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The power sector crisis

Dr Ashfaque H Khan

Pakistan is currently facing the worst power crisis in its history. The resulting power cuts in the form of loadshedding, often lasting 8-18 hours, have served to constrain economic growth and development and also adversely affected the lives of the people, poor or even middle-class.

The power sector crisis is not a recent phenomenon. Such crises have existed in Pakistan since the 1980s with varied intensity but worsening in the last four years. A task force on energy constituted in 1994 found loss to industrial output due to loadshedding to be in the region of Rs12 billion. A survey of 200 industrial enterprises which was conducted by the World Bank in 1995 found that, on average, these industries lost 21 workdays in a year due to electricity shortage.

Then came the 1994 Power Policy of the government which opened electricity generation to the private sector. With the induction of the private sector in power generation, the fuel mix in electricity generation changed in favour of imported furnace oil. Until 2002, this policy worked reasonably well because the oil prices in international market remained low, ranging between $10-25/barrol. With the United States moving into Iraq in 2003, the international price of fuel started rising and so did the cost of electricity generation. The cost of generation, however, increased drastically in 2007-08 with an unprecedented surge in international fuel prices. Sharp depreciation in exchange rate and heavy reliance on petroleum sector for tax revenue after the NFC Award further compounded the difficulties. Today, electricity generated from furnace oil costs Rs16-17/unit.

Why has the power crisis worsened in recent years? Frankly speaking, Pakistan doesn’t face electricity shortages today. It has installed capacity of 22,500MW as of 2011. With power plants generally operating at 70 percent capacity, Pakistan can easily produce 15,750MW of electricity and meet its requirement comfortably. It is interesting to note that with installed capacity of 19,430MW in 2007, Pakistan produced 98,213GWh (Gigawatt Hour) of electricity. But with 22,500MW installed capacity in 2011, Pakistan could produce 94,384GWh of electricity, almost 4000GWh less. Is it not surprising? While installed capacity has increased, electricity generation has declined.

Why has it happened? Several factors have contributed to the decline in electricity generation. These include the T&D (transmission and distribution) losses, rising power theft, growing circular debt, rising inefficiency of power plant, diminishing state authority, and, most importantly, substantial decline in the availability of gas for power generation. In 2005, 504 billion cubic feet (BCF) or 43.5 percent gas was allocated to power generation but the share declined to 337.4 BCF or 27.2 percent in 2011, which is a reduction of 33.1 percent in six years. Gas allocated to transport sector, on the other hand, increased from 24.4 BCF (2.1 percent) to 113.1 BCF (9.1 percent) between 2005-2011 (an increase of 363.5 percent).

What have been the implications for electricity generation? In 2005, electricity generated from furnace oil stood at 13,516GWh, which increased to 33,186GWh in 2011. On the other hand, electricity generated from gas stood at the peak of 43,472GWh in 2005 but declined drastically to 25,879GWh in 2011. In other words, Pakistan moved from relatively low cost of electricity generation (Rs5-6/unit from gas) to high cost generation (Rs16-17/unit from furnace oil) in the last six years.

Higher cost of generation has forced the government to increase the price of electricity by more than 100 percent in the last four years. In a recently defended PhD thesis, Faisal Jamil of Quaid-e-Azam University Islamabad found a strong positive relationship between the rise in the price of electricity and power theft. On one hand, the government continued to increase power tariff and on the other hand power theft continued to rise with little impact on revenue to utility companies. I have been stating time and again that raising power tariff is not a solution and will never be a solution as we move forward. My position has been vindicated through the doctoral dissertation.

What can be done in the short run to address power crisis? Several solutions are in order. Firstly, as we have seen that the diversion of gas from power to transport sector has aggravated the power crisis, it is therefore suggested that through price mechanism the government must discourage the use of gas in transport sector. The price of CNG should be brought at par with motor gasoline in a phased manner so that people will have little incentive to use CNG for transport sector. Secondly, the gas so retrieved from transport sector must be diverted to efficient power plants operating at over 50 percent efficiency level.

Thirdly, there are highly inefficient power plants currently operating at 18-25 percent efficiency level. These plants have outlived their useful life and must be dismantled and the private sector may be invited through competitive bidding to set up new plants in the same area. The gas earmarked for the dismantled plants must be given to the newly setup power plants. With the same amount of gas, the new power plants will generate more electricity. Fourthly, the provision of free electricity to Wapda/Pepco employs must be withdrawn forthwith as this has become a major source of power theft. Fifthly, the government must go for a performance-based appointment for the head of distribution companies. Sixthly, the finance department of Pepco/Wapda be strengthened by inducting professional finance experts.

The power crisis in Pakistan is not because of the shortages of electricity. It is the outcome of misgovernance. The crisis is self created. Wrong policies have been pursued by the government. Development financial institution must also share the blame as they have been advising the government to pursue a one-track policy, that is, to keep increasing the power tariff. This policy has not worked and will never work. The power sector needs urgent and bold action. It needs reform more than a price hike. Is the present government ready to take difficult decisions in this regard?

The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk

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