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.

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.