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Category: Power Sector

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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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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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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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Sustainable development of power system

Planning of power system in the past has been dominated by the urgent need to address the large amount of load shedding. This resulted in greater attention to increasing power generation capacity while the development of T&D infrastructure lagged behind. Financial viability of the power sector has also been a matter of serious concern in the wake of likely procurement of more than needed capacity in the short run, determination of tariffs on cost plus basis in most cases, large amounts of arrears and circular debt, need to rationalize electricity retail tariff, growing dependence on imported fuels and declining share of clean energy in the generation mix. To avoid the problems caused by repeated cycles of power shortages and surpluses and mismatches in the development of various components of supply chain affecting the socio-economic development of the country, sustainable development of power system will be pursued in future through integrated planning for optimal[1], affordable and secure development of the power sector.

Integrated Planning of Power system

The integrated plan will be based on the following principles:

  1. A thorough assessment of demand and supply position taking into account Demand Side Management (DSM)[2], provision of adequate amount of reserves for scheduled shut downs of plants for maintenance, real time fluctuations in demand supply balance (spinning reserves), Forced Outages due to unforeseen failures and resource variability (Renewable Energy and Hydropower).
  2. Synchronized development of generation, transmission, distribution infrastructure and associated services in accordance with the requirements given in the various Codes and standards laid down by NEPRA[3].
  3. Incorporate modern technologies and management practices, needed for a well-managed, stable and reliable power system.
  4. Priority to be accorded to indigenous energy resources, particularly hydro, Renewable Energy (RE), Thar coal based projects with energy purchase prices arrived in accordance with the parameters given in Section 1.2(a) below.
  5. Meeting the demand of under/or unserved areas through systematic grid extensions, local mini-grids and off-grid applications for use of RE. 
  6. Power plan will be financially viable, affordable and integrated with the overall macroeconomic planning framework of the country

[1] (Least Cost Planning adjusted for requirements for transfer of technology, energy security and development of underserved or unserved areas).

[2] Demand Side Management (DSM) will be promoted through various measures such as time of day tariffs, demand charge for residential sector except for life line consumers, support of Energy Service Companies (ESCOs) through fiscal and financial instruments/facilities to assist the end customers in carrying out DSM. NEECA will also launch several programs to promote DSM.

[3] Commercial Code, Grid Code, etc.

Financial Viability of the Power Sector

Electricity Procurement

The government is reforming the power sector such that the price of electricity supply is determined through open access and market-based competition in the long run (see road map in Section 6 below). However, in the interim, the cost of electricity purchase by DISCOs will be minimized, to the extent possible based on the following principles:

  1. New power capacity will be acquired on the basis of estimated requirements under integrated plan to avoid shortage or idle capacity in future. The integrated plan would be updated every two years to remain in sync with actual developments. Electricity will be procured at least possible cost adjusted only for needs for energy security and development of underserved or unserved areas.
  2. Electricity from following categories of projects will be procured on the basis of international competitive bidding[1]:
    1. All new thermal, solar and wind power
    2. Hydropower and indigenous coal based power projects, where feasibility and engineering studies have been prepared.
  3. Hydropower and Indigenous coal projects on raw sites (those sites for which detailed feasibility and engineering study has not been done) will receive Letter of Intent (LOI), through international competitive bidding for the work program, to carry out feasibility studies. LOI may also be issued to IPPs for unsolicited hydropower projects for raw sites, identified by the IPP, after evaluation of the proposal by the PPIB/AEDB.
  4. LOI/LOS will be given to projects envisaging a specified minimum component of transfer of technology (TOT) on the basis of international competitive bidding with suitable incentive for maximizing TOT component.
  5. Government to Government (G-G)/ Transfer of Technology (TOT) Projects and nuclear power projects will also be eligible for supply of electricity to NTDC system (preferably through competitive bidding within the donor country). Before making the award, prevailing international prices will be used as benchmark.
  6. Tariffs for the projects developed on the basis of LOI (i.e. projects on raw sites), will be based on EPC and O&M costs arrived through competition amongst at least three bidders under the supervision of a third party. The cost of Balance of Plant (BOP) including project development costs, financing costs and ROR will also be required to be competitive. Any subcontracting of EPC/O&M will require Government of Pakistan (GOP) approval.
  7. For hydropower projects, resource variability risk will be borne by the purchaser as per the present arrangement (based on monitoring of actual water flows). Other RE projects will bear the resource risk themselves.
  8. Renewable Energy[2] (RE), hydropower, nuclear and indigenous coal projects (with back to back guarantee to miner), will be “must run” projects.
  9. Payment obligations of the federal power purchaser entities will be backed through government guarantee.
  10. LOI/LOS will be issued by AEDB/PPIB for projects feeding electricity in the national grid for purchase by Federal entities in accordance with this policy. Provinces may issue LOI/LOS according to their policies as per the Constitution.
  11. Contribution of customers towards electricity supply through net metering regime based on distributed solar power generation will be promoted through attractive tariff and financing support schemes (see Section 2.2 below).

