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Khyber Pakhtunkhwa Energy Sector – A Primer

The energy sector of Khyber Pakhtunkhwa is centered around the development and operations of Hydro Power projects. With most IPPs in Pakistan located in Punjab and Sindh due to port and logistic access, KP has an abundance of hydel resources with an aggregated capacity of 30,000 MW. To facilitate public and private sector investment in the sector, the Sarhad Hydel Development Organization was inaugurated by the government, which was later renamed as the Provincial Electricity Development Organization (PEDO) in 2014 to act as an investment arm for power development projects. KP has also shown the most promise on the upstream exploration. Post-18th amendment, GoKP established Khyber Pakhtunkhwa Oil & Gas Company Limited (KPOGCL) with the mandate of commissioning oil and gas upstream activities and ensuring private sector participation and investment in the E&P industry. The energy sector in the KP is fourth in contribution to KP’s economy after services, agriculture, and industry sector and contributes roughly 7-8% of provincial GDP. It also retains the potential to be a provider of future FDI in the province and employment opportunities to vastly remote rural areas of the region. Overall, the energy sector in the KP contributes to 11 percent in the employment rate of the province. Renewable energy has become an emerging sector with most of the employment taking place in trades related to micro hydel energy trades in Swat and Chitral, which have high potential for the production of cheap electricity through micro hydel power plants. In terms of RE, solar holds the second most potential besides hydel. The prolonged and unresolved power shortage in the country, particularly in the rural area of KP and FATA, has given a surge to solar energy deployment and has the potential to ramp up off-take.

Besides community hydel projects, the GoKP has shown interest in the mobilization of large and medium-sized hydel projects. It has adopted the federal Alternative and Renewable Energy Policy 2006 for all renewable energy projects except hydropower. For hydropower potential, the PEDO has issued the Khyber Pakhtunkhwa Hydropower Policy 2016. The provincial government has developed a ten-year action plan to develop hydropower projects in the province through public funds and private-sector investments. There are differences between the rural policy and the federal policy of 2006. The latter assigns grid interconnection responsibility to NTDC while the provincial rural requires the project developer to construct the transmission line and embed the tariff’s cost. The strategy envisaged a mix of public spending, corporate funding, and public-private partnership to mobilize investments.

Additionally, the large projects, such as SK Hydro, Azad Pattan, and Chakothi Hattian have seen private sector engagement with installed capacities of 870 MW, 640 MW, and 500 MW respectively, primarily with the aid of Chinese investments. Nonetheless, issues persist that hinder the growth and investments in the energy sector. High transmission and distribution losses in PESCO / TESCO circles and weak operational structures have spiralled the power sector under high technical and commercial losses. Additionally, the monopolistic structure of the electricity market alongside high inefficiencies means that there is little incentive for the private sector to mobilize investments on its own. Also, sub-standard customer service, along with red tape, make it a challenging industry to attract private investments.

Some issues persist in renewable energy and oil and gas sectors also. For large and medium hydel, PEDO has demonstrated little capacity to initiate, design, and close projects. Overall, technical capabilities remain weak and require strengthening. Other challenges also abound. For instance, to reach full capacity, PEDO needs to initiate detailed designs and feasibilities on the Chitral river. Further, extensive delays have been observed in project management such as the due implementation of hydro projects which leads to increased costs on both financial and economic fronts, a case in point is that in PEDOs 40 years history, it has only been able to install 120 MW of public sector projects). On the hydrocarbons front, the GoKP needs to liaise with federal agencies to improve the regulatory framework to incentivize exploration. If streamlined, such processes can greatly simplify due diligence and compliance procedures and facilitate investment opportunities by local and international E&P firms. A technology-driven approach also needs to be part of the new hydrocarbon strategy, such as availability of hydrocarbons prospects and seismic data to investors who can access data through secure online platforms. Additionally, seismic studies need to be carried out for unexplored areas to improve upon hydrocarbon prospectivity data. On energy efficiency, there appears to be a lack of a coherent strategy to foster energy efficiency and conservation efforts. There is a need to improve upon a transaction off-take model that can facilitate energy efficiency investments, such as a guarantee fund through first loss guarantees in coordination with IFIs, Pakistan Credit Guarantee Company, lenders etc. Moreover, capacity building through education and training remains a major bottleneck along with compliance, following the enactment of national EEC laws.

To counter the issues, present and further enrich the business environment in the KP province, GOVERNMENT has been presented with specific entry points for their intervention that can streamline the process. This process then, in turn, could speed up the projects that are in the pipeline in different energy streams and ultimately bring in more projects that could catalyse the economic development in the province. For instance, there exists an opportunity in the ARE policy 2020 to auction new RE projects on a competitive bidding process. This would require capacity building at PEDO to incorporate changes that would be introduced in the ARE policy 2020. PEDO would also need to deepen its’ understanding of the transaction design and implementation process, including project management, evaluation of technical and financial feasibilities and risk-return parameters. GOVERNMENT could also help in providing transaction support in preparing and evaluating concessions under the tripartite agreement, which can be done by deploying specific consultants specialized in the domain. Support around specific transactions could assist PEDO in procuring the right concessionaires for new hydel projects and build capacities for future purchases. In turn, this will improve GoKP’s ability to invite financially and technically sound concessionaires to ensure projects continuity over its’ proposed life, hence realizing Value for Money (VFM) for the government. It is suggested that GOVERNMENT deploys specislized transaction consultants to assist PEDO and help them in designing the optimal framework.

One of the most significant ways that Government can help GoKP is to build upon the wheeling regulations and coordinate a market between generators (publicly owned, such as PEDO) and Bulk Power Consumers (BPC) for industrial off-take of power. Some projects can be facilitated for wheeling such as Malakand HPP (81MW) that can be offered to industries through strike price (which would still be substantially lower than what they are paying to CPPA(G)). If these projects are successfully executed, they can pave the potential for a homegrown, competitive power model for GoKP, realizing efficiencies for the entire province. Government can facilitate such transactions under wheeling arrangements. It can build upon projects for a competitive market off-take that would consequently reduce their reliance on federal institutions while augmenting revenues for the province through indigenous hydel development offerings. Also, GoKP can coordinate for the establishment of a new transmission company. Under the NEPRA Act amendment, provincial governments can now set up their own provincial transmission companies, such as the one established in Sindh called the Sindh Transmission and Dispatch Company (STDC). With the setting up of this company, GoKP can evacuate power by relying on its agency (instead of NTDC) while promoting projects under both public and private sector. At the same time, maintaining a viable transaction structure and bid security package would allow investors to utilize the opportunity (most likely under a tripartite arrangement).

Another entry point suggested in this report is around waste to energy. There is a strong political will to execute waste to energy projects, and they have the potential to bring about a socio-economic revolution in KP. Further, such projects have a strong link with climate change, are capable of generating employment opportunities, and can directly impact health improvement indicators and sub-surface water. With rapid urbanization in Peshawar and Mardan, one of the most daunting issues is the mounting waste problem that affects public health, pollutes the environment, and threatens to drown some poverty-stricken areas in toxicity. It is estimated that solid waste is growing in Peshawar and the adjacent regions at an annual rate of 2.4%. GoKP can carry out specific pre-feasibility studies, identifying densely polluted areas in major cities and targeting an optimal point that would be suitable to place a waste to energy plant that could benefit the population. Additionally, a Model Concession Agreement (MCA) and a bid security package for a transaction that could be implemented in the Public-Private Partnership (PPP) domain could start from a pilot transaction and if successful, can be replicated throughout with more substantial stimulus. This exercise could involve several stakeholders such as the Ministry of Climate Change, Global Environment Facility (GEF) for assistance on financial and technical fronts.

Another area that GoKP can target is the completion of feasibility analysis of the Chitral River that is a conglomeration of around 36 tributaries originating from the same number of separated valleys in the district. It is the largest river in KP, but the capacity for hydraulic power generation remains severely limited. To be fully implemented, site and feasibility assessments of projects need to be undertaken. GoKP can help prepare transaction opportunities and a transaction structure for possible locations in the Chitral River. The transaction opportunities include developing a well-defined pre-feasibility study in the area and identifying key factors that could help in harnessing energy. Adding on to the site surveys, GoKP can help the government formulate models and analysis on the Chitral River and the surrounding area through preliminary designs in the first stage, leading to detailed plans. Consequently, legal and financial feasibilities could be firmed up in case investors are interested in specific sites and locations.

