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Trap of surplus power capacity

February 19, 2018

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AS the government procrastinates to make public bankable studies on the energy demand and supply, the debate continues if the nation may be entering a ‘capacity trap’ followed by another cycle of shortages few years down the road.

That path appears well known in Pakistan. After successful implementing the upfront tariff-based energy policy in 1994, the then PPP government contracted thousands of additional capacity that not only overcame serious shortages but also appeared to create a capacity trap.

The following PML-N government cracked the whip on surplus capacity, launching a campaign against investors for alleged corruption and kickbacks in securing unjustified contracts to stagger upcoming capacity after botched attempts for power exports to India.

The following 1997 policy for hydropower projects offered on paper an upfront tariff of 4.7 US cents per unit to make good use of lean period to develop long-gestation renewable projects against thermal tariff of 5.9 to 6.5 cents per unit. But intoxicated by surplus capacity at the time, the Wapda management declined to abide by the sovereign policy of the state and offered a tariff of 3.3 cents per unit to move forward.

Around a dozen private investors from South Korea to the United States attracted by 4.7 cents upfront tariff left Pakistan after wasting their time and money in preparing feasibility studies. One among them agreed to go ahead with a tariff of 3.3 cents and ended up revising it to about nine cents per unit when it signed the final agreement in 2009 on financial close. The 84-megawatt project near Mangla Dam was later sold to Hub Power Company Limited before commercial operations in 2013.

The government concedes around 3,400MW of surplus capacity, but claims it can close down old public sector plants and phase out furnace oil-based private plants to evade the trap

Between 1998 and 2013, successive governments struggled to attract a prominent investor to the power sector because of the investor witch-hunt after the 1994 policy despite the fact that shortages starting to return soon after 2000.

In fact, Wapda proposed two projects at Chichoki Mallian and Nandipur (both in Punjab and having a total capacity of 1,000MW) for completion in 2004-05 to meet shortages. Chichoki Mallian never materialised while Nandipur came into being only a year ago amid much fanfare.

Wapda and the Private Power and Infrastructure Board — a one-window operation for the power sector — offered a number of projects between 2002 and 2013 for bidding but failed except for a few controversial rental power projects. They repeatedly wrote papers to policymakers to inform them that top-quality investors had shied away and only a package deal on a government-to-government basis could secure second-class investors.

That finally delivered, but after two decades of economic loss. Now we again appear to have overcome shortage, and the government expects there will be no load-shedding in the coming summer. It concedes around 3,400MW of surplus capacity but claims it could close down old public sector plants and phase out furnace oil-based private plants to evade capacity trap.

The prime minister claims that the government has not only eliminated load-shedding, but hopes that the country will not face power shortages until 2030.

Meanwhile, the government has again blocked renewable projects when many of them were seeking formal agreements after having achieved significant progress and spent time, money and energy.

Professionals at public sector entities had almost reached a consensus in May last year that enough capacity had been contracted and there should be a slow paddle on imported fuel-based plants to minimise foreign exchange loss. They forecast a maximum demand of 40,000MW for 2025 based on a GDP growth of 7.2 per cent and hope the proposed staggered capacity will meet that target.

A ban on imported fuel-based projects crossed lines with powerful investors and embedded politicians. The officials were shown the door to accommodate blue-eyed investors.

In fact, the National Transmission and Despatch Company (NTDC) insisted that the country will not need more than 35,000MW by 2025 in case of a low GDP growth (below 6.5pc in the short run) and 40,000MW assuming 7.2pc growth after 2018. Mr Smith forecast a power demand of 37,000MW for 2025 based on all conservative and high growth projections.

During all this debate, the only missing link has been a lack of an integrated energy system planning.

On the other hand, the private sector is nervous that the government at times appeared over-indulging and others complacent in future planning. The Overseas Investors Chambers of Commerce and Industry (OICCI) — a group of 191 multinationals across 14 sectors of the economy — expects almost 70pc growth in Pakistan’s energy consumption in 10 years, which is in line with above projections.

In recent engagements with the government the OICCI has sought broad-based reforms to shift the focus from imported energy sources towards indigenisation.

It feared that pending the commissioning of Thar coal and long gestation hydropower projects, additional power generation will continue to be based on imported coal and LNG which together with high system losses was going to keep the issue of circular debt and high energy costs alive for years to come.

Published in Dawn, The Business and Finance Weekly, February 19th, 2018