It is also recognized that any large capacity surplus will have to be converted to economic opportunities in order to safeguard against the diseconomies and tariff impacts caused by idle capacity. For this purpose demand promotion schemes will be devised and tariff design will be improved to promote consumption in the productive sectors.

Curtailing aggregate technical and commercial (atc) losses to reduce arrears

Sustainability of the power sector is seriously threatened by accumulation of arrears due to failure in reducing the power system losses to targeted levels and less than full recovery of revenues.  These Aggregate Technical and Commercial losses (ATC) result in nonpayment to IPPs who in turn fail to make payments to primary energy/fuel supply companies. The Government recognizes the urgency of settlement of these issues. A committee of experts will be formed to make recommendations to address the root causes of ATC on permanent basis.

Rationalizing electricity tariffs

The Power Sector Reform in the country is witnessing a progressive tariff rationalization process. Tariff is based on the principle of cost recovery except for consumers with consumption below 300KWh and agricultural tube wells. In future, the thresh hold for subsidised customers will be further reduced. Simultaneous steps are being taken to gradually move towards open access and competitive market regime where the electricity prices will be market based. However, in the interim period, NEPRA shall determine the tariff in the light of the Amendment in 1997 NEPRA Act (2018). In summary, the key features will be the following:

  1. Uniform tariff for distribution licensees wholly owned and controlled by a common shareholder.
  2. Cost of service except for poor class of customers.
  3. Through pricing signals, promote energy efficiency, conservation and DSM
  4. Promote net metering.
  5. Promote use of surplus power by industries and commercial sectors[3].
  6. Tariff for off grid, mini grid customers to be subsidized.
  7. In the long run, prices be determined by the market itself.
  8. Cross subsidies will be minimized.

Tariff structure will be guided by the principle of reducing the cost of electricity through, but not limited to, efficiency in supply, improvement in end-use efficiency, improved power factors, better customer awareness and other demand management measures. For preparation and implementation of demand management programs, the National Energy Efficiency and Conservation Authority (NEECA) will be revitalized.

Priorities for investment

Emergence of power generation surplus provides an opportunity and gives fiscal space to focus on and address the long overdue need for improvement of transmission and distribution infrastructure. For this purpose, rehabilitation, augmentation and expansion of transmission and distribution system benefitting from modern technologies and management practices will get the highest priority. Financing schemes will be designed to promote investment by private sector in transmission and distribution infrastructure. The transmission and distribution companies will be also arranging resources from commercial sector, market and other means besides the conventional recourse to PSDP/Donors.  

New power generation projects will be required once the surplus power is absorbed. In this context, clean-energy and indigenous fuel-based projects will get priority. The new projects’ financing plans will be guided by the integrated long-term plans, which will allow their investment arrangements to be made reasonably up-front. However, investors will be responsible to raise financing through financial markets on the basis of strengths of projects, balance sheets, other market-based collaterals and/or innovative financing schemes except for nuclear, large hydro (run-of-river or multipurpose), technology transfer or other strategically important projects.


[1] Letter of Support (LOS) to be given to the successful bidder.

[2] RE means wind and solar based projects

[3] It may be considered that for the period during which the generation capacity is projected  to be surplus beyond the reasonable limit ( approximately up to 2023) , tariff for industrial sector be so designed that it would decline for  consumption above a minimum thresh hold for industrial and commercial customers reducing their cost of doing business.

Pakistan’s Energy Sector – What we achieved in the last decade!

The 2010 energy recovery plan prepared under the Friends of Democratic Pakistan (FODP0 study, and 2013 National Power Policy objectives have partly been achieved as new generation and transmission facilities were either launched or completed. Imported and local coal-based power generation capacity has been added or will be added in the next two years (FY19 and FY20), thereby addressing both the capacity shortages and the power mix issues to a large extent. Power system losses have gone down to about 18% and revenue recoveries have increased to about 94%. Failures include: regression on regulatory issues; lack of integrated power system planning; recoveries issue has not been completely solved although better numbers have been achieved by imposition of surcharges which has brought down the magnitude of cross subsidy. Industrial cross subsidy to domestic sector (high industrial tariffs) has impacted on export competitiveness of the industries and a mechanism to settle the inter-DISCO cross subsidy is yet to be devised.

 

Progress on hydropower has been less than desired as major hydro powers viz. Dasu and Diamer-Bhasha have not yet entered the construction phase. On positive side, Neelum Jhelum HPP and Tarbela extension are nearing completion and a number of high head medium/small output plants have achieved their CODs. Dependence on foreign fuels persists adding to the growing imbalance of trade and foreign exchange reserves problems. Privatization and restructuring issues have received attention, courtesy IMF Program (since concluded), but has seen little progress. Privatization of the four high-performing DISCOs is deemed to be crucial since the proceeds will write off the circular debt parked in the Power Holding Company. Market reform and regulation issues also received little attention, and in some ways regulatory affairs have not progressed. Moving towards a multi buyer market structure is seen as a must for the sector to perform.

 

Pakistan’s primary energy use has seen a CAGR of 3.9% during the 6-year period between 2010 and 2015. The detailed table showing the trend of primary energy supplies and projections are given in the following table.

Pakistan’s Energy Sector – What we achieved in the last decade!