For KP’s energy growth, there is a clear need for a well-coordinated demand-side management strategy that can help take prudent supply-side decisions and related infrastructure. With the demand for intersectional developments, such as transmission and grid investment, the need for a cohesive strategy becomes much more significant. To KP, this exercise will mean better preparation, evident not only at the provincial level but also with the federation for a successful evacuation, tariff, and regulatory regime. GoKP can conduct a comprehensive, long-term (10-year) energy demand-side assessment of KP, identifying which sectors are expected to consume energy (such as tourism, hospitality, marble, SEZs, transport).  Furthermore, a calculation of how much could be saved from energy efficiency and conservation, and how much new generation stimulus would be needed. A holistic plan that balances supply-demand scenarios for KP would optimize public sector finances without imposing excessive direct and contingent liabilities. Moreover, capacity building to create awareness regarding the demand side management poses another entry point. Educating the masses about the EEC laws and projects’ adherence to these laws is also required.

As identified, for hydrocarbons off-take, GoKP can be best positioned to organize regulatory dialogues that can best present interests for KP in liaison with the federal agencies. Enhancing the capacity of DGPC / provincial government and making existing regulations more investor-friendly through quick, compliance-based decisions and in line with international standards is a priority. This can be achieved on an on-going basis to ensure that regional priorities are well-matched with federal legislation. There is a need to have a sound regulatory and policy framework to improve the existing investment framework. The policy and organisational context will eventually drive the demand for GoKP to bolster the capacity to address longer-term structural challenges while responding to immediate-term priorities. Also, a sound regulatory structure will provide for more equitable, evidence-informed policymaking, and lead to effective, value-based governance that engages stakeholders in the policymaking process inclusively and openly. Moreover, GOVERNMENT can also facilitate discussions on the unbundling of natural gas, lead discussions forward and devise a framework that can pave the way for operational and institutional efficiencies, which would enable both federal and GoKP to design a new competitive and operationally efficient landscape.

GoKP can also work on fostering energy efficiency transactions, especially in industrial and building sector. There are two impediments generally faced for industrial and building energy efficiency financing; i) high transaction costs and ii) performance risk. GoKP can play an active role in the development of a framework that can overcome both the impediments to catalyze a road to success. For instance, the provincial energy department can attempt a few pilot projects by overcoming the disproportionately high transaction costs that the transactions face. To address this barrier, GoKP can work with financial institutions, such as lenders, IFIs, Pakistan Credit Guarantee Company Limited in making energy improvements easier for KP energy consumers, and to develop low-risk and cost-effective energy efficiency measure packages that can achieve up to 20% energy savings for one specific small industrial unit. The team can choose to focus the pilot project efforts on small commercial office buildings with GOVERNMENT providing transaction support, allowing building owners who meet a specified criterion to obtain funding with minimal paperwork and without lengthy bureaucratic processes.

Lastly, there are positive energy nexuses that can accrue from various interventions that GoKP can capitalize. For instance, one of the fundamental challenges that KP faces is meeting the growing demand for food, water, and energy for a rapidly growing population. First, GoKP can focus on providing 30MW power to the Chashma Right Bank Lift Canal Project, which has been approved by the Executive Committee of the National Economic Council to irrigate approximately 286,140 acres of land in the southern districts of the province. If executed, this can free up space and provide an area for plantation of the crops that could mitigate the provincial government’s burden to import food and declare self-sustenance. This along would be a milestone and can result in significant improvement in food security, climate change mitigation efforts, and employment opportunities to the indigenous population of the province. Second, GoKP can also plan and execute transaction design for a potential HPP near the Tang on the Tochi river, which can boost the energy required for the surrounding areas, i.e., North Waziristan in the north and D.I Khan in the south. If executed, this would catalyse the development pathway in the NMD areas – providing them with cheap and affordable electricity for economic and social upliftment.

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Battery Series: What policy makers need to know about batteries?

The most significant source of anthropogenic emissions accounting towards climate change includes transport and power sector. However, we do have a technological solution for both the sectors that include the deployment of renewable energy technologies (with storage) and electric vehicles. As with any other technologies, the mass proliferation of these solutions revolves around the economics of both technologies. Subsequently, the central pain point/barrier for a mass mobilization of these technologies is batteries. That is why it is also termed as Holy Grail for reducing greenhouse gas emissions. For RE, batteries can provide storage to counterbalance the intermittent nature of wind and solar technologies while EVs essentially depend upon battery’s capacity/weight/volume to overcome the technological/financial barriers leading to make them more cost-effective option when compared to conventionally fueled vehicles. Improved battery technology can help reshape the transport and energy industries that contributes most to emissions.

The battery technology has many complexities as the best solution is dependent on the application and use case. A battery having a higher capacity that could provide 1000 miles range may not be a suitable if it offers subpar power, let’s say to top speed of 20 km/h. Similarly, a battery with higher power that could power a truck to top speed of 100 km/h may not be suitable due to limited range it may provide, like 10 miles. Therefore, it is necessary to understand the dynamics of battery technology to find optimum solution depending upon the use case. Additionally, specific power and capacity per unit volume and weight is also an essential factor in deciding the optimum battery for usage.

On upstream side of manufacturing, battery technology is continuously evolving, starting off from one-time use (nickel-cadmium batteries) to rechargeable high capcity lithium ion batteries. Lithium-ion batteries currently have the highest energy and power densities among commercially available alternative battery chemistries, which is why they’re in all of our cell phones and other portable devices. They can store a large amount of energy and deliver it quickly.  However, the primary barrier to vast adoption of batteries is the cost barrier, that is majorly defined by the type of materials used in batteries. For usual lithium ion batteries, the anode (positive electrode of battery) is comprised of graphite which is a relatively cheaper material. On the other hand, cathode (negative electrode of material) differs from battery to battery but mainly consist of LiCoO2 or LiMn2O4 in commercially available. Other elements are also present in traces amount. Cobalt is the expensive material that drives the economics of the batteries. This seemingly basic technical information is necessary for the decision makers to understand that if they would want to kick start the manufacturing of batteries, cobalt would be the significant pain staking point. So, addressing that issue can drive the economics of manufacturing batteries locally. According to World Economic Forum the increase demand of batteries by 2030 will result in four folds increment in cobalt demand. It should also be kept in mind that battery technologies are continuously evolving, and significant breakthroughs are achieved every decade or even on yearly basis. For instance, TESLA on battery day announced that they have developed a cobalt-free battery which may change the dynamics of battery manufacturing altogether. Lithium Nickle battery technology is also offering increased capacity for batteries but is accompanied by safety issues and therefore not yet widely available on commercial scale. Additionally, Lithium Sulfur and Lithium Air batteries also offer more than twice the capacity compared to current Lithium Cobalt batteries. However, the major challenge is the insufficient life cycle, high self-discharge, and low efficiency.

The decision makers need to have sound understanding of battery technologies to come up with a customized framework that could build nexus among different kind of battery technologies based on use cases. Following matrix could help decision makers to get relevant input that could essentially help them in coming up with most optimized solution on policy level with least programmable/technological risk.

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Way to the Future Structure of DISCOs

A legitimate question that every organisation or entity asks itself is how is its performance along a set of pre-defined KPIs (Key Performance Indicators). If it is not of an acceptable standard it first looks for the underlying reasons that are the cause of the low performance. The next step is to take the necessary corrective actions and then monitor the results of such actions over a stipulated period of time. If there is still no improvement in the performance indicators, it once again goes back to the first step of identifying the reasons followed by corrective measures; and the cycle continues. In the context of Pakistani DISCOs, has such an iterative thinking process taken place? If it has, was it at the level of the DISCOs themselves or at least with their active participation? Even if the answer to the first question is in the affirmative, the answer to the second question would most likely be in the negative.

