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Energy crisis calls for a radical policy change

PAKISTAN’S energy crisis, if not tackled at both operating and strategic level in the immediate future, might become a national security threat.

It has been a major drag on the economy and a serious impediment to growth with an estimated cost of 10 per cent of the GDP over the past five years.

The present crisis started around 2006-2007 as a gradual increase in demand outstripping power generation. The installed generation capacity is 23,500MW but at any given time, the actual available capacity has remained below 14,000MW because the independent power plants (IPPs) have not been able to buy the fuel oil, and production of old plants in the public sector has dropped causing a shortfall of 4,000 to 7,000 MW.

While it is true that the IPPs are not producing enough power to meet the shortfall, it is only part of the problem.

Total electricity generation has virtually remained flat since 2008 despite an increase of 7,827 GwH produced by the IPPs since the generation by old public sector power plants (otherwise known as Gencos) decreased by 7,647 GwH as shown in the table. The government’s failure to upgrade and make capital investments in old facilities like Jamshoro and Guddu thermal power plants not only caused the production to fall but also contributed to higher cost of generation. Due to poor maintenance, public sector power plants lost nearly one-third of their capacity and nearly 17 per cent of their thermal efficiency due to plant degradation. In addition, hydro power plants were mismanaged causing a fall in their output in 2012.

However, the energy crisis is not about the installed generation capacity. While one can blame incompetence of the previous government for the present level of power shortages, the structural reasons go far beyond just the circular debt, bad governance and corruption. Hence, policy prescriptions that remain limited to the revision of tariffs to recover full cost of power generation, phasing out of subsidies, and the removal of the so-called circular debt may buy some time but will ultimately fail to address the fundamental causes of the crisis.

Therefore, the conventional wisdom and mantra of market-driven reforms articulated by the World Bank and some economists need a full and deeper examination by the incoming new government. It is pertinent to point out that in South Korea, 93 per cent of electricity generation is done by a vertically integrated publicly-listed corporation (Kepco) controlled by the government.

Only a massive and determined state intervention by a strong political leadership involving a) radical restructuring of the power generation sector, b) consolidation, reorganisation, and recapitalisation of the distribution networks, and c) mega investments in hydro, coal, and nuclear energy (secured through friendly foreign governments and other sources) can provide a lasting solution to the energy crisis which is too big and complex for the private sector to manage given the ground realities of the country’s political economy. A lesson learnt from the 2008 global financial crisis, when big banks were brought under the state control by the western governments, is that during extra-ordinary situations that threaten to destablise an entire system, there is no alternative to state intervention no matter how undesirable it may be in ideal conditions.

Pakistan’s energy crisis resulted primarily from the failure of a strategy which was driven by short-term considerations and misguided notions about the role of the private sector and how it should be engaged. Until the mid-1980s, the Water and Power Development Authority (Wapda) and Karachi Electric Supply Company (KESC), the two public sector organisations responsible for the generation, transmission, and distribution of electricity did a reasonably good job.

Faced with the power shortages in the early 1990s and due to delays in exploitation of hydropower potential in the country, the 1994 energy policy opened up the power generation industry to the private sector. There were two serious flaws with that policy.

The private sector was asked to participate in what was rather the easy part of the energy sector: generation. The policy attracted investments only in the thermal power as it offered a quick and almost risk-less way to make money due to the generous terms offered to the investors. The most difficult and challenging part, that is, managing the distribution was never privatised except in the case of badly executed privatisation of KESC in 2005.

Second, the 1994 policy was against the very spirit of free market economics as the private sector was guaranteed a rate of return for putting in a rather small portion of its own equity while major risks were assumed by the government and 70-75 per cent of the investments were actually financed by the bank loans. The first big step in this direction was the Hub Power Project (or Hubco), a 1,292MW, $1.6-billion thermal project that was actively supported by the World Bank. It was the beginning of a strategic blunder that was to haunt Pakistan decades later. This policy was continued by the successive governments and though adding thousands of megawatts to the electricity generation capacity also made Pakistan hugely dependent on the most costly source, that is, thermal power, especially on oil.

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