The above Table presents the steady decline of gas at a rate of about 1.4% p.a. over the period 2010 to 2017.  With international gas import projects (TAPI and IPI) seemingly stalled, Pakistan has turned to LNG to bridge the gap. LNG supplies are set to increase; this will balance the decreasing domestic gas supplies and will substitute diesel and furnace oil, mainly in the power generation sector.  Domestic coal supplies have increased, although at a very low average rate of 1.2% p.a.  The portion of imported coal in the power generation mix is set to increase in the near future as its offtake at a large scale is about to begin by the near-completion imported coal power plants. It’s expected that imported fuels, including gas and coal, will exceed 50% of the total primary energy supplies by 2018. Oil supplies have increased at an average rate of 4.3% p.a between 2010 and 2017 and half the oil supplied is through imports. The portion of imported oil as a percentage of total oil supplies has slightly decreased in 2017.

 

The Energy sector in the period 2009 to 2017 has seen some significant additions, especially, the progress since 2013 has been impressive on many counts. Some of the gas shortage has been bridged by LNG imports as the first LNG terminal is operating since 2016 and a second one is targeted for commissioning by end of 2017. Additional LNG terminals are being installed which will be owned and managed by the private sector. New LNG based power generating capacity continues to be added aggressively, thereby bridging the power gap and effectively eliminating load shedding. The power generation mix is also shifting due to addition of new coal fired power plants and LNG power plants. This is causing excessive reliance on imports which will further increase in the next five years, as imported coal based plants and LNG based combined cycle power plants will register an increase in fuel utilization and is not sustainable in the long run.

 

During recent years improvements have been registered in: electricity transmission and distribution losses (which are expected to be 17.2 % by end of 2017-18 as compared to 18.2 % in 2017); revenue recoveries (which are reported to be 96% by end of FY 2017 as compared to 94% in FY 2016). The improved performance of energy sector due to the recent building of new gas, coal and power infrastructure masks some glaring failures. The goal to rely more on indigenous energy sources is not likely to be achieved in the near future. This, in turn, is increasing dependence on imported sources of energy thus further ballooning the country’s balance of payments. Pakistan’s energy use intensity (EUI, which is a measure of Gross GDP divided by energy use) is among the highest amongst the developing countries for which energy efficiency improvement initiatives need to be launched. The governance issues of energy sector need immediate attention as they are at the root of some of the problems of the sector. In hydrocarbons, the E&P activities are virtually stagnant as some of the major companies are not finding it financially attractive to invest in Pakistan. There has been virtually no progress in exploiting the shale or off-shore petroleum resources. Mining of local coal (except in Thar coal-fields, where significant progress is being made) has not received much attention. Biogas and biomass (except bagasse) has also received little attention. Especially, biomass usage for village electrification and for tube well conversions is viable and needs to be considered. Energy efficiency and conservation are low-hanging fruit, but they are still not playing their rightful role.

 

Utility scale solar power plants, both PV based and CSP, offer a great potential for meeting Pakistan’s future energy needs. Apart from one on-going solar power project in Punjab (Quaid-e-Azam Solar Park) there are no other significant ones in the pipeline. The regulator has shifted from the earlier policy of upfront tariffs and, instead, solar sites will now be offered on the basis of competitive bidding. The result of this change in policy are yet to be seen, but in the meantime roof-top solar can be developed at a faster rate than at present with active promotion of Net-Metering program by DISCOs. One of the impediments solar roof projects are facing is the lack of standardization of solar panels available in the market for which NEECA will need to take necessary measures. Microfinance can be a useful instrument in developing both solar household projects as well as rural micro-grids. Solar water heating in industrial and domestic sector has good potential and is in need of incentives for its promotion. The regulator has withdrawn upfront tariffs for wind projects as well which too will be offered on the basis of competitive bidding from now on.

 

Some of the 2013 Power Policy objectives have been achieved and it is expected that by 2018 the new power generation plants will nearly eliminate the load shedding. While rightly focusing on arranging new investments in the power sector, the Government has underestimated the need for integrated planning of the sector. The decision makers went through a number of mid-course corrections in their planning (examples are Gadani coal projects, Nandipur project and Guddu project) which suggests that the government was moving too fast down the road to commissioning new power plants and neglecting to carry out a proper feasibility study of all the requirements before induction of larger scale power generation into the system. This calls for taking urgent steps to put the energy planning process on sound footings.

 

During the last few years transmission system has presented some problems as in many instances transmission was not in place to deliver already commissioned capacity. In some cases, transmission was unable to deliver the full capacity of a plant. The transmission system master plan does provide detailed plans, but these are apparently not implemented in the order and timeline required by the newly added generating capacity. There are also frequent changes in generation addition plans and matching changes in transmission plans are not made or implemented to adopt to these changes. Transmission requirements to deliver the additional capacity that is being added are being studied by NTDC and it’s expected that by 2020 the transmission system will be in a reasonable shape to serve peak demand.