It appears that it has been decided at the government level that the way to fix the problem of high indebtedness and bringing about a general improvement in Pakistan’s power sector is by reorganizing the DISCOs’ structure. Specifically, it is being proposed that each DISCO should be bifurcated into two independent entities – one responsible for technical/engineering aspects and the other for managing the financial matters. It would be advisable that the decision-makers step back and reassess the pros and cons of this approach. What is needed is an in-depth thinking and analysis aimed at ascertaining the reasons of these inefficiencies – let’s call it diagnostics study. Afterall, for the medicine to work and act as a cure the underlying causes of the disease should be first determined. It is highly plausible that a deeper thinking will give rise to additional options that are more viable and would help achieve better outcomes.

The first question to ask is whether there is one medicine for all, i.e. should all the DISCOs undergo the same change of structure. For example, is the proposed bifurcation into two entities – Wire and Commercial – an equally applicable solution for all DISCOs? Before answering this question, consider, for example, that FESCO has T&D losses (11%) and revenue loss (1%) in contrast to PESCO where these are (38%) and (12%), respectively. These are two extreme ends of the spectrum which illustrate the point; Other DISCOs fall somewhere in between them and require varying remedies to increase their effectiveness. As the new energy landscape takes shape, distributed generation based on solar systems is expected to take a centre-stage in the growth of electricity production. Not all the DISCOs are at the same stage of development of the Net-Metering systems in their respective constituencies. Therefore, each will need to evolve into an organization that promotes this business according to its own specific situation.

The second point to ponder is whether the division into separate entities will result in more cohesion and smoother overall working of the DISCOs. On the contrary, it is more likely that the resulting entities would be operating in “Silos” with little communication among them. As a result, instead of an improvement in their operations, exactly the opposite is likely to happen. Just imagine the situation that the revenue collecting entity decides that a certain consumer should be disconnected due to non-payment of bills. It would have to advise and depend on action by the technical entity to physically disconnect the customer. Now, it is quite possible that the consumer has an on-going complaint with the technical entity, e.g. there is a pending complaint about a defective meter or increase in approved load, etc. Under this scenario, the resolution of such a situation and achieving of a timely corrective measure within a reasonable time-frame is outside the realm of possibility.

Thirdly, considering that the eventual goal is the privatization of DISCOs, on which there appears to be a consensus on all sides of the political divide, would it be easier to achieve this objective by putting the wire business on the bidding block, separate from the commercial business. More likely than not, because the new owner would not be interested in a business whose operations have been constrained due to the need for a close day-to-day working relationship with the counter-party. Not only that, but in order for a business to be attractive to own by the private sector, it should be of a fairly large size in order to make economic sense. A larger business that combines all the T&D operations would also attract more experienced and versatile set of companies that will add good value for the sustainable growth of a DISCO.

Fourthly, any restructuring of DISCOs should take into account how they will evolve out of legacy systems as they are still tied with an umbilical cord with WAPDA. The provident fund and pension systems of DISCOs’ staff continue to reside in WAPDA although it is more than 15 years since they became independent commercial entities. Further, the insurance of assets is still being managed by WAPDA and DISCOs can only get the insurance from NIC and competitive environment is discouraged. To make yet more spinoffs from the existing organizational arrangement of DISCOs will require a careful handling due to the human resource linkages with the former parent entity which is a highly delicate matter.

So how to proceed forward toward the goal of removing the endemic inefficiencies of DISCOs and to reduce the indebtedness of the power sector which continues to afflict the government in a major way. It is built into our corporate tradition and culture that those who are in the higher echelons sit in their offices and believe that they know more about a given business than those who are on the ground – in this case DISCOs. The later end up facing the brunt of the decisions made by those in the upper levels. The lesson of Management is that in the absence of a “buy-in” by those at the lower rungs of the ladder, the changes – or so-called reforms – often prove to be counter-productive.

First and foremost, it should be resolved that decision about the future course of action should be made at the level of the DISCOs’ BODs. In carrying out this ground-breaking task, the BODs should be given the necessary guidance and advice as well as the required tools and resources. A detailed management study is needed at the level of each individual DISCO which addresses the peculiar situation faced by it and to offer viable solutions. The study should outline a future vision and the steps that are needed to achieve it. All actions, including the need for any restructuring, should emanate from the recommendations of this study with the endorsement of the BOD.

This approach would potentially generate up to 10 (ten) separate reports, one for each DISCO, and a similar number of proposed courses of actions and thus result in the generation of a wide range of ideas. It can be expected that the recommendations of some of these studies might overlap in some aspects which is not a bad thing as it could lead to the building of consensus on a unified action-plan to be followed. Anything less than a professional approach based on conducting detailed studies being proposed here runs the risk of adopting a less than optimum improvement strategy of the DISCOs. In this case, not only precious time will be lost but it will lead to further increase in the government debt as a result of the ineptitudes of some, if not all, of the DISCOs.

Author: Mr. Farrukh Mahmood

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Impeding Gas Crisis: Key Issues

Demand – Supply Gap:

Pakistan’s demand of NG (Natural Gas) including RLNG (Re-liquefied Natural Gas), which accounts for 45% of primary energy mix, remains at 3875 MMCFD as compared to its demand of  5315 MMCFD. The demand supply-gap currently standing at 1,440 MMCFD, is projected to further increase by 3,684 MMCFD by 2024 under business as usual scenario. With projected sharp increase in Natural Gas demand, there exist a dire need to bridge the gap between demand-supply to sustain country’s progressing economy. Present government has already anticipated a substantial shortfall of natural gas to be faced by domestic and industrial consumers this year, which may be further amplified by next year. This portrays an alarming picture and necessitates a long term strategic as well as short term vital solutions to sustain current economic development.

High share of Imported Gas:

Pakistan Initial LNG policy 2006 was modified in 2011 to attract more private investors. The new policy offered two-tier import practices to be followed to facilitate potential investors and meet the growing demand by increasing gas import capacity. The model allowed the import practices to be structured as unbundled (buyers and terminal developers are different) or integrated (buyers and developers arranged by same entity). Although, the change in policy increased the investment in gas and oil import sector, yet the increase in demand during the same period surpassed the additional installed capacity. This creates an issue where we have high share of  imported gas for our energy requirements, yet we are still at shortfall to meet our foremost priority of domestic demand. Although, GoP in the past has taken certain measures to increase upstream exploration activities to increase production of natural gas reserves, the steep increase in demand eventually results in large share of imported gas in the country. This huge share of imported gas than ultimately leads to ever increasing burden on our current account deficit as the imported gas costing around 17 Rs/unit is sold at 14 Rs/unit, creating a 3 Rs/unit deficit. Therefore, dependance on high share of imported gas, under our current centralized pricing regime, will keep on increasing circular debt of energy sectors unless a long-term strategic solution is envisioned.

Uneven demand and production:

Another issue, specific to Pakistan, is the highly uneven gas production capacity of provinces corresponding to their domestic and industrial demand. Punjab has been the province with highest gas demand for industrial as well as domestic use. However, its share in production is of  natural gas is closest to none. Sindh and Baluchistan, being the highest producers, have least demand. This uneven picture of gas demand and production give rise to multiple issues including high cost of transmission infrastructure and provincial political biasness. This situation than double downs to extreme load shedding when gas production is not sufficient to meet peak demand.

18th Amendment and Article 158

The article 158 of  the constitution entails that the province with higher share in gas production shall have precedence in its use subjected to all bilateral , and other commitments and obligations. The 18th Amendment also makes sure that the gas allocations at the time of enactment of amendment shall remain protected. This ensured high demand provinces, like Punjab, of its share in natural gas to avoid any excessive shortfall. However, with the increasing demand-supply gap, even the high production provinces like Sindh may also start facing load shedding as warned earlier this month by PM Imran Khan. Load shedding for low demand – high production provinces may also increase substantially by next year. A sound political solution is needed to overcome this problem by having diverse RLNG portfolio including imported gas for each province.

Subpar Exploration Activities:

Another reason, for anticipated looming gas crisis is the subpar exploration activities as the gas production is decreasing at a rate of 9% annually. This portrays an alarming picture when coupled with the fact that our demand is increasing substantially. Even though certain measures have been ratified on policy level to speed up exploration activities, the new discoveries fall far behind when compared to evacuation of existing reserves. Therefore, indigenous gas production is not sufficient to sustain Pakistan’s economy in short term.

