricity costs. This emanates from the fact that there are no indications that a decline in transmission and distribution losses in the electricity and gas sector is on the horizon to take root in 12 months from now. Also, public sector entities have been struggling to sustain a higher recovery rate or inculcate efficiency patterns in the system.
Renewable producer tariffs have been falling drastically over the past few years and are forecast to maintain that trend. Having said that, the renewable market, particularly small hydro, wind and solar resources, in Pakistan is already hitting a road block.
For small hydro projects, the government has announced not to guarantee their power procurement, practically making them irrelevant going forward. For solar and wind, the government would hold competitive bidding with a cap of 400MW and 600MW respectively for the next year.
This is despite the fact that large power projects on imported fuels, particularly LNG and coal, would continue to be operated on ‘must-run’ basis to ensure their economic viability at the cost of foreign exchange.
That should in a sense be a critical point that will shift individual consumers towards self-reliance through alternate sources, and drive them away from the national grid as the price of storage equipment (batteries and cells) starts falling drastically in the international market.
With nominal increases forecast for global oil prices in near future, Qatar appears to be loosening its grip over the LNG market with major output originating from Australia and the US put together. That would also shift producer prices from traditional crude to significantly lower levels based on Henry-Hub dimensions.
The government would need to keep pace with changing LNG prices after having entered into long term supply contracts with Qatar, Gunvor and ENI at a higher base, owing to security of supply, and move towards creating a basket price to take advantage of the upcoming Australian and US supply influx.
On top of that, the price differential between domestically produced gas at about Rs600 per unit and imported price of LNG at Rs1,100-1,200 per unit would continue to cost heavily on the competitiveness of the manufacturing sector, not only with international competitors but also among those stationed in different provinces.
At the close of 2017, the PML-N government is estimated to have added around 6,000MW to the generation capacity since it came to power in 2013 and was able to deliver about 19,000MW to consumers in peak summer of 2017.
About 4,000MW of electricity generation is estimated will be added during 2018 with completion of three LNG projects of 1,200-1,300MW each (total 3,600MW) in Punjab besides the 1,400MW Tarbela fourth extension, 969MW Neelum-Jhelum Hydropower project and completion of Port Qasim Coal based project of 1,320MW among the major sources. The LNG projects at Balloki, Bhikki and Haveli Bahadurshah are currently running at half capacity.
On the other hand, the new year begins with completion of the second LNG processing terminal that puts total gas imports at 1.2 billion cubic feet per day (BCFD) against a decade long gap of about 2BCFD. In the oil sector, there is no major capacity addition lined up for 2018 except for laying of a pipeline for transportation of petroleum products to reduce reliance on road network.
Because of higher LNG imports, the dependence on furnace oil would come down significantly, from about 9.5 million tonnes per annum to somewhere between 6 -7 million tonnes during the year, down by almost 30pc.
That would mean furnace oil based generation, historically above 30pc of average power supply, would be partially replaced by relatively cheaper and efficient LNG based power generation, particularly with the commercial operations of three public sector run LNG projects in Punjab (having better fuel efficiency) to be followed by some smaller independent power producers.
With induction of almost 4,000MW during 2018, the power sector is poised to touch generation capacity of around 25,000MW to breakeven demand, without any spinning reserve to adjust for emergency breakdown, from less than 15,000MW about five years ago.
At the end of the year, the country would be entering an era of capacity trap unless the economy enters the much desired 7-8pc growth rate per annum.
Published in Dawn, The Business and Finance Weekly, January 1st, 2018