 

The Circular Debt issue has beset the system for years. In 2015, the Government issued a policy document which aimed to limit circular debt to Rs.350 billion. This has partly been achieved, but by means of: surcharges; and changes in the regulatory regime. Losses and recoveries are showing signs of improvement in FY 2018. The inherent cross subsidization of domestic customers by industrial customers has not been addressed. This results in high industrial tariffs which has negative implications for industrial output and GDP growth.  DISCOs also do not deliver acceptable service to customers due to system efficiencies and human resource considerations. Tax issues with FBR have not been resolved by DISCOs and, likewise, tariff issues relating to FATA and AJ&K continue to linger.

 

Improvements in the decision-making process and their implementation could be an important ingredient in working toward a fair and sustainable electricity sector. Well-functioning governance system will allow for better decision making about the goals of electricity reform and ensure that these goals are modified to local needs. Better governance will allow for making and implementing decisions at the right time and ensure a means of holding all the stakeholders (government, private sector, public sector organizations and consumers) accountable for their actions. Generally speaking, the energy sector has been a victim of bad or slow decision-making due to a serious lack of institutional capacity. One key change that is needed is that policy-makers need to focus on longer term interest of the sector rather than short-term goals which will be one of the areas on which this study will be giving advice on.

 

 

State of the Energy Sector 2010 – 2016

The analysis of Pakistan’s primary energy supplies during the period 2010 to 2016 indicates that there has been a decrease in gas supplies which was compensated by increase in oil and, and to some extent, Re-gasified Liquified Natural Gas (RLNG) and coal (Table-1).  The total primary energy supplies (not including non-commercial energy) registered an CAGR of 2.6% between 2010 and 2016. A comparison of energy growth rate with the GDP growth rate – which was below 3% in 2010, above 3 % for the next three years and above 4% in the last two years – indicates a weak correlation although suppressed demand due to energy shortages can be attributed as one of the possible reasons.

State of the Energy Sector 2010 – 2016

From a comparison between 2010-2016, Pakistan witnessed oil and oil products increasing their share in the energy mix, whereas gas share in the total primary energy mix decreasing by 6.3% over the 6-year period (Annex-1). The decrease in share of gas in overall energy mix was marginally compensated due to increase in the share of Liquified Petroleum Gas (LPG), which went up from 0.42% to 0.79%, and to some extent RLNG which constituted 2.10% increase. Share of hydropower as a percent of total energy supplies was 8.26% in 2010 but went down to 7.23% in 2016. The contribution of nuclear based energy, which contributed at an increasing rate, went up from less than 1% in 2010 to more than 7% in 2016.

 

Supply shortfall of natural gas (which contributes about 50% of the commercial energy supplies) has ranged between 10% and 15% of demand in recent years. The gas consumption by the power sector in Pakistan has increased over the years and resulted in a shortfall of 1,623 mmcfd in FY 2013, rising to 3,541 mmcfd in FY 2017. The gap between supply and demand of gas has been recently bridged after the commissioning of two LNG terminals and signing of LNG import agreements

 

Energy intensity, which is a measure of the efficiency of energy use, decreased by a nominal 0.5% during the last 7 years. The industrial sector responded to depleting gas and uncertain electricity supplies by increased reliance on coal, mainly imported coal. Transport sector also registered a decrease in LPG and CNG consumption and compensated by increase in oil consumption. Residential sector registered an increase in oil, gas and electricity consumption. The self-reliance objective is not being met as the imports as percent of total energy registered an increase due to higher oil and coal imports. The efficiency target was also not met as losses in the gas and power sector increased at an average rate of 3.6% and losses in the gas and oil sector registered a growth of 5.6%.  Even when Industry and transport were denied gas supplies the residential customers registered an increase of 4.7% over the period.  Gas supplies to residential customers continued to increase despite the depleting domestic gas supplies.

 

Distribution area is the most underperforming area of the power sector. NEPRA performance evaluation report of ex-WAPDA distribution companies (DISCOs) and KE for 2015-16 makes a comparison of their performance during 4 (four) succeeding years starting 2011-12 through 2014-15.  The report states that there was no major improvement in the performance of DISCOs and KE under the Performance Standards (Distribution) Rules (PSDR) 2005. Under the said rules, each distribution company is required to submit an Annual Performance Report (APR) in the prescribed format to NEPRA. The regulator also noted that DISCOs and KE caused a loss of around PKR 49 billion and PKR 83 billion, respectively, to the national exchequer in 2015-16 due to their inefficiency with respect to transmission and dispatch (T&D) losses and recovery targets. High losses and low recoveries are also a contributing factor to the growing circular debt.

 

The recommendations in the past have been presented in a setting when the energy sector was beset with crippling issues, mainly electricity and gas shortages.  Electricity shortages which were about 6000 MWs and 10 hours a day in 2010 now stand nearly eliminated.  The investments which are already in place will ensure that by 2018 there will be, at worst, only nominal load shedding. Capacity has been added or is in the process of being added, however, hydel-based capacity additions are not at the desired level that would improve the indigenous element of total capacity. On the other hand, the overall power generation fuel mix is being rationalized and, especially, coal, RLNG, nuclear and renewable have started contributing a greater share in the power mix. Generation Companies (GENCOs) continue to underperform as both their efficiency and availability are low and they have failed to perform to acceptable standards. The expansion of primary transmission, secondary transmission and distribution networks has also been at a low rate and there are some critical bottlenecks in the system due to reduced capacity of transmission system.