Regulated Market:

Worldwide, energy markets, including gas and electricity have shifted from a regulated centralized model to deregulated structure to ensure competitive pricing and thrive private sector investment. However, in Pakistan we still follow the old model of centralized pricing for all energy products. Even though, back in 1960 the petrol market was deregulated at national level, we transformed to centralized pricing through induction of “Fright adjustment Surcharge” mechanism which  averaged out the pricing of petroleum products nationally. The provinces near by import terminal or refineries payed the freight adjustment charges for other provinces. A similar problem is noticed in electricity market where performance of DISCOs varies largely. A centralized pricing system removes any motivation for lower performing DISCOs to increase efficiency. Likewise, in gas market there needs to be a modern deregulated market structure to increase private sector investment at competitive prices. This will also remove burden of additional financial support of GoP in subsidizing gas for domestic and industrial consumers. Instead, the competitive market itself shall drive down the gas prices while keeping up with the demand.

Resolution:

The GoP needs to avert this crisis by addressing it at multi-facet level:

  • Accurate Demand-Supply Projections: OGRA and other federal entities need to come up with accurate model-based demand projections that needs to be revised at regular intervals. This shall serve as the basis for short-term and long-term strategic plans for meeting gas demands.
  • Long-term clear strategies: GoP needs to optimize its primary energy mix based on strategic and financial considerations while also reflecting upon the looming shortfall in natural gas and indigenous reserves. It needs to envisage a long-term strategic plan that entails cost-benefit comparison, financial sustainability, affordability and sourcing optimization of gas supply.
  • Structural Reforms: GoP needs to bring about structural reforms and plan towards shifting to a modernized regulated market structure, similar to developing countries like U.S. There is a dire need to corporatize the gas transmission monopoly to allow private investors to participate, resulting in reduced pricing through competition and increased performance at the same time.
  • Political Harmony: The GoP needs to bring all provincial stakeholders on board and bring about political harmony to ensure fair split of gas commodities. Political polarization and stalling will evolve this crisis into something more complex, therefore, political parties need to adopt give and take approach to reach an amicable solution as soon as possible.

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We need a new approach to Karachi’s electricity woes

What happened to Karachi warrants serious reflection. The urban flooding wiping out Karachi’s entire electric power infrastructure should in no way become an acceptable norm. The ensuing power outages have come with heavy economic costs and the entire system collapsing is a stark reminder that Karachi remains susceptible to large scale electric system shocks that needs a new approach and a novel governance model.

Japan provides an excellent example

Japan provides an excellent reminder and a way forward. Back in 2011, the fatal earthquake and tsunami resulted in large-scale blackouts and loss of lives. As per the estimates, the city suffered the loss of 1,100 and nearly 75 percent of the city’s homes were gone. After the tsunami, the Government set up the “National Resilience Program”, which would fund the reconstruction of the cities affected by the disaster and would focus on building back-up capabilities in the event of another natural disaster. The entire focus shifted from large scale monopolistic distribution to small scale distributed generation. Later, Reuters reported that in the city of Higashi Matsushima, a ‘silent’ revolution has happened with more and more municipalities setting up distributed energy systems to reduce reliance on the main grid and securing supplies indigenously during natural disasters.

Karachi’s fragile grid remains vulnerable to wide shocks

In Karachi, K-Electric’s fragile grid is not a new news. But what is now abundantly clear is that the weak grid poses a national security risk that needs a course correction. Evidence show that fragile energy systems are vulnerable to a wide range of shocks – including natural ones that can be responsible for a large number of disruptions. Though limited data availability makes it difficult to quantify the link between power outages and torrential rains in Karachi, K-Electric’s power systems woes are compounded by aging equipment, lack of maintenance, rapid expansion of the city, and insufficient generation that all contribute as factors that reduce the reliability of service in general and increase grid vulnerabilities in particular.

The higher susceptibility means that infrequent events (such as rains) would have large, disruptive impacts. In Karachi, the rains have damaged infrastructure, grid stations and power distribution networks. In the aftermath of a strong shock, now even a mild storm event would significantly increase the incidence of power outage. As Schweikert et al outlined in 2019 that during a natural hazard, three main types of incidents can lead to system breakdowns: transmission and distribution grid failure, generation plant failure, and fuel and maintenance supply chain failures. Unfortunately, KE remains vulnerable to all three.

Also, consider the ripple effect of grid disturbances. Electricity outages can affect supply chains and ports, which in turn can affect fuel supply availability. If the port infrastructure is damaged, plant operations are generally reduced or shut down completely. In Puerto Rico, for instance, following Hurricanes Irma and Maria, port closures resulted in an estimated loss of 1.2 million barrels per day over 11 days that directly affected the major generation stations. The interdependency other way round is also strong. Due to power outages, infrastructures such as ports, pipelines, oil terminals, storage tanks and filling stations can hardly function. A weak infrastructure results in a vicious cycle that is hard to break.

Repercussions of a weak transmission and distribution infrastructure has been catastrophic

In Karachi, T&D failures are responsible for most outages. Transmission is generally more resilient than distribution and can withstand natural disasters. The real problem lies with the distribution sector. Most of the KE’s distribution sector has not been able to cope with torrential heats and rains with outages of 36 hours and longer reported during the last week. Many parts of the city have not been fixed as yet. Restoring electricity has become a bigger problem as different substations have completely submerged in the rain. When substation components are not properly anchored, rains can cause substantial damages. For instance, it is reported that tall components of electrical substations are susceptible to damages with floating water having the potential to damage expensive components and resulting in far-reaching service interruptions.

In Karachi, the cost of economic disruptions has also reached disproportionate levels. Firms and households are forced to spend an additional sum on self-generation electricity to cope with outages, often backing up between UPS and diesel generators. For households, the impact of power outages can result in additional sums spent on cooling and heating (which in turn may have health implications if fuels are below electricity standards). Outages also affect economic activities and income, children’s educational outcomes, social and leisure activities, and regular household tasks, such as cooking and cleaning. It is time to rethink service delivery and take bold steps.

To aid service delivery, think of ending the distribution monopoly

It is time to rethink KE’s distribution monopoly. The world has moved away from monopolies to competitive markets and in the process, has improved service delivery manifolds. The historical Public Utilities Regulatory Policies Act (PURPA) of 1978 in the United States has already provided a guiding path. Before PURPA, energy companies were classified as natural monopolies, and for this reason, were established as vertically integrated. Utilities became protected as monopolies because it was thought that a single company could produce power more efficiently and economically as one company than as several. But PURPA changed all that by adding a series of provisions that enabled non-utility operators to participate and break previous monopoly function. The results have been staggering. The average cost of power has come down, service delivery has improved, and market forces have led to competition, enabling innovation and modernization.

What is now clear is that Karachi’s weak grid managed in a monopolistic fashion is beyond unsustainable and is in need of a similar like overhaul as PURPA. The reasons are straightforward. Natural monopolies should only exist when cheaper alternatives can’t be provided by multiple, competing firm. In Karachi’s case, this is not the case. The behemoth natural monopoly has not been agile enough to prevent losses or augur confidence in its services, showing recurrently that it can no longer bear the burden of a sprawling city. If consumer delivery is any important, the answer should now lie in multiple utilities coordinating for their respective territories, managing small systems, preparing and mitigating threats in advance and leaving the room for innovation to improve utility sales and returns.

The lack of competition in electricity distribution business has proved the death knell of reforms. Unlike in Pakistan’s telecommunication sector where consumers have the choice to choose between multiple service providers, where all compete for the same market share, the power consumers, especially households and commercial consumers of Karachi, have been left to the mercy of a single distributor who secures all the rights. The monopoly of the power distributor then implies that it has no incentive to ensure quality power to consumers or improve efficiency let alone charge market competitive tariffs. NEPRA which is to decide upon tariff generally has little choice but to often allow monopoly distribution companies a pass-through tariff in the absence of any clear, competitive benchmark emerging from market forces.

