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Energy quagmire

That power sector continues to be one of the most profound challenges is a stark reality that has found its best expression in the ongoing but seemingly stalled Pakistan-IMF talks as the global lending agency has voiced its serious reservations over power subsidies.

Chief Minister Punjab Shahbaz Sharif made commitments on the timeline to eliminate loadshedding, but it soon became clear that more time would be required to solve this conundrum than promised at the election rallies. Prime Minister Nawaz Sharif wisely decided to take a more realistic course. And now Minister of Water and Power Khawaja Asif, previously the most vocal critic in the opposition ranks, appears to be fully briefed about the Herculean task and is desperately trying to be more realistic. Chairing a meeting only a couple of days ago, an upbeat PM stated that the New Energy Policy would be a panacea for all energy ills. We wish the government ‘best of luck’ for the sake of our people. However, we would like to point out the potential gap in its policy ie weakness in implementation arising from a profound lack of technical expertise.

We have a history of making the best policy possible on paper. Institutional weaknesses in implementation have been our Achilles’ heel. Faulty data and misplaced assumptions sometimes also lead to a wrong approach. For instance, there appears to be no clarity on the operational and reliable supply of electricity in our existing system. According to the power ministry, it is 19 to 20,000 MW. On the other hand, an audit of the system places it at 14,000 MW. According to Nepra, the cost of delivery of electricity is Rs 14.70 per unit. This is based on 100 percent collection by the Discos. This assumption is also erroneous if one applies the discount factor. Then the cost of delivery could be as high as Rs 19 to 20 per unit. Similarly, there is a weak correlation in subsidy to supply for the power sector in 2013-14 budget. In case, the power supply situation improves next year (we hope it does) – the subsidy amount will also soar unless the tariff structure is drastically reformed. At present, 80 percent of the subsidy goes to consumers using up to 300 units. The cross subsidisation of these ‘lifeline consumers’ is by commercial and industrial consumers and not met from the budget.

Further, the charging rate is said to be Rs 8.88 per unit. But once a discount factor of the actual collection is put in the model – this rate reduces to seven rupees per unit. As a result this yearly increase in the subsidy amount always exceeds the budgeted figure year after year. At least one can say that the first step has been taken by clearing circular debt of over Rs 300 billion to Independent Power Producers (IPPs). The supply situation would hopefully improve. However, this is only one part of the solution. The other part has to be timely import of furnace oil – its supply and dispatch upcountry – and, maintaining adequate stock of FFO by the IPPs. Availability of domestically-produced natural gas to power producers is to get a priority. It is at this point in time that the policymakers will get into a ‘catch-22’ situation.

Importing natural gas either through a pipeline or as LNG as well as conversion of furnace oil-based plants to coal-fired units will require not only a huge amount of fresh investment but a three-year timeframe to accomplish the task. Till then the country has to share the gas shortage not only between provinces but also among various businesses clamouring for cheap gas. This requires decisions based on political acumen as well as on country’s economic needs. The 18th Amendment to the constitution gives provinces rights over the mineral wealth ie fossil fuel and gas discovered within their respective boundaries. How ironic, however, it is that not only does Punjab fail to produce any significant amount of gas, it happens to be the largest consumer among all the four provinces. Following in the footsteps of its predecessors, the new government has given domestic users of gas the topmost priority followed by electricity producers. Pakistan’s flagship industry -textiles – seeks priority over power producers. The government has to decide whether it wants large conglomerates to exist and prosper or it wants industrial clusters of small and medium enterprises which are said to be a backbone of any economy. It increasingly appears that the PML-N government would like four big boys to convert the furnace oil-based plants to coal. Which means coal conversion policy is anchored on large conglomerates. All Pakistan Textile Manufacturers Association (APTMA) has firmly rejected giving priority to IPPs over Captive Power Plants (CPPs) as this sector employs 38 percent of country’s workforce and has an over 50 percent share in exports, fetching nearly 13 billion dollars annually. According to APTMA, cotton and ancillary textiles contribute 10.5 percent of GDP.

Fertiliser sector has been relegated to fourth place and CNG to the last – with a clear choice to phase it out. It needs to be pointed out that nearly all captive power plants are single cycle, while the four natural gas-based IPPs are combined cycle power generation units; these are definitely more efficient. For a fair comparison, however, this efficiency needs to be pro rata discounted with line losses when electricity reaches a factory. The average charge paid by our regional competitors, for electricity at Rs 4 per unit. Textile spinners having ‘captive power’ and are supplied with cheap natural gas, claim the cost of power at Rs 5 per unit and spinners say it is 30 percent of their cost. Buying electricity from Discos within the Pepco system will cost them Rs 12 to 14 per unit. They argue that this would make them increasingly uncompetitive, which could result in a dangerous fall in textile exports.

Economics is not an exact science. Between choices and trade-offs government has to decide where to create the hub for coal-gasification. The situation underscores the need for converting gas-based plants to coal-fired in Punjab. Importing coal and maintaining an uninterrupted supply chain is more costlier than taking electricity through a grid. Coal gasification plant needs to be based in Sindh. India’s Gujrat has become the industrial hub mainly because of its geographical advantage – it has a coastline – and relatively better infrastructure. Historically, land-locked provinces in India are raw material providers. But none of India’s states or provinces is 50 percent of the country. Pakistan is different and has been different. East Pakistan was 56 percent of the country in terms of population and since its secession Punjab finds itself in that painfully awkward position: more people live in this province than in the rest of the country. PML-N, therefore, needs to carry the other three provinces where it has hardly any significant representation. Nawaz Sharif is, therefore, required to carry through on his promises by demonstrating his skills in managing state and political affairs as a prime minister whose worldview is not influenced by narrow parochialism.

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