Pakistan Business Council Shares Solutions for The Power Sector

Market-determined exchange rates, revisions in the price of petrol and diesel, and increases in energy tariffs are being implemented belatedly and jacking up inflation to record levels.

According to the Pakistan Business Council’s “Minimum Consensus on Key Economic Reforms” report, Pakistan suffers from the highest electricity costs in the region. By penalizing industrial consumers with the cost of inefficiencies and theft, their competitiveness and capacity to create employment and generate exports are impeded.

Whilst five export sectors are provided power at rates competitive with comparable countries, the rest of industry, including import substitution sectors and many SMEs, in the value-chain but not direct exporters, continue to be impacted. High tariffs for electricity also reduce the incentive for domestic users to switch out of the less efficient but underpriced gas, reserves of which are depleting rapidly.

Tariffs for industry and commerce are also encumbered by cross-subsidies to residential and lifeline users. To make matters worse, there is substantial reliance on imported fuel, the transmission system is inadequate to maximize the use of indigenous fuel, and is there a rail link to transport coal from Thar. The grid is also fragile and in need of investment.

The salient effects of a sub-optimal power sector on the economy are:

  • High import reliance – $6 billion of the $26 billion annual imports of fuel are for power;
  • Circular debt stands at Rs. 2.3 trillion;
  • T&D losses at 17.5 percent amount to Rs. 528 billion per annum, of which Rs. 165 billion is above the NEPRA allowance;
  • Theft and under-recovery are estimated at Rs. 178 billion per annum;
  • The industrial tariff in 2021 of 16.5$c/KWh was 85 percent higher than Bangladesh’s at 8.9$c/KWh;
  • Cross subsidies in the industrial tariff amount to about Rs. 3/KWh or 10 percent of the rate;
  • We heat (and cook) with gas, supplies of which are dwindling, and cool with electricity, for which there is unutilized capacity;
  • Demand forecasting is poor – 48 percent of capacity unutilized in 2022;
  • Thar with substantial coal reserves is yet to be fully exploited. The rail link with plants reliant on imported coal needs to be built;
  • Focus on the energy efficiency of appliances and buildings is poor and conservation measures are weak.

The PBC report says the objective of reforms is to reduce import reliance on fuel, make power more competitive by addressing the inefficiencies in transmission and distribution and make transmission more stable and reliable.

Opportunities in the immediate term
  • Conserve consumption through penal pricing of power on a time-of-use basis in peak hours
  • Given the pressing need to preserve the depleting Fx reserves, enhance reliance on indigenous fuel (Thar coal), hydel, solar, wind, and nuclear. A complete switch away from imported fuel at the current consumption rate could save $4.7 billion annually but entail an average of 8 hours of daily power shutdowns
  • Complete the transmission line for Thar Block 1 on a war footing basis. In the absence of this line, total evacuation from Thar is
    restricted to 1,600-1,800MW versus the available capacity of 2,400 MW. This will enable additional cheap electricity from
    indigenous resources.
Opportunities in the medium-to-longer term
  • Federal government to restrict its role to removing bottlenecks in power transmission infrastructure and to ensure that the merit order in a generation is maintained;
  • Exploit the full potential of Thar coal mines, build rail connections, initially blend and ultimately replace imported coal with Thar coal. This requires an investment of $2.2 billion (Mine $1.5 billion; Rail link $449 million and conversion from Imported to Thar coal $500 million) and would yield annual savings of $0.9 billion per annum. As work on Thar started sometime back, it may be possible to convince the Chinese government to treat this as an ongoing project;
  • Government to explore converting $12 billion commercial loans under CPEC to longer tenor, concessional cost G2G loans
  • Any properly justified new capacity addition only be allowed on indigenous coal (if available) and renewables;
  • Restore investor confidence by following all GoP commitments to investors in true spirit including tariff regime and MOU terms reached with IPPs;
  • Utilize excess generation capacity through marginal pricing to promote industrial use;
  • Enhance solar and wind power in line with the availability of baseload and Fx;
  • Upgrade the transmission system post which reliance on expensive RFO & HSD plants will decline to allow them to be phased out. This will also make the power supply more stable and reliable;
  • Transfer management of government-owned GENCOS not due for retirement to technically qualified private sector companies
    on reward terms linked to performance improvement reward arrangements or through privatization. Facilitate this through
    adequate protection from NAB and build appropriate safeguards on asset stripping and forced the dismissal of employees. Retire all inefficient and costly generation plants;
  • Transfer responsibility to fund T&D losses closest to the point of consumption – provinces, cities, and local bodies, which may engage the private sector on a loss mitigation reward basis;
  • Move to multi-seller/multi-buyer arrangements, allowing market dynamics to set the price for both generation and distribution of electricity;
  • Phase out country-wide uniform pricing so that the more efficient DISCOs are able to supply at a lower cost to consumers and enable provinces to use this to attract industry;
  • Remove all “cross-subsidies” e.g., from industrial/commercial to residential customers – The government can provide targeted cash transfers to lifeline customers via the Ehsaas program;
  • Without sovereign guarantees, fast-track additional LNG terminals, storage, and transmission to meet the shortfall between the demand and supply of gas;
  • Consider consolidating the electricity and gas regulators for a holistic regulatory environment;
  • Revise the tariff for indigenous gas to stem misuse. Incentivize conversion of domestic cooking and heating from gas to electricity and promote energy-efficient buildings;
  • Phase the switch of captive generators to the grid in line with the improvement in reliability of supply and without disrupting their operational feasibility. Potential saving of $0.5 billion per annum.

The PBC says things like market-determined exchange rates, revisions in the price of petrol and diesel, and increases in energy tariffs are being implemented belatedly and which caused inflation in January to clock in at 27.6 percent, the highest in 47 years. This will push more into poverty, cause more lay-offs by businesses affected by import restrictions, and “will threaten street agitation” if political parties don’t put the country over party interests and resolve to fix the economy.

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