What is also clear that it is not legally difficult to restructure this model. The power sector has been on this transition before when it witnessed cheaper and smaller electric generating technologies and competition from independent power producers (IPPs) to erode the utility natural monopoly in generation. In much the same way, continued capabilities emerging from technological advances in distributed resources and smaller utilities can create widespread competitive alternatives to monopolistic electric utility service. If and when that happens, the distribution natural monopoly should fade, as a simple matter of economics. This does not mean the distribution system or the grid itself will disappear or that it will no longer provide for critical value to consumers. But new regulatory paradigms and business models should emerge to ensure and enhance the benefits the grid can continue to deliver. And that will only benefit the consumers of Karachi.

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Getting rid of stale power sector reforms

Enough has been written about Pakistan’s power sector reforms that it hardly keeps anyone on the debate sidelines now. Nearly everyone produces a detailed power sector reform road map. On their part, the Government has been ‘reforming’ the sector for the past two decades. Development organisations have been suggesting their own reforms road map with circular debt topping their reform agenda. Consultants, members of civil society, regulator all have contributed extensively to the debate. The result so far: circular debt has continued to rise with impunity – with a stock of over Rs. 2 trillion and sector inefficiencies (recoveries and losses) almost the same as they were a decade ago. Even a child would point out that none of the suggested reforms have worked.

Let’s call this set of reforms as stale reforms. The stale reforms put circular debt as the biggest nut to crack. Solve circular debt and everything falls in line. As a start, make an elaborated circular debt plan, have all the reasons outlined as what causes circular debt and benchmark future targets against the current ones. Till the time anything materializes under such targets, emphasize on cost recovery tariffs, even when there is not enough room to accommodate more inefficiencies. When there is little room to increase tariffs, revert to surcharges as add-ons to consumer bills. Essentially, impose surcharges on paying consumers for inefficiencies caused by non-paying consumers. But as long as surcharges minimize gaps in the circular debt hole, make them a fine addition. Put here and there reforms to improve regulatory underpinnings and sectoral policy outlook and you have produced an ideal reform road map.

This set of reforms have unfortunately been repeated time and again with little or no avail. The stale reforms, no matter how many times have been repeated, have always produced a higher circular debt than before, more reliance on surcharges than before and lesser consumer welfare than before. Surely, something is not right with stale reforms. And here is why? The stale reforms have never challenged the status quo i.e. the Government’s own monopolistic role in the market, its inability to give up its own vested interest, its own bureaucracy’s role to not cede command and control behavior and private sector’s lack of incentive to invest, innovate and compete to create competitive tension. Consider this simple scenario. Today, all power producers in the country sell power to a monopolistic Government buyer (CPPA-G), which is nothing but a bankrupt institution. No lender gives them a dime without sovereign guarantees because they know their projects would go bust. The result is a perpetual cash flow crunch which the Government manages through more expensive debt, donor money and development aid. The cycle repeats with consumers as the only victims.

Let’s focus on an alternate, real-reform road map that has actually worked around the world – one that hinges on market economy and competition. Under real reforms, prices are determined by market with buyers and sellers free to transact voluntarily. No party remains hostage to another as both the buyers and sellers act on their own self-interest. In the words of Adam Smith who in the Wealth of Nations remarked, “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”. Unfortunately, this very simple idea remains missing from the entire reform road map. Today, if you are a buyer in the electricity market, all you have is the Government grid, which howsoever wretched and pitiful does not give buyers any leverage to transact from an alternate, more competing supplier. The result is a monopoly without any incentive to improve or make supplies available at lower costs. The consumer welfare in such a model is always at a loss without any regard to service, quality or the price.

The command and control mode of Pakistan’s power sector also negate concepts of private ownership in a free-flowing market economy. Whether they are cups, mobile phones or coffee, the state does not enter into production and distribution of all the commodities. The Government of Pakistan does not decide how many smart phones residents of Islamabad should purchase in a given year and neither it decides how many cups of coffee residents of Lahore should consume, but it surely does decide how many megawatts of electricity should be provided to the residents of Quetta and to the residents of Peshawar and so on for the rest of the country. Why operate in this command and control fashion is beyond anyone’s comprehension? Further, the rules of tariffs and subsidies are also pre-determined. For consumers, it’s a take it or leave it contract. The Government, being the monopoly, decides how much to subsidize every household, how much to charge at each exact slab and what rates to levy at what times. Disagree with it, but there is little you can do anything about it.

To show the Government’s true intent on reforms, when any material reforms, has in fact, taken place, they have been swiftly sabotaged. One example is the wheeling arrangement, introduced by NEPRA in 2016. Wheeling allowed generators to sell directly to bulk power consumers through a bi-lateral contract that was supposed to be governed by NEPRA. What should have become the basis for a competitive road map, was soon strangled by the Government. Obviously, DISCOs feared that any introduction of alternate suppliers would make them redundant as they will provide better service, reliability and price to what is currently being provided by them. The end result was a blockage of wheeling transactions throughout the country. If the Government had allowed the wheeling arrangements to flourish, we would have seen suppliers and consumers transacting amongst themselves and coming up with perfectly legal ways to improve service delivery, thus giving the Government a run for their money. In economist-speak, this would have made the markets contested, resulting in consumer welfare.

Sadly, competition is not anywhere in the reform roadmap as there are entrenched vested interests. Knowing full well that any competition would challenge policy makers fiefdom and would ultimately result in door closing of several billions of rupees of corruption and mala-fide exploitation. In short, why corporatize? why introduce best practices? why improve service delivery and why compete when the Government can operate under the garb of a close sector; un-challenged, un-hindered and un-contested. If there is a real reform, it would only come when the Government ends the cost-plus tariff regime for generation contracts, end exclusivity to distribution license monopoly, let wheeling flourish, adapt competitive bidding practices, introduce private sector transmission investments and gradually introduce competitive tension in the sector.

We all remember the old PTCL days when consumers would end up in the que to ask for a telephone connection. It does not happen anymore. Today, there is no circular debt in the telecom sector. Consumers can procure connection, anytime, at any place. Tele-density is touching an all-time high and broadband connection seems to penetrate even in rural areas in wide numbers. In a quite contrast to circular debt, telecom sector earns the Government license fees every year and is one of the highest contributors to national exchequer. Could all this have been achieved with an old, monopolistic style government Telco. Surely not. The Government needs to wind up its role in the power sector, introduce competition and stay on the sidelines. That is the only way to introduce real reforms and exempt us all from the routine, stale-reforms.

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RF Insights: Five Key Takeaways of Pakistan’s New Integrated Generation and Capacity Expansion Plan (IGCEP)

The Integrated Generation and Capacity Expansion Plan (IGCEP) 2020-47 is a policy document prepared by the NTDC that lays out how the future generation capacity expansion should take place on the principle of the least cost generation. As per the IGCEP released, a total of 148,074 megawatts of electricity will be added to the national grid by 2047. This would include 45,929MW hydel-based electricity, 32,697 MW local coal-based energy, 27,090 MW based on re-gasified liquefied natural gas, 26,522MW solar, 9,241MW wind, 3,300MW nuclear, 1,620MW based on imported coal, 1,000MW from across the border and 655MW bagasse-based. To synthesize the results, NTDC would first use a load forecast that would be placed under PC 4.2 of Planning Code of the Grid Code. The load forecast would be followed by the generation plan (IGCEP) that would be reviewed and approved by NEPRA and placed under PC 4. This would then be followed by a Transmission Systems Expansion Plan (TSEP) and finally, the transmission investment plan which would fall under PC 4.1 and PC 4.2 respectively.

The report on the IGCEP presents the results of the most recent expansion planning studies conducted by the Load Forecasting and Generation Planning (LF&GP) Power System Planning (PSP), National Transmission and Dispatch Company (NTDC) following the criteria set out in the Grid Code. To do this, NTDC used PLEXOS, a generation planning software, to optimize projects incorporated. The annual updating of the IGCEP is also a regulatory requirement on the part of the NTDC, that consequently needs to be validated by NEPRA. To maintain the higher degree of transparency and to make this report detailed, various aspects have been included by NTDC, such as stakeholders who exchanged input data, the currency of input data for the IGCEP, the software tools used along with their requirements and limitations, generation planning process, etc. Nonetheless, as a first of its exercise, there is more that needs to be done to align IGCEP and embed it as a long-term planning option in Pakistan’s power sector. From the hearing that occurred on 15th July 2020 at NEPRA, Resources Future would like to highlight give key takeaways of what transpired in the hearing and some of the suggested way forward.