 

Dismal Performance of Power Generation Company Continues

Power Sector Generation – 2018

The Government of Pakistan made a provision of efficient electricity supply system as one of the key objectives of the National Power Policy 2013. To achieve this, the Government set in a motion a huge program of power generation and infrastructure through both the additions through the China-Pakistan Economic Corridor (CPEC) and Federal Government spending. Help was also sought from the private sector and multi-lateral agencies for the improvement and development of Pakistan’s power sector. The following sections provide an overview of the generation sector and discusses new generation capacity, public sector generation’s woes and difficulty and progress made so far on critical power generation projects.

The following projects have been added to the national grid as per the CPEC program:

Operational Power generation Projects – China Pakistan Economic Corridor

Project Description Status
1,320 MW Port Qasim Supercritical coal power plant 1st unit operationalized while second unit awaits COD
1,320 MW Sahiwal Imported Coal Supercritical coal power plant Project completed in 2017 and connected to national grid

 

Apart from the CPEC projects, the Government’s own power sector generation initiatives are as follows. As it can be seen however, that performance of the public-sector generation projects requires a much-improved performance than the one currently demonstrated.

Near Operational Power generation Projects – Public Sector

Project

Description Status
Quaid-e-Azam RLNG Power Project 1,320 MW RLNG Power Project Not operationalized.

 

Produced 66 million Kwh in the month of Feb 2018 as compared to monthly optimum production capacity of 807 million Kwh (8.2%).

Balloki Power Project 1,320 MW RLNG Power Project Not operationalized completely.

 

Produced 17 million Kwh in the month of Feb 2018 as compared to monthly optimum production capacity of 807 million Kwh (2.1%).

Havelli Bahadur 1,320 MW RLNG Power Project Not operationalized completely.

 

Produced 33 million Kwh in the month of Feb 2018 as compared to monthly optimum production capacity of 807 million Kwh (4.1%).

Tarbela IV 1,410 MW Hydro power First unit (470 MW) commissioned in February 2018 while unit 2 will be commissioned in May 2018 and unit 3 in June 2018.
Neelum Jhelum 969 MW hydro power Not functional. Cost increased to Rs. 507 billion for project completion.

Source: NEPRA’s Monthly Fuel Price Adjustment Data

The above picture is a gloomy one indeed. The RLNG power plants are producing next to nothing to the national grid and raises serious questions as to their operational viability. The earlier commissioning date for the Haveli Bahadur Shah RLNG plant was April 15. Under the agreement, the COD (Commercial Operation Date) of both the projects was January 9, but so far these are not functional despite the lapse of over five months. While the government wanted these projects to come online before May 2018 – the testing phase keep pushing the eventual operations delayed. The production in the range of 4% – 8% has also affected the RLNG supply chain.

There is also an insurance issue going forth. The National Insurance Company Limited (NICL) has already refused to provide reinsurance cover to the two RLNG projects of 2,460 MW saying the risk factor is on the higher side, as the plants had never been tested or tried anywhere in the world and therefore the Ministry of Finance should provide a counter-guarantee for the reinsurance. The Government remains in a quandary whether to provide for a counter-guarantee or it should start operations with adequate insurance. If NICL seeks a reinsurer to arrange cover from a private entity from the global market, the insurance cost will certainly increase and so will the tariff. Further, since the plants have not come online as per the COD, the Government is believed to have imposed penalty of $1,200,000 per day on the contractor of both the projects ($600,000 per day penalty to each contractor) – which does not bode well for the contractors and sets a bad precedent for the investor community. The Bhikki power plant is also assumed to have come to a halt, as the seal of the power turbine-4 had burnt damaging the rotor. As a result, the Unit-4 is no more operational. The repair will take additional three months.

Power Generation Units – Existing Plants

The performance of public sector thermal power plants (GENCOs) have been found to be lacking in terms of all Key Performance Indicators (KPI) for the past many years. As NEPRA reported in its 2016 State of the Industry Report:

It was also observed that a number of power generation units have outlived their useful lives, operating at lower than their rated capacities and inferior efficiencies. These power plants have not only poor operational results, the work force which is already on the higher side on per MW basis remained idle due to their closure and non-operation; contributing towards higher cost of generation”

It further continued:

In order not to pass on imprudent costs to consumers, the Authority had earlier advised all the GENCOs to carry out performance tests, so that degradation in their operational capabilities, efficiencies and administrative factors like manpower and overhauling and maintenance schedules are set afresh. The performance tests for two of the GENCOs (TPS Jamshoro and TPS Muzaffargarh) have been completed and the Authority while deciding on the tariff petitions of Jamshoro Power Company Limited and Northern Power Generation Company Limited have determined tariff components using the latest results. At the same time concerns of GENCOs have also been addressed by allowing certain parameters which were not part of their tariff earlier.

