Self-created energy crises

06 Jul 2020

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Power generation on diesel is the most expensive followed by furnace oil–based generation at about Rs14-15 per unit.
Power generation on diesel is the most expensive followed by furnace oil–based generation at about Rs14-15 per unit.

THE government is still struggling to control the recent petrol crisis, which was preceded by a diesel shortage in March-April. The electricity shortage continues unabated amidst scorching heat in the country’s largest city. Power cuts are resurfacing across the rest of the country.

We had to shut down indigenous oil and gas fields to let refineries exhaust the stockpiles of their selective products. We banned petroleum imports to keep local refineries running and yet our storages were empty when the global oil prices hit the rock bottom. The nation failed to benefit from the historic oil price bonanza.

On top of that, the country had been importing maximum (over 1,200 million cubic feet per day) liquefied natural gas (LNG) in winter when its landed delivered costs went beyond $12 per million British thermal unit (mmBtu). Yet we were unable to import even half of this quantity when prices literally plunged below $2 per mmBtu in the international market.

Lo and behold, we lifted the ban on the import of expensive furnace oil by the private sector to meet electricity requirements and instead kept paying capacity charges to LNG terminals without utilising their full capacity while similar private firms were pleading to let them bring in cheaper and cleaner LNG for transport, power generation and even industry, including textiles.

Plants were asked to switch to diesel for electricity generation. At this point, we could have maximised LNG imports or normalised local production

As if that was not enough, the authorities even asked power plants to switch to diesel for electricity generation — the most expensive source — because of a gas shortage when stocks were insufficient for transport. At this point, we could have maximised LNG imports or normalised production from local fields. That’s happening at a time the government’s narrative revolves around the surplus capacity and resultant unaffordable capacity charges.

There were also days — weeks, in some cases — when major power plants dedicated for gas or LNG were providing base load generation on diesel as fuel involving a cost difference of Rs7-8 per unit on RLNG to Rs20-21 on diesel. It may be remembered that power generation on diesel is the most expensive followed by furnace oil–based generation at about Rs14-15 per unit.

In the meanwhile, natural gas and RLNG pressures dropped so low that linepack was not enough to let the industrial units operate because of limited import arrangements. The textile industry formally protested with the government for low gas pressure and the resultant loss of export orders.

This was because the domestic gas supply had been curtailed due to the non-lifting of crude oil, which is a necessary by-product of gas production. On the one hand, neither sufficient LNG imports were arranged nor the private sector was allowed to make up for the simultaneous decrease in domestic gas production.

On the other hand, the extra cost of power generation from diesel would be charged to consumers through the fuel price adjustment. This means the consumer will bear the burden of inefficiency through higher electricity costs as the country suffers owing to the export and balance-of-payment losses.

An immediate impact of it was the recent hike in the prices of petroleum products necessitated by the loss of domestic gas production to allow refineries to restart and not make a Rs20 loss on every litre produced. International petroleum product prices were way below the local cost of production for refineries, which are nonetheless paid international prices for production.

These are just a few glimpses of the disconnect in planning and economic energy modelling. Almost every element enumerated above involves losses worth billions of dollars in both domestic currency and foreign exchange.

More importantly, these decisions are not being taken in isolation by individuals new to these fields. All of them have spent decades precisely in these areas and without any exaggeration are the leading lights in respective fields. Moreover, they have specialised agencies like line ministries having experts of relevant fields, regulators like Nepra and Ogra and institutions like the Planning Commission to assist and advise on matters of national economic importance.

They are expected to benefit from each other’s specialised expertise before utilising collective wisdom at forums like the Cabinet Committee on Energy, Economic Coordination Committee and the cabinet itself. Yet the energy sector is completely lost owing to a lack of planning foresight and coordination within the power and petroleum divisions.

Interestingly, the creation of the Ministry of Energy with the merger of petroleum and power ministries had remained one of the key common features of the manifestoes of almost all political parties. Yet when the Ministry of Energy came into being, petroleum and power divisions appeared more fragmented. They are run by two federal secretaries. They are led by two special assistants to the prime minister (SAPMs) even though on top is a common federal minister for energy.

More interestingly, additional secretaries dealing with policy matters in both ministries take direct signals from the secretary to the prime minister rather than following policy and administrative line of action from their secretaries or SAPMs and have the guts to defy their immediate bosses on major issues. In the middle of a petrol and diesel shortage, the focus was more on controlling the board of directors of oil and gas companies.

Published in Dawn, The Business and Finance Weekly, July 6th, 2020