IGCEP should practically be decided via market forces

Considering Pakistan’s diverse stakeholders involved through various provinces and conflicting political ideologies, there will always be differences as to which generation options under IGCEP should be adapted at the country level. All over the world, generation expansion planning is a function of market forces with investors taking risks and returns as where they see best to invest. Why this cannot be done in Pakistan? The answer is still a closed sector, guarded by single buyer model that leads to an IGCEP going to be determined by a single entity, NTDC. As it transpired in NEPRA hearing, no one participant agreed on the results and there were conflicting propositions as to the best generation model of deployment. The long-term strategic focus should be to open up the market, reset sector direction and let market decide where and how and under which fuel they want to invest in coming years.

Britain is an excellent example. Since market de-regulation, the cost of energy in the UK has been set by the market. Power Purchase Agreements (PPA) are still in vogue but the purchaser is no longer a Government and could be anyone; a utility, trader or a corporate. However, where the Government decides to give a technology impetus, they do so by announcing a strike price and organizing auctions. For example, the UK Government announced a strike price of £ 180/MWh for geothermal projects, £ 39.65/MWh for offshore wind and £ 92.50/MWh for nuclear Hinkley project. Pakistan’s long-term should be the same – introduce competition, let the market decide where and how best to invest and focus on regulatory framework which enables long-term private investments.

IGCEP should be comprehensively peer-reviewed

One of the key issues pointed out in the hearing was the basis of several assumptions taken by the NTDC to incorporate under PLEXOS (the software planning tool used by the NTDC). This resulted in various outcomes that were not favorable to the provinces, which they consequently objected. For instance, Punjab believed that NTDC did not incorporate enough solar projects, even for projects which have been issued LOIs. KP believed their hydel potential has been missed out. Similarly, Sindh pointed out that out of 78 projects having a capacity of 11,000 MW in their pipeline, only a few were included. And, Balochistan and AJK mentioned that specific LOIs regarding their projects had not been incorporated in the design. NTDC, on the other hand, believed that they strategized projects using different categories, such as if a project is a “classified project”, they would be sent straight to the generation planning tool. Similarly, projects which came under CPEC, or those under construction, or those who have achieved financial close or agreed upon G2G projects have been prioritized. The plants and projects that did not fall under these prescribed categories were not considered by NTDC.

There were differing views on the set of assumptions and the only way to reconcile those differences is to build credibility around the entire planning process and make it transparent and peer reviewed. For most part, IGCEP has a theoretical foundation now, that needs to be validated independently by experts. The empirical revalidation and a comprehensive peer-review would make it a more coherent and strategic initiative, backed by evidence. A credible peer-review identifying and laying out critical assumptions is needed to provide an answer whether recent adoption of strategic planning via IGCEP could significantly improve the performance of the sector? Will IGCEP planning increase the amount of sector effectiveness in terms of choosing better generation options? Would the exercise lead to decreasing costs? These questions can only be answered through empirical assessments, backed by sound data, results widely available to stakeholders and a comprehensive validation through an independent third-party peer-review process.

Take into account negative externalities 

We all know Garett Hardin and the Tragedy of Commons. It’s been repeated under several public hearings that full cost of energy is not often reflected through least cost optimization models. The world understands the negative externalities that accrue due to coal power plants, especially Lignite ones and IGCEP has given it a lot of weight, especially the Thar Coal. We have an example of Germany that transitioned itself out of the lignite and positioned itself to be a world leader in the renewable energy. On the other hand, the IGCEP has planned 32,697 MW Thar coal generation that would compete for the same scarce resources with human population such as the availability of clean water and out flora and fauna. In calculating least cost generation, it would be important to include the cost of negative externalities by drawing upon the tragedy of the common’s principle. Only accounting for least cost generation by considering ‘cost’ while ignoring the price of shared-resource system can deplete and spoil the value of shared resources.

Hydel power needs more attention

IGCEP 2047 has taken hydropower and nuclear working life as 50 years and 70 years, respectively. Working life is a key variable in the economic evaluation of different generating technologies. Hydropower has the longest working life of all generation technologies. Some 80% of hydropower cost is civil works and hydraulic steel structures having a life in excess of 100 years; remaining 20% cost comprises generation plant i.e. turbine/generators. In Pakistan too, the hydel power has shown promise for an extended life. For instance, Mangla HPP which was built with a design life of 100 years in 1960, has been in operation for 55 years. With Mangla raising completed in 2009, it is expected that the 100-year design life will extend further. Further, new strategic hydro power projects (such as Diamer Basha and other large HPPs) will also be needed to replace previous strategic projects for flood control, water storage and cheap power generation. Any IGCEP need to overlook ‘least cost’ only to see far more deep, longer-term strategic interests of the country.

The problem with Pakistan’s IGCEP continues to be inclusion of both the commercial and strategic projects under one plan. As outlined earlier, for any stable direction, the country needs to open up the sector, let investors decide on the commercial and financial viability of projects and pursue them independently under multi-buyer model. Governments can push for selective strategic projects only – as and when they like but not for the entire generation stimulus. 

A longer timeframe muddles the results

The sector has been marred by inefficacies and lack of sustained, coordinated energy planning. Given the background on the sector, it was quite clear that the stakeholders never really believed in a plan that spanned for 27 years – a horizon far too stretched. Stakeholders believed that a tenure of a 27 years extended plan was a risk as there are various economic and political changes at play. Sindh government opined that owing to the tenure of the Federal Government being not more than five years; it would be best if the plan would be kept at 5-10 years’ timeframe to mitigate most of the issues faced and prove to be fruitful for all the stakeholders involved. NTDC, on the other hand, argued that although the complete plan spans to the year 2047, the plan is to be revised yearly to incorporate changes accordingly with the first phase of the plan to be extended to ten years. NTDC believed that the stakeholders’ primary focus on the timeline should be on the first ten years, which could then be stretched later given the circumstances.

We too, believe that there is a distinction to be made between policy and technology and associated time horizons between the both. It often becomes a crisis when longer tenor policy directions often fail to account for future technologies or just simply predict how the future would look like. A single software like PLEXOS cannot predict societal or behavior changes that will occur twenty years down the road. Today, it’s all changing fast; technology is literally creating the world we all live in, and policymakers have not been able to keep up, especially in Pakistan. Getting it wrong, especially for a larger planning tool like IGCEP, can be increasingly dangerous. Surviving the future will depend in bringing technologists and policymakers together, but more importantly leaving the business decisions to the market and not to the government.

Consider what can transpire to our energy future and outcomes basing our assumptions primarily on a software for an end to end country level planning. The software may have the potential to aid human decision-making, eventually replacing notoriously subjective human processes with something fairer, more consistent, faster and more scalable IGCEP of the future. But it also has the potential to entrench bias and codify inequity, and to act in ways that are unexplainable and undesirable, just what the provinces have highlighted. In short, how can we avoid the pitfalls of long-term planning while the horizons of those operating the technology may remain short-term? The answer requires a strong coordination among institutions, iteratively evolving policy tools as per technological advances and opening up the market for risk return led private sector investments.

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Electric Vehicles Policy 2020

Pakistan EV Policy 2020

The Economic Coordination Committee of the cabinet in Pakistan has approved the Electric Vehicle policy for 2-3 wheelers and Heavy
Commercial Vehicles in June 2020. The policy was proposed by the
Ministry of Industries after consultation with various ministerial
stakeholders (Engineering Development Board, Ministry of Science and
Technology, Ministry of Climate Change and others). This publication
outlines key features of EV Policy 2020 and salient incentives offered.

Why EVs in Pakistan?

According to a global estimate, around 20 percent of greenhouse gas emissions happen due to various means of transportation. This statistic stands at 40 percent in Pakistan. With transportsector in Pakistan growing
with the overall increase in country’s population,
transition to EV should become an imminent
strategy.

Background

Although Pakistan has a meager contribution to total global Green House Gas emissions – less than 1% – but it continues to remain the most vulnerable to climate change hazards and has low technical and financial capacity to adapt to any adverse impacts. Concerns about climate change and adaption to newer technological frontiers led the government to issue a comprehensive Electric Vehicle Policy 2020 for buyers and manufacturers with an aim to encourage investors to invest in EVs such as two to three wheelers, buses, trucks and cars. The benefits of developing EVs are far ranging – from technology acquisition to employment generation (with creation of more than 40,000 technician jobs), and from attracting foreign direct investment to reducing oil import bill to reduce fiscal and budgetary deficits remain as some of the key motivations for the Government.