Operation of new power plants like 747 MW Guddu Power Plant and 425 MW Nandipur Power Plant are also glaring examples of poor governance by the public sector. In case of Guddu Power Plant, according to the information provided by the company to NEPRA, the plant underwent testing and commissioning for more than 8 months, whereas prudently done, testing and commissioning phase lasts for 20 to 25 days only. Even after the COD, 747 MW Guddu Power Plant, which is among the most efficient plants in the country, has been operated for 53% of the time only, during the reporting year. Nandipur Power Plant is another typical case of poor handling by the management. However, refusal of the regulator, to allow any imprudent costs related to such projects, is not viewed in the context of the health of overall power sector”

Sector Update – Pakistan Power Sector 2018

Introduction Pakistan’s Power Sector

Under Pakistan’s constitution, Electricity is a Federal Subject. The Council of Common Interests (CCI) is the highest constitutional body in the country and is responsible for formulating and regulating the sectoral policies of the electricity sector. However, the Constitution does provide that the Provincial Government may play an important role:

  1. by requiring supply to be made in bulk for transmission and distribution within the Province;
  2. by levying tax on consumption of electricity within the Province;
  3. by constructing power houses and grid stations and lay transmission lines for use within the Province; and
  4. by determining the tariff for distribution of electricity within the Province.

Pakistan continues to face myriad power sector challenges. Chronic load shedding, caused by technical, operational, commercial, and regulatory barriers, has reduced industrial output, crippled economic growth, and has created social unrest. To avert a looming energy crisis, Pakistan needs to address structural deficiencies in its power sector to provide an enabling environment for private sector investment to close a growing power deficit. At present, Pakistan’s almost 30,000 MW installed capacity is insufficient for the country’s growing population of 220 million (of whom 60 percent is believed to have access to the grid with others relying on off-grid solutions and other sub-standard fuels). Moreover, with losses at the distribution level of up to 40 percent in some DISCOs (HESCO, PESCO and SEPCO), not all of it reaches the end user. With the new capacity additions through China Pakistan Economic Corridor (CPEC) and Government’s own push to install new generation capacity, Pakistan will relatively receive new power generation capacity the extent of 10,000 MW which is expected to improve system efficiency and lower fuel cost. However, there remains a substantial capacity which is run down, obsolete, and inefficient and requires rehabilitation. A third of the existing capacity is fueled by fuel oil (“furnace oil”), with attendant pollution and economically onerous foreign exchange requirements. Though Furnace Oil is on a way out to accommodate RLNG in the fuel mix, the delays in existing project commissioning has strengthened operations of furnace oil plants for the time being. Further, end user tariffs are not cost-reflective and together with low collection rates, high transmission/distribution losses, theft, and technical/managerial inadequacies — render the power sector incapable of financing itself. The tariffs are financed primarily through surcharges – which have attracted litigation and have not resulted in industrial competitive disadvantage. The circular debt – last settled in 2013 for Rs. 480 billion – has again surfaced up and has touched a north of Rs. 500 billion already with additional Rs. 500 billion in the accounts of Power Holding Private Limited (PHPL). As such, it seems a challenge to shoulder the continuous O&M price tag to sustain the growing supply base given the operational efficiencies are yet to be improved. With 10% on average of loss in recoveries and 20% on average of T&D losses, the power sector losses 30% of all bills to be collected which poses a continuous liquidity challenge.

The reforms so far have also been unsuccessful. The IMF program intended to cap the circular debt at a ceiling has not been a success and no major operational improvement is yet to be observed in the system. The positive change has been led the State’s own institutions and primarily National Electric Power Regulatory Authority (NEPRA) which has taken a sectoral direction in line with international best practices and initiated a much-needed renewable energy agenda in the last five years. To expedite RE base, NEPRA gave upfront tariffs for wind, solar, bagasse, coal and liquefied natural gas (LNG) which spurred investments in various RE projects of around 2,000 MW. Also, the GOP’s investment push in large- and medium- scale public-private partnerships (PPPs) seek to expand the role of the private sector in generation, transmission, and distribution offer a potential pathway to improving the security, stability, and economic growth.

Presently, the National Transmission and Dispatch Company (NTDC) power system is being operated in a single-buyer mode, where Central Power Purchase Agency (CPPA-G) buys electricity on behalf of DISCOs and provides it to DISCOs in proportion to their actual recorded demand. The total electricity generation in the country during FY2017 was 119,276 GWh (comprised of 107,410 GWh in the NTDC system and 11,866 GWh by KE). The transmission sector is dilapidated and there is an urgent need for higher investments. On the planning side, the n-1 planning is not evident as large tripping continue to occur all over the country. NTDC has been in project partnership with China State Grid for the construction of HVDC line which will bring power down from South to North of the country. Over the years, and in the future, private investments for thermal, hydro and Renewable Energy projects, some smaller transmission lines besides private captive generation have an important role to play in the country’s power sector.

