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Panel formed to review energy policy

The Council of Common Interests (CCI) on Tuesday deferred the new energy policy after Sindh and Khyber Pukhtunkhwa refrained from giving their immediate inputs and directed the constitution of a committee to give its recommendations within seven days.

The PML-N government unveiled its new power policy at the meeting of the CCI with ambitious targets.

Chaired by Prime Minister Muhammad Nawaz Sharif, the council, however, failed to accord approval to the much-trumpeted energy policy because of the fact that the central government shared the draft with the provinces just a night before the meeting and the provincial heads took the stance that they did not get the time to read the draft.

Sindh protested over the provision of deduction of Rs5 billion at source from the Divisible Pool which the central government did in the heads of power bills.

Sindh Chief Minister Syed Qaim Ali Shah adopted the stance that at source deduction mechanism mentioned in the policy of the outstanding bills of electricity was simply not acceptable, as the bill amounts needed to be reconciled first. Chief Minister of the Khyber Pakhtunkhwa also raised the same issue.

He is also said to have pointed out that the KP generates cheaper hydro power and gives it to the national grid but it gets back power at higher tariff. The KP consumers, facing the worst law and order situation, are unable to pay the higher tariff, he added.

A committee comprising the chief secretaries of the four provinces, secretary of water and power and secretary inter-provincial coordination ministry will review the power policy 2013 and draft bills of two ordinances to check gas and electricity theft.

The committee would give its input in the power policy and two draft bills of the proposed ordinances within seven days.

Addressing the 23rd meeting of the council, Nawaz said power thieves and government officials were hand in glove and held Wapda and other government departments responsible for the ongoing power crisis in the country.

The premier said the power issue needed a policy encompassing all dimensions and needing a strong will of the federal government as well as the federating units to make it successful. “The role of the provinces is crucial in making the policy a success,” he added.

The premier said the major problems being faced by the power sector were demand-supply gap, lack of affordability, inefficiency and power theft. He said major changes will beovercome these issues. He said Pakistan was producing 45 percent electricity through furnace oil that was costing too much and hence higher tariffs.

“Distribution losses which account for 25-28 percent and theft of electricity amounting to Rs140 billion per annum are the major causes of shortfall. We plan to finish load shedding within next 3-4 years through a multi-pronged strategy.

 “The strategy includes production of low-cost energy, tariff restructuring, efficient technology, transparency and merit-based system. Low cost energy will be produced by using coal and hydel power for power generation. Extraction of coal and development of infrastructure for power production will be carried out simultaneously to save time. Till such time that the local coal is available, it will be imported for power consumption,” he added.

He said run of the river projects were being initiated to overcome short-term demands while large dams including Bunji Dam and Bhasha Dam will be constructed over a period of time to overcome the irrigation needs as well as power shortage. He said power strategy was focused on bringing the power tariff down to the single digit in three years.

“Tariff restructuring is the main feature of the new energy policy through which subsidies will be gradually rationalized. The 200-unit consumers will be provided subsidies,” he added.

The premier said mismanagement and inefficiency of Wapda and other departments were responsible for this situation. “It is their responsibility that we are facing this situation today. They have miserably failed to maintain system and today our distribution lines cannot bear the burden. The 1400 megawatts of electricity can be brought into the system within one year only through proper maintenance of the system,” the premier maintained.

He said the government had to take lead in power projects’ implementation strategy and announced that the construction of Gaddani Energy Corridor which will provide services to investors for energy production.

“It will be a hub of electricity generation,” added the premier. The new policy moved the deadline of ending load shedding to four years. The other targets include reducing the line losses from 28 percent to 16.1 percent and bringing the tariff down to single digit, enabling the country to produce surplus power by 2018.

The new power policy contains seven points with a mission statement that Pakistan will build a profitable, bankable and investment-friendly power sector focused on meeting the needs of its population and boosting its economy in a sustainable and affordable manner.

When contacted, spokesman for the Prime Minister’s Office Mohiuddin Wani clarified that it was not the energy policy, rather it was power policy 2013 and the gas policy would be approved after Eidul Fitr.

He said the participants of the CCI were given a presentation on the power policy and all the chief ministers including the chief ministers of Sindh and KPK appreciated it.

However, they (Chief Ministers) wanted to give their inputs in the draft bills of the two proposed ordinances and on this the prime minister asked the chief ministers to also give their input in the power policy.

When asked if the Sindh government had highlighted the issue of at source deduction of electricity bills that the four federating units owe to pay, Wani said the Sindh government had raised the issue but Finance Minister Ishaq Dar clarified that the Federal Adjuster would only deduct 70 percent of the electricity dues of the provinces to be piled up in future after clearing the present dues.

However, the 30 percent remaining dues would be adjusted in the reconciliation process. This mechanism will help not build up the volume of arrears to be paid by the federating units and would ensure better cash flows.

Under the policy, the govt-owned power plants and few power distributing companies (Discos) would be sold out bringing the double digit cost of power generation to single digit, restructuring of water and power ministry, National Electric Power Regulatory Authority (Nepra), Oil and gas Regulatory Authority (Ogra), adjustment of outstanding dues that the government and privately-owned bodies are bound to pay back, through federal adjusters, and formation of regional transmission and power trading system would be made.

The power policy draft says Pakistan’s power sector is currently afflicted by a number of challenges that have led to a crisis: a yawning supply-demand gap where the demand for electricity far outstrips the current generation capacity (up to 4500-5000mw). Highly expensive generation of electricity (Rs12/unit) is due to an increased dependence on expensive thermal fuel sources (44% of total generation). A terribly inefficient power transmission and distribution system currently records losses of 25 to 28% due to poor infrastructure, mismanagement and theft of electricity.

Goals: The power policy highlighted the goals that include i) To achieve the long-term vision of the power sector and overcome its challenges, the government of Pakistan has set the following nine goals: ii) Build a power generation capacity that can meet Pakistan’s energy needs in a sustainable manner.

The policy also disclosed that efficiency would be predicted on three pillars of merit order, transparency/automation, and accountability.

 Merit order will be privileged fuel allocation on the basis of efficiency set a tariff structure that encourages efficient technology and management, optimise dispatch and payments and retire high cost power in favour of lower cost sources.

The transparency will be achieved by providing greater and easier access to information through a public website and by optimising transmission through technology and automation. And, accountability will be ensured by hiring solely on the basis of competency, signing performance contracts with heads of all entities, and exercising zero tolerance towards corruption and poor performance. Similarly, competition will be built on three pillars: upfront tariff and competitive bidding, and key client management.

Infrastructure will be developed and incentives provided to attract greater private sector investments. The government will set the foundations of energy cities and corridors and sponsor public-private partnership for coal and run of river projects.

The government will also redesign and strengthen the national grid transmission network and build a regional transmission and power trading system. The government would like to limit its role to policy making and unless necessary, service delivery will be promoted through a fiercely competitive and transparent private sector.

The tariff and competitive bidding process will be controlled by a world-class regulatory authority. Up-front tariffs will be set for low cost fuel and competitive bidding will be used to decrease the costs further.

Similarly, a transparent and competitive process will be established to privatise government assets. Under the policy, the government will assign “key client managers or relationship managers” at the Ministry of Water and Power who will act as a one window operation for investors in the power sector and ensure the timely completion of investments and projects.

Again, sustainability will be grounded on three pillars of low-cost energy, fair and level playing field and demand management.

It is also mentioned in details in the policy that the low cost of energy will be ascertained by altering the fuel mix towards less expensive fuels such as hydro, biomass and coal. The power sector will be afforded a privileged access to gas allocation. Investments required for the low cost fuel mix will necessitate rationalization of the electricity tariff.

Similarly, fairness will be ensured by protecting the poor and cross-subsidizing their consumption from affluent domestic, commercial and industrial users all across the country. And, demand management will be introduced through time of day metering; setting technology standards (such as Green Star compliance) for electrical appliances; mandating energy efficient building standards; and subsidizing low cost renewable energy among consumers.

Overall, the strategy to achieve the above goal is focused on attracting and directing local and foreign investments towards rapidly expanding the power generation capacity. Investments can only be encouraged if the sector is made attractive and bankable by treating the subsidy to the abject poor and clearing it out through cross subsidization mechanisms.

In the short run, the government has already brought the existing capacity online by retiring the circular debt. This action has provided financing to plants that were dormant due to lack of feedstock and or disputes.

In the medium term, the power ministry will attract new investments and expedite the pipeline projects on a war footing by employing a key client management system. In the long run, large infrastructure programs such as the Indus River Cascade will be aggressively developed.

The strategy focuses on shifting Pakistan’s energy mix towards low cost sources such as hydel, gas, coal, nuclear and biomass. Local and foreign investment will aggressively sought for small and medium size run of river hydel projects.

Selected hydel projects under development will be positioned for privatisation. Multilateral agencies will be invited to partner in large infrastructure hydel projects. LNG terminals will be developed in close collaboration with friendly countries such as China. Development of coastal energy corridors based upon imported coal (mixed later with local coal), rapid proliferation of coal mining all across the country-especially at Thar and conversion of expensive RFO (residual fuel oil) based plants to coal are the central tenets of coal policy.

The proposed strategy will change the energy mix of Pakistan in favour of low cost sources and significantly reduce the burden of energy to the end consumer.

Once relief from load shedding is forthcoming because of a decreased supply and demand gap, this strategy will focus on redirecting the supply of fuel from inefficient Gencos to the most efficient IPPs (independent power producers). This reallocation alone has the potential of saving Rs3billion per month and generating an additional 500 MW electricity. At the same time, the water & power ministry will sign performance contