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There’s a way but where’s the will?

By Ghufran Khan

As another wave of power riots sweeps across the country, one wonders if the government is really serious about addressing the structural issues of the power sector. This is because the government, unfortunately, seems to be resorting again to short-term measures such as writing a few cheques to restore furnace oil supply to power plants. As the past is testament, such a myopic approach does not make for a sustainable power sector and will exacerbate the existing situation.

By assiduously following fundamentally flawed policies, the power sector –the lifeline of social, industrial and commercial activities – has been damaged and brought to its current dismal state. Little has been done to exploit the water resources of the country and there has been negligible development in utilizing the much talked about coal reserves of Thar. Meanwhile, successive governments have used gas as a tool to win political support and have recklessly allocated quotas to the industrial and transport sectors without considering the consequences of this haphazard approach. Unsurprisingly, this has created powerful lobbies, which jostle for even larger allocations. But all this has come at the cost of the power sector: in 2005, the sector used 44 percent of the country’s gas supply but is now making do with just 27 percent.

The combined effect of all this has been to increase the power sector’s reliance on furnace oil, which is four times more expensive. And this is the root cause of every issue that the power sector now faces, including the rapid increase in electricity tariff, the growing burden of tariff differential subsidy on the national exchequer and the circular debt crisis that that has paralyzed the entire energy sector.

While the people had to suffer the consequences of this mismanagement, a few powerful and resourceful industrial groups have begun generating power using gas. These industrialists are not to blame – their commercial interests were threatened by the sharp rise in electricity prices – but the government was duty-bound to protecting the interests of the people. Sadly, each successive government failed to fulfill this responsibility and more and more gas was diverted to private power plants. An estimated 1,000 mmcfd gas was supplied to captive power plants through the SSGC/SNGPL network while another 250 mmcfd was supplied through the SSGC network. This volume, if supplied to the power sector, would have been enough to generate around 5,000 MWs of power.

Shockingly, the gas allocation to private captive power plants blatantly violates the government’s own policy. The Natural Gas Allocation and Management Policy of 2005 mandates:

“Gas supply to all consumers in Captive Power Sector will be made after first meeting the requirement of Domestic, Fertilizer, Commercial, Industrial, and Power (both WAPDA/KESC and IPPs) Sectors on the following basis:

(a) Those dual fired power plants with a capacity of up to 50 MW, which employ combined cycle or cogeneration technology, shall be encouraged for allocation of gas. In order to ensure the optimal gas use for power generation, industrial units collectively setting up merchant power plants for self-consumption only will also be included in this category.

(b) Gas supply for self-power generation would be on “as and when available basis” at different locations.

(c) The pipeline extension, if required, would be at the cost of the sponsor of the industrial unit.” and (b) The gas load does not exceed 1 MMCFD.”

Clearly, a handful of captive power plants have been supplied huge volumes of gas at the cost of the power sector that serves millions of ordinary people and thousands of industrial and commercial entities. The ever decreasing supply of gas to the power sector has also led to annual imports of additional furnace oil worth Rs. 700 billion, of which Rs. 300 billion is the additional burden on government’s resources in shape of tariff differential subsidy.

That the state is allowing this state of affairs to continue, only to protect the interests of a small minority driven by its own selfish commercial interests, is mindboggling. Even so, if the government is serious about reviving the economy and providing social justice to the people, it will need to make decisions for the greater good. And the first bold step would be the revocation of all gas allocations for captive power plants. The gas so freed up must then be supplied to the power sector so as to provide relief to individuals, businesses and industries, which have equal rights to this scarce national resource.

The strategic benefits of such a decision would be immense. More gas for power utilities means cheaper power generation. Even if we generate just 5,000MW, this could potentially reduce tariffs by over Rs625 billion. This will also reduce the amount paid under the Tariff Differential Subsidy, at present almost Rs300 billion annually. More gas will also reduce the hours of power outages, which will in turn drastically improve the cash flow situation of the power utilities and enable them to improve performance. The net impact would be a significant reduction in the circular debt volume that would not only energize all power utilities but also invigorate the entire energy sector.

Given the benefits, the government should also consider the following additional steps:

I. Increasing the price of gas for captive power plants by at least 150 percent so that they get power at the same rate as industrial consumers of power companies. This will encourage them to use supply from power distribution companies.

II. SSGC and SNGPL should ask independent auditors to unearth the irregularities in the implementation of the 2005 gas allocation policy.

III. NEPRA should not grant any more licenses for captive power plants and should conduct a financial and operational audit of each existing plant. The regulator should also take action against any plants found to have reduced capacity offtake from power plants and made a shift towards self generation or those involved in selling capacity to a third party. According to section 22 of the NEPRA Act, such companies need to serve a notice period of three years and pay cross subsidies as well.

IV. Distribution companies should be empowered to disconnect supply to those industrial/commercial/bulk customers that have keep the utility connection as a backup and are thus violating the regulations outlined in II and III above.

V. Distribution companies should be directed to utilize the capacity freed up by the above measures and provide new connections to industrial applicants.

VI. Distribution companies should be directed to ensure uninterrupted power supply to all industrial consumers.

VII. In accordance with the gas policy of 2005, the maximum amount of gas must be diverted to the power sector. The gas allocation policy should also be revised to give top priority to the power sector.

VIII. Part of the benefit of the reduction in Tariff Differential Subsidy must be passed on to the industrial sector in order to encourage them to switch to power utilities.

IX. Distribution companies should be directed not to procure power from captive power plants using gas or furnace oil for generation and to prefer those plants that use coal or renewable sources.

We need an all-inclusive policy that revitalizes every sector of the economy, not just a few individuals or industrial groups. Fortunately, we have the solution to the present power crisis. We only need our decision makers to take the right step now, before it is too late.

The writer is chief communications officer of the KESC.

FACTS

5,000 mw

of power can be

generated using

approximately

1,250 mmcfd gas

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