Institutional Environment

Overlapping institutional jurisdiction remains one of many challenges facing power sector governance in the country. A large number of government entities play a role in influencing policy making, governance, and/or management of the power sector, including: the Presidency, Office of the Prime Minister (PM Secretariat), Parliament, courts, four provincial governments, Ministry of Finance (MOF), Ministry of Energy (Power Division), Ministry of Energy (Petroleum Division), NEPRA, Water and Power Development Authority (WAPDA), Private Power and Infrastructure Board (PPIB), Alternative Energy Development Board (AEDB), Privatization Commission, National Transmission and Transmission Company Ltd. (NTDC), Central Power Purchasing Agency (CPPA) (G), 10 state owned distribution companies (DISCOs), and four state owned generation companies (GENCOs) along with 33 privately owned Independent Power Producers (IPPs). All the DISCOs and GENCOs are incorporated under the Pakistani Companies Act 2017, issue shares, have boards of directors, and are controlled and managed by MOE, Power Division essentially as government entities; 100 percent of their shares are titled to the president of Pakistan.

While Pakistan’s 33 major independent power producers (IPPs) are not GOP owned and controlled entities, they have power generation licenses, generate more than half of the country’s electricity, and are a key part of the power sector. The IPPs, from time to time, are embroiled in the settlement of circular debt issues and have faced clashes over the call of sovereign guarantees and non-payment of capacity dues. K-Electric, which serves Pakistan’s largest city of Karachi, is the only vertically integrated utility in Pakistan and was privatized in 2005. KE – though has improved operational and financial performance – has continued to rely on the national grid for the 650 MW of power to meet its demand.

Fact Check – Power Load shedding in 2018

There is a lot of talk whether the load shedding has ended in 2018. The Government claims that the quantum of load shedding has substantially reduced on a year on year basis and over the last five years period. However, with an objective analysis, it can be ascertained if the quantum of load shedding has declined or not. Since the monthly electricity generation numbers are available on NEPRA’s website – Resources Future has run a quick reality check.

Load shedding status: 2013 – 2016:

The government believes that they have reduced the load shedding since 2013 which was more than 12 hours of load shedding in rural areas and 8 hours in urban areas. However, it is interesting to note the actual surplus/deficit numbers reported by the NEPRA for last five years. The actual reported numbers are as follows:

Surplus/Deficit in Demand and Supply – NTDC system

Year Generation Capability (MW) Peak Demand in NTDC System (MW) Surplus/Deficit (MW)
2013 14,600 18,827 (4,227)
2014 16,170 20,576 (4,406)
2015 16,500 21,701 (5,201)
2016 17,261 22,559 (5,298)

Source: NEPRA, State of the Industry Report 2016

Going by with above numbers, the total power generation deficit has increased from 4,227 MW to 5,298 MW. This means that the overall quantum of load shedding must have increased from prior years since overall deficit in the system has shown an increasing trend. Going by the above reported statistics, the actual load shedding may not have declined up till 2016.

Load shedding status in 2017

The above numbers till 2016 implies that there must have been little improvement in actual load shedding numbers. But what about the last two years –2017 and 2018. The consolidated numbers of actual electricity generation are not available yet from the regulator and other reporting agencies. However, Resources Future has ascertained the actual electricity generation figures for the last two years based on the NEPRA’s monthly fuel price adjustment data. The consolidated 2017 numbers are as follows:

Fuel Generation 2017 – GWh %
Hydel                                           31,786 30%
Furnace Oil                                           31,933 30%
Gas                                           31,057 29%
Diesel                                             1,648 2%
Coal                                                 961 1%
Others                                             9,684 9%
Total                                        107,069 100%

 

For 2016, NEPRA reported a comparable figure of 100,114 GWh of actual electricity generation. Compared to 2016, the 2017 numbers show a 7% increase in electricity generation – not enough to eliminate load shedding completely. This implies that on year on year basis, after accounting for an increase in peak demand, the actual surplus/deficit must have remained a north of 5,700 MW and above – and almost at the same levels as of 2013 – contradicting the reduced load shedding claims of the Ministry of Energy (Water and Power Division).

Load shedding status in 2018:

To analyze the load shedding claims in 2018, the monthly fuel price adjustment numbers have been consolidated. Till date, from July 2017 to February 2018 generation numbers are tabulated below as compared to monthly numbers from the same period of FY2017.

Gwh Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18
Hydel          3,847.6      4,196.5      4,142.6      2,438.4         2,212.5     1,231.5          606.3      1,356.6
Coal              368.1          405.1          551.2          687.4            961.8         909.5      1,144.4      1,102.0
HSD              335.6          336.0            60.3                 –                   –           51.5                 –              0.8
RFO          3,198.5      3,123.0      2,328.5      2,547.5            648.5     2,251.5      1,630.5          581.4
Gas          2,145.2      2,186.0      1,882.0      1,683.0         1,778.0     1,767.6      1,657.3      1,672.9
RLNG          1,514.5      1,369.0      1,326.0      1,492.0            865.0         395.1      1,802.0      1,340.1
Nuclear              641.6          432.2          777.6          837.6            634.2         728.1          821.0          609.2
Import                54.3            44.7            49.2            48.6               40.6           38.8            38.0            34.5
Mixed                26.7              7.8            56.7            56.8               56.1           65.4            72.4            61.1
Wind              232.8            82.6          141.7            76.8               71.1         188.8            73.1            84.9
Baggasse                75.3            69.0          110.3            65.6               55.5           86.4            86.9            81.0
Solar                56.6            52.0            61.9            62.0               42.2           48.8            54.8            54.7
Total        12,496.6    12,303.9    11,487.9      9,995.6         7,365.5     7,762.8      7,986.6      6,979.1