General Framework of Financial Incentives

As per 2019, there were only 250 plug-in hybrids and full EVs registered
in Pakistan. The government now has an ambitious plan of converting
30% of cars – about one hundred thousand (100,000) and 50% of the five
hundred thousand (500,000) two and three wheelers, into electric
vehicles in the next four years.

What could be a foreseeable impact of EV Policy 2020?

The most significant impact would be savings in the fuel costs. With EVs, the average fuel consumption of motorbikes in Pakistan is Rs. 6,000 (six thousand) which will be reduced to Rs. 1,000 (one thousand). Similarly, the fuel costs of a 650-800 cc cars will come down to Rs. 1200. Another impact would be the savings in the fuel import bill, which is estimated at Rs. 2 billion per annum.
To improve the EV offtake, the Government can offer rebates on capital cost to encourage early adopters. Annual renewal fees may be waived and credits in terms of tax exemptions can be provided to encourage people to opt for EVs. The government may also contribute in terms of financial subsidies, tax preferences, and concessionary credits to promote investment in the sector.

Pakistan’s EV manufacturers

Some of the local significant players in the EV space include:

  1. Karakoram Motors (Dynasty IT electric cars), Karachi
  2. Rahmat Group (for electric cars, two wheelers and buses, in
    cooperation with BYD), Nooriababd, Jamshoro.
  3. Master Motors (has signed an agreement with Changan
    automobiles for selling and distribution of their cars).
  4. Al Haj Automotive Private Limited (FAW holding, Chinese
    company), signed an agreement with Proton, the Malaysian
    company for its distribution and assembling, Karachi.
  5. Topsun Motors electric car company (with Chinese
    collaboration), Jail Road, Lahore.
  6. Jolta International – electric motorcycle (is a subsidiary of a
    Lahore based company Auj).
  7. Sazgar, an electric rickshaw company in Sundar, Lahore

Support for charging infrastructure

As a support for the charging infrastructure, the GOP has set a target of transforming three thousand (3,000) CNG stations to EV charging stations.
Different countries follow different charger configurations according to their charging capabilities. The kilowatt capacity of a charger defines the rate at which the battery can be charged, and it also defines at which place such chargers can be deployed. Easy and affordable access to charging infrastructure, both standard AC and rapid DC charging, is key to supporting EVs growth. Distribution companies, private investors and auto manufacturers will have to play their role in developing the required charging infrastructure. On the other hand, the government also needs to outline policies that support all stakeholders in development of a charging network for EVs.
For electric cars, there are multiple auto manufacturers with different charging configurations. Pakistan’s public charging infrastructure will be driven by players with large market share in future. For the initial five years, there will be a combination of different charging options. Probably medium or semi-fast chargers will dominate the charging infrastructure with CHAdeMO or CCS.
As the density of EVs increases, the next phase will require the installation of fast chargers with higher power ratings. Hyundai recently launched the first electric car IONIQ in Pakistan, which uses CHAdeMO technology. Toyota is marketing its JDM model of Prius Prime (a plug-in hybrid) in the country, also with CHAdeMO technology. New entrants, however, have models that support CCS technology. This could make the case for both CHAdeMO and CCS technology viable options for Pakistan. Going forward, we believe that public-charging infrastructure may be a combination of both of these widely used technologies.

What do industry leaders think about EV Policy 2020?

Raheel Ahmed Liaqat – Sales Manager, ABB Pakistan
“Overall, the policy looks good. The implementation might take some time due to the new automobile plants adjusting to newer technological standards from currently MOGAS-based cars. Also, there are only a few EV manufacturers, with very limited learning curve to adapt to the newer technology. Overall, I believe ministries will need to put in more effort, so the final draft of the policy is officially released, and the implementation can take place swiftly.
With respect to ABB, we are looking forward to the policy. ABB is already working on the charging solutions in the range of 3kW to 60kW, with all chargers installed in Pakistan are up to 50kW capacity. We have seen the rise in Audis E-tron Quattro sales which are swiftly going up with 250 cars sold and 100 additional orders to be delivered this year. The news of potential collaboration of GM motors and Haier Pakistan for making EVs in Pakistan is also encouraging.
Syed Qadir Jillani, Manager Services & Operations, Porsche Pakistan
“I appreciate the overall policy but believe that there are a few things that should be finalized before the policy comes out. Overall, Porsche has an electric vehicle market in Pakistan and people have already booked 50 Taycans (Porsche’s EV), with more orders expected in the future. The step to convert 3,000 CNG stations to EV charging stations is also a step in the right direction. We also have our charging station ready and we will take necessary regulatory approvals before deploying it countrywide.”

Muhammad Kamil Quddus, Policy Economist, International Growth
Centre

Electric Vehicle (EV) Policy of Pakistan is a step in the right direction considering the greatest existential threat of our times, Climate Change. Considering this challenge, any measures related to mitigation and adaptation to climate change must be aggressive which is reflective in the target setting of this policy. However, this needs to match with proactive coordination at policy and operational levels of government functionaries. It is prudent to mention that such ecological challenge needs to be utilized as an opportunity whereby switching fossil fuel vehicles to electric vehicles reap benefits not only for the exchequer but also for industry and public, at large.
Targets such as 30% of new vehicle sales for 4 wheelers and 50% of new vehicle sales for 2-3 wheelers by 2030 have great political optics yet obscure us from the core policy objective of “displacement of fossil fuels in general and motor-spirit in particular”. Approximately 25 million vehicles consumer 7.9 million Tonnes of Oil Equivalent (MTOE) currently of motor-spirit. Out of this 25 million, 70% vehicles are 2-3 wheelers consuming ~
43% (3.4 MTOE) of the motor-spirit. Considering this, a shadow policy target could be to set that ‘X’ percentage of motor-spirit be displaced by the year 2030 or 2040. Furthermore, citizens and civil society should start attaching strings to such targets and claims by successive governments on outputs and not on mere symptoms.
Last but not least, the current automobile development policy 2016-2021 and the EV policy 2020 should go hand in hand and the Government should look into the possibility. Smart meters to be utilized as a silver bullet solution in controlling the off-peak usage as well as taking care of overloaded feeders. This serves as a pre-requisite to any operational level penetration of EVs. To ensure that this well-deserved aggressive timeline is met, this pre-requisite needs to be followed up on aggressively.

For more information on EV & its policy, contact us today
Integrated financial and infrastructure advisory firm
yaser@resourcesfuture.com
Office 9, 3rd Floor, Executive Complex, G-8 Markaz,
Islamabad.
+92 321 5588 355

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Launch of Telecommunications Vertical

Resources Future, Pakistan’s leading financial and infrastructure advisory has introduced a new vertical within their portfolio to deal with digital telecommunication projects.

The company will leverage its existing extensive experience in Public Private Partnership (PPP), feasibility studies, project finance and regulatory scoping exercises. Their consulting experts have been some of the best in their fields, having executed cutting-edge transactions in Pakistan. Present in 3 locations across Pakistan, they help clients around the world looking to invest in Pakistan as their investment destination.

The digital vertical will focus on solving various problems of existing telecommunication and broadband companies in this circle and also draw potential investors towards Pakistan to increase foreign investment. Some of the key services will include a digital transformation strategy for telecom and broadband operators in view of COVID-19 situation along with improving their capital allocations.

Acting as trusted advisers, RF will be supporting these companies in making strategic decisions about consumer acquisition strategy, service convergence and also determining where to fit into the rapidly changing digital ecology. RF will also partner with different global content delivery providers to offer easy access opportunities for operators to deliver content and to monetize and increase their existing income pools.

Speaking during the online press conference the CEO of Resources Future, Khurram Lalani said that there is a huge potential in this country for digital related services and what will attract the local and international investors in Pakistan is the growth in hungry market trend that continuously require improvement and expansion. The space for existing operators to grow and for new players to come, especially in broadband services category, is immense. This will also help create more significance for Government’s Digital Pakistan initiative.

The vertical will be led by Bilal Mughal as the Principal Adviser. Previously, Bilal was serving as Head of Marketing for Transworld Home a GPON subsidiary of Transworld Associates and brings with him over 15 plus years of hands-on experience in operational excellence.

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Paying for the road public private partnership projects in Pakistan

We recently completed a multi-case study for a client and thought to share few of our findings in relation to Pakistan’s public-private partnership (PPP) projects in road and infrastructure.

Snapshot – Pakistan’s road infrastructure

As a start, Pakistan has an impressive road infrastructure with total roads of 264,000 Km, motorways of 2,066 Km, national highways of 11,321 Km and expressways of 78 Km. Transport sector’s overall contribution remains 12% of GDP. For its population of 210 million, 76 million live in cities and the population is growing at 2.4% per annum. The urban population is expected to reach 50% by 2050, which would demand more pressure on existing highways and roadways. On average, Pakistanis travel nearly 400 billion passenger Kms per annum and this is expected to rise to 1,000 billion passenger Kms by 2030.

Overall rural connectivity remains low while safety standards also lag behind

About 118 million – which is almost 60% of the country’s population live in poverty. Overall, rural transport access remains low with only 53% of the rural population living within 2 Km of an all-weather access road. This limits economic growth and development in rural areas. Also, efficient transport remains a barrier for 40% of women in Pakistan in accessing social welfare facilities such as health and education. Car and motorcycle ownership levels by women are lower than for men and women also have to rely on family support for travel outside their homes, leading to limited access to economic opportunity, healthcare, and education.

Also, the World Health Organization (WHO) estimated that 25,781 persons were killed in road crashes in Pakistan in 2013 due to many factors, including poor driving skills, limited usage of protective helmets on motorcycles, outdated vehicle standards, poor road design and no routine maintenance. Such standards warrant an immediate need to upgrade Pakistan’s road infrastructure network.

New infrastructure and upgradation require large capital financing

Pakistan requires capital funding to augment its current infrastructure for safe and reliable rural road access network. Expansion of the existing National Highway Authority (NHA) network would be necessary for creating an improved road access grid around the country. Estimates necessitate an addition of 5,000 – 7,000 Km to the NHA network alone during the next decade to continue the pace of growth and development.

Provincial highways and expressways constitute the next important part of the road network in the country. Of the provincial highways, less than 5 percent roads are four-laned, about 22 percent have two lanes and the remaining are single lane. Their maintenance is generally poor. Further, the resources require for upgrading and maintenance are may well be equally daunting and are seem nowhere in sight.

NHA’s financial position remains precarious and budgetary resources inadequate

If NHA is to be given the responsibility of managing and funding Pakistan’s large infrastructure requirement, it needs to have a stable, strong and robust balance sheet. Unfortunately, its balance sheet strength has deteriorated in the last few years with operations and maintenance far outweighing the revenues, which remains meager compared to the size of its operations. A snapshot of NHA’s profit and loss is as follows:

Source: SOE Federal Footprint Report, 2017 (Ministry of Finance) – Amounts in Rs. Million

The revenues show a topline of Rs. 29.2 billion whereas the O&M expenses alone amounts to Rs. 101.7 billion. Adding finance cost for various loan receipts, the net loss comes out a whopping Rs. 133.5 billion. A meager top line also demonstrates that NHA does not recover adequate tolls from its operations and relies on the government funding to finance its losses, which is an unsustainable long-term proposition.

It is also evident that Government’s budgetary resources will be grossly inadequate for meeting the resources requirements for building next round of highways and expressways. Raising public debt is not a viable option with high fiscal deficits of the GOP. Further, raising debt for a non-revenue earning asset can at best only be a short-term exercise and cannot bear the burden of massive outlays required.

User-pays infrastructure development and PPPs remain a long-term viable alternative

All infrastructure services around the world including power, natural resources, telecoms, railways, airports, irrigation rely on user charges. In India, even the rural roads have been funded out of levies paid by farmers. In Pakistan also, the user pay scheme under an ambit of a comprehensive PPP agenda can bring in reforms and more road access development. There are examples available in Pakistan where projects have relied on toll-based systems to meet growing needs of transport infrastructure. Pakistan needs to continue this momentum.

The motivation of doing PPPs in road infrastructure remains simple. Given the resource constraints, there seems no other option but to commercialize highway projects and raise private capital and market borrowings, which are then sustained by levying user charges. If highways can be developed through self-sustaining approach, the development and capital inflows can grow manifold without too much reliance on scarce budgetary resources. If better services are provided at reasonable and affordable user charges, there will be general acceptability for such an approach.

Examples of PPP projects in Pakistan

A brief snapshot of some of the PPP projects undertaken in Pakistan are summarized as under.

Swat Expressway Lahore-Islamabad Motorway Hyderabad Mirpurkhas (Sindh PPP) Jhirk Mullah Katiyar (Sindh PPP) KTDC  (Sindh PPP)
Project Summary Construction of 81 Km long, high speed, fenced, 4-lane expressway linking M1 directly with Swat Overlay and modernization on 357 km long existing 6-lane motorway Construction of 60 km long road with 8 bridges and 62 culverts Construction of 17 km long road including bridge over River Indus Construction of 50 km long two-lane dual road and rehabilitation of existing highway
Construction Period 2 Years 2 Years 2 Years 2 Years 2 Years
Concessioner Frontier Works Organization (FWO) Frontier Works Organization (FWO) Deokjae Construction Company Al-Jasr Pakistan Pvt. Ltd. Frontier Works Organization (FWO)
Concession Type BOT BOT BOT BOT BOT
Concession Period 25 Years 25 Years 30 Years 25 Years 25 Years
Initial Project Cost PKR 35 Billion PKR 46 Billion PKR 5.8 Billion PKR 4.5 Billion PKR 9.9 Billion
Financing Structure 58:42 (Debt:Equity) 70:30 (Debt:Equity) 70:30 (Debt:Equity) 75:25 (Debt:Equity) 70:30 (Debt:Equity)
Project Details Under this project, the Government has provided upfront subsidy as well as operational subsidy to support debt obligations – Private Sector to assume demand risk The Sponsor issued corporate guarantee in favor of Lenders The Project was supported by bridge financing and minimum revenue guarantee by GoS. Private Sector to assume demand risk The Project was undertaken on an annuity basis The Project was undertaken on an annuity basis

Governments have moved away from annuity-based PPP model.

Under PPP road projects, governments and policy makers have moved away from traditional annuity approach of infrastructure financing. Instead the focus has shifted to a more comprehensive long-term PPP concession involving construction, tolling and O&M all combined into one contract.

Annuity schemes were preferred by the construction companies since they did not involve taking traffic / demand risk while getting assured of semi-annual annuity payments from the government. The typical logic was that an annuity led model limited to construction only would provide a more competitive bid for the construction component, thereby giving more value to the government. The government can later outsource other components individually under separate contracts, if they so wish to do so. For road projects, this only meant limited private sector participation, typically limited to construction component only.

In Pakistan, NHA projects have been constructed with a similar rationale that the government would levy a toll / user charge once the construction is completed. This implied a series of tolling contracts subsequent to the construction component which never materialized. Often, the government found it difficult to run separate procurements for each subsequent component whereas the lack of strong technical, financial and legal capability also inhibited long-term road infrastructure development in the PPP mode. A better deal is a single DBFOT (design, build, finance, operations and transfer) allowing a single concession to do all this in a far more efficient and cost-effective manner.

A single PPP concession can provide a much-needed impetus

A much-needed impetus in providing financing to large road projects can be provided by a single PPP concession. When applied in India, UK and USA, the response of the user community has been positive and has accelerated economic growth by providing better and cheaper transportation.

We believe that in Pakistan also, the only way to support a larger program of road development is to rely upon user charges. In order to keep these charges at affordable levels, upgradation of highways and related capital costs should be phased out over time so that self-sustaining projects are undertaken with minimal support from the government exchequer. By commercializing road development and making it financially sustainable, it is possible to expand the investment program multi-fold. As China and several other countries have shown, toll-based road projects remain the key to better infrastructure and economic growth. That would be a win-win for all stakeholders and users.