ON February 24, the government announced a 10 per cent increase in electricity tariff. This was unavoidable in view of Water and Power Development Authority’s (Wapda) current cash shortfall of over Rs80 billion and the government's inability to extend huge subsidy any further.

It is hard for consumers to digest the current tariff increase at a juncture when prices of oil in international market are declining and the government, on the same day, has reduced prices for natural gas. The two fuels are currently used for thermal power generation, which accounts for 67 per cent of the total Wapda system and almost 100 per cent of the Karachi Electric Supply Corporation) (KESC) system.

Wapda will be benefited financially manifold, in terms of higher tariff, lower generation cost and reduced price for power purchase from the Independent Power Producers (IPPs). The fuel, a major component of the tariff is a pass-through item and requires tariff readjustment, whereas the government has reduced gas price by 10 per cent for power generation effective February 1.

However, the decision to increase electricity cost will have far-reaching implications on economic and industrial activities which may affect the projected 8-10 per cent growth rate and thus reduce demand for electricity in future, revisiting power policy of yesteryears.

As the installed power capacity could be surplus, mostly of the new IPPs, it would result in multiplier increase in electricity rates in coming years, since the IPPs will continue to charge part of the "capacity price" as per agreement. At the same time, the measure will not provide any relief to consumers who would continue to brace power outages and shortages, whether called load-shedding or load management, or simply unscheduled maintenance.

Today, total installed capacity for power generation is 20,456 MW, excluding that of captive power plants, whereas de-rated/dependable power generation works out to be nearly of 18,800 MW capacity. In relation, total peak demand at national level is not exceeding 15,300 MW (during summer season). Thus, at present, there is no shortage of power, even after taking into account thefts and technical line losses.

Yet there are factors impacting smooth, uninterrupted and stable supply to the consumers, primarily in major cities. These include limited supply of natural gas, logistic constraints for oil transportation, availability of water in case of hydro power, operational bottlenecks, major shut-downs, outdated transmission/distribution network, management problems and alike, not to mention repercussions of privatisation process of utility companies.

Strengthening and widening of electricity transmission and distribution systems is of prime importance, which remain the sole responsibility of Wapda (excluding KESC system).

A major revamping, modernization and expansion of Wapda's existing transmission and distribution network is currently being undertaken, ensuring dispersal of additional power generated in near future. Asian Development Bank (ADB) has extended a loan amounting to $800 million to be utilised for completion of transmission/distribution schemes undertaken during 2007-2016.

The power scenario of Karachi is complex and different from the rest of the country. The demand for electricity in the metropolis is growing at a fast pace but there seems to be no respite to the residents in near future due to a number of factors.

First, KESC's transmission and distribution system is not capable of taking any additional load, and the company has not shown so far any keenness to invest in rehabilitation and strengthening the network. Second, KESC has failed to achieve any progress on implementation of its generation capacity expansion plan announced last summer, so as to balance the demand and supply position.

The privatised KESC has refused to purchase electricity from the two gas-based IPP projectsd to be located in Karachi that were originally scheduled to start operations by 2007. These are Tapal Group's Western Electric Power and Fauji Foundation's Fauji Korangi Power, each of 150 MW capacity, which are being relocated elsewhere in Sindh aiming now to supply power to Wapda.

In the process, the projects would be delayed for more than three years, the tariff will be much higher than envisaged and the allocated natural gas would not be utilised for power generation during this period.

It suits KESC well to continue to "import" electricity from Wapda which is cheaper compared to the IPPs, and obtained on "long-term credit", thus fully exploiting the Karachi power situation, particularly during peak load of summer time.

Currently, KESC owes a hefty sum of Rs13 billion to Wapda since its change of ownership, and there appears to be no possibility of KESC clearing its dues soon.

Under the circumstances, Wapda will be obliged to sell 600 MW electricity to KESC in near future, while Wapda itself will continue to import power from Iran to meet Balochistan's power requirements.

Demand-supply projections suggest that under the present conditions, there would be power shortage of 1,300 MW by the year 2008. To meet the challenge, the government has adopted a three-pronged strategy. First, efforts are being made to remove irritants to enable the new IPPs to start construction of the respective projects without delay. Second, Wapda has been asked to put up two thermal power plants urgently, on rental basis. Third, fast track projects have been allowed, based on new and used/refurbished equipment, primarily on reciprocating (diesel) engine technology.

Against the projected additional demand of 1,300 MW, the IPPs alone, of cumulative capacity of 2,730 MW, are scheduled to come on stream by the last quarter of 2008/first quarter of 2009. Orient Power, the first project being implemented under the Power Policy 2002, has achieved financial close in December 2006 and construction at site is in progress. The 225-MW capacity dual-fuel project, using pipeline quality natural gas for 9-months period, is being located at Balloki, Punjab, and is scheduled to be operational by October 2008.

Hallmore' s Bhikki Power project of 225 MW capacity, based on dual-fuel combined cycle technology, has achieved financial close in February 2007, and the project will be operational by December 2008. The other two projects scheduled to achieve commercial operation by December 2008 are Sapphire Group's Power project of 225 MW capacity at Muridke to be operated on natural gas and Warda Power's 200 MW oil-based project near Lahore. Projects' sponsors are in advanced stage of securing financial close, prior to commencing the construction activities.

Saifullah Group of companies is setting up Saif Power project of 225 MW capacity at Sahiwal. The sponsors have signed the security package documents and now expect to achieve financial close sometime in March 2007. The dispersal of power from the plant to the Wapda transmission system is scheduled by March 2009, for which power sale/purchase agreement has been concluded in January this year. The plant will operate on natural gas, using oil as alternate fuel and employing gas turbine technology.

Originally, the power policy not only encouraged the use of indigenous energy resources, such as gas, coal, waterpower and wind-power, it also prohibited setting up any furnace oil/HSD-based projects, primarily for reasons of higher operating cost and heavy dependence on imports. Realising the emergent need to bring power projects on stream, the government has relaxed this condition, promoting a limited number of oil-based projects on diesel engine technology having short gestation period compared to gas turbine technology.

AttockGen Power of 150 MW capacity is the pioneering oil-based project being implemented under the policy, though its fuel will still be an indigenous resource. To be established within the premises of Attock Refinery Ltd at Morgah, Rawalpindi, the Attock Group of companies has sponsored the project. Though expected to achieve financial close by June 2007, it would be the first project under the policy to generate and sell electricity, by August 2008.

The strategic decision of the government to invite the existing IPPs for capacity expansion will pay dividend, as fast track projects of another 400 MW will be operational by March 2009. Likewise, businessmen have agreed, responding to an initiative taken by Prime Minister Shaukat Aziz, to establish green-field power plants of a total capacity of 600 MW, which are scheduled to achieve the commercial operation date (COD) by March 2009. A number of amendments in the policy were thus made by the ECC of the Cabinet, extending additional fiscal and financial benefits to prospective investors.

Not being certain about sponsors' continued seriousness to put up e power projects within the agreed timeframe, the government has also allowed many fast-track projects based on second-hand or refurbished equipment, to take care of slippage of planned projects. These include 179-MW Gulf Power at Sahuwala, Taiyo Hills at Lahore and Glimmer at Pasrur, both of 150 MW capacity each. The regulatory authority, Nepra, has already determined electricity tariff for these projects. These oil-based projects on diesel-engine technology will achieve the COD by October 2008.

The public sector has not lagged behind in contributing towards augmenting power generation capacity, as power projects of a cumulative capacity of about 1,000 MW will be on stream by end 2008 and others of a total of 450 MW capacity by the year 2009. Wapda's two thermal power plants acquired on rental basis for three years will be operational by April/May 2007. The 150-MW rental plant at Lahore is under trial, while the other of 136 MW capacity to be located at Bhikki is on high seas. Also, a 400-MW capacity combined cycle power plant is being established by Wapda at Chichoki Mallian, District Sheikhupura targeted to produce electricity by September 2008.

Wapda is undertaking expeditious completion of its on-going hydro power projects, namely Duber Khwar, Allai Khwar and Khan Khwar, of an aggregate capacity of 400 MW or so. Likewise, Malakand-III hydropower project of 81 MW capacity, being constructed by the NWFP government, is nearing completion and will generate power by January 2008. Another 325 MW capacity nuclear power project will take-off by the end of this year, while wind-farm power generation units of at least 100 MW capacity will be operational soon.