 

Gwh Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
Hydel          3,948.0      4,249.6      4,249.6      2,762.0         2,842.5     1,642.7          511.8      1,493.5
Coal                  5.4            10.4            10.4            10.2                   –             2.5              8.6              4.6
HSD                65.5          142.2          142.2          172.6                   –           60.6          362.1              6.0
RFO          3,186.7      3,054.4      3,054.4      2,630.7         1,345.0     2,673.3      3,297.0      1,677.5
Gas          3,041.4      2,620.9      2,620.9      2,459.5         2,211.7     2,152.0      1,866.8      2,334.6
RLNG                     –                 –                 –                 –                   –                –                 –                 –
Nuclear              434.6          432.2          432.2          437.4            338.5         441.7          580.6          581.1
Import                45.8            44.7            44.7            41.3               35.0           32.1            34.6            33.8
Mixed                  8.1              7.8              7.8              6.0               14.6           27.8            32.5            36.1
Wind              129.9            82.6            82.6            71.6               46.7           54.1          106.6            81.0
Baggasse                68.8            69.0            69.0            18.7               56.0           69.8            73.3            80.5
Solar                57.6            52.0            52.0            56.4               45.3           43.2            39.9            54.2
Total        10,991.8    10,765.8    10,765.8      8,666.4         6,935.4     7,199.7      6,913.6      6,382.9

 

In absolute terms, there is an increase in electricity generation from 68,621 GWh in FY2017 to 76,378 Gwh in FY2018 – an 11.3% increase. If the same 11.3% increase continues, the country would be able to make 119,167 Gwh at the end of FY2018 – highest in its history. However, does that mean that it will be able to reduce the absolute quantum of load shedding? Again, just as it happened in FY2017, the 11% increase is electricity generation in FY2018 is not large enough to ameliorate the load shedding gap completely – as this still leaves a gap of more than 4,000 MW of average electricity generation to be fulfilled.

Net electricity generation addition:

In a snapshot, the total increases in electricity generation in the last five years has been as follows:

Year Electricity Generation (Gwh)
2013 88,835
2014 95,441
2015 97,881
2016 100,114
2017 107,619
2018 E 119,167

 

The CAGR increase in generation is 6.05% – not large enough to eliminate the load shedding, assuming the demand also grows by 5-7% per annum.

What may have gone wrong:

All the power sector projects that the government expected will be online before their term has unfortunately not been completed fully. For instance, the much awaited Neelum Jhelum power plan of 969 MW was expected online much before but so far only generates 60 MW. The three RLNG power plants of 3,600 MW are still in the testing phase and has not come online fully. Second, the circular debt has surfaced up again – albeit in a bigger proportion today. The large outstanding circular debt of Rs. 1,000 billion as of April 2018 (including PHPL) has constrained fuel supplies and has impeded continuous electricity generation. Last, the generation addition projects continue to face evacuation issues. While generating electricity has been the focus, the transmission bottlenecks has not allowed the electricity to be evacuated to distribution networks – causing the load shedding to stay as a permanent feature of Pakistan’s power sector.

Pakistan Electricity Generation – 2017

Pakistan has been steadily increasing its generation output. Total electricity generation has registered an increase of 6.7% year on year with net electricity generation in the NTDC system reaching up to 107,069 GWh in FY2017 as compared to 100,253 Gwh in FY2016.

Month on month, the total electricity generation in Pakistan peaks in the summer months when hydel power along with the furnace oil ramps up the total production. The maximum electricity generation in the country was witnessed in June of 2017 (11,461 Gwh) whereas minimum electricity generation was experienced in February 2017 (February 2017). On average, the country produced 8,922 Gwh of electricity per month throughout the year. With population of around 220 million, this means that an average Pakistani consumes 486 Kwh/capita electricity which is a fairly low number as compared to the world standards – 12,600 Kwh/capita for the USA and 10,100 Kwh/capita for UAE.

The total electricity generation for FY2017 is outlined as below:

[image src=”http://localhost/resource/wp-content/uploads/2018/05/pakistan-electricity-generation.png” width=”100%” height=”” align=”” stretch=”0″ border=”0″ margin_top=”” margin_bottom=”” link_image=”” link=”” target=”” hover=”” alt=”The total electricity generation for FY2017 ” caption=”The total electricity generation for FY2017 ” greyscale=”0″ animate=””]

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The fuel wise electricity generation is outlined as below with hydel, natural gas and furnace oil all contributing almost equally to the total electricity generation share (30%). With CPEC on horizon, however, it is expected that the share of coal will gradually increase, displacing furnace oil generation in the future.

You can download the data in the excel file from here

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Fuel Total Generation (Gwh) %
Hydel                                           31,786 30%
Furnace Oil                                           31,933 30%
Gas                                           31,057 29%
Diesel                                             1,648 2%
Coal                                                 961 1%
Others                                             9,684 9%
Total                                        107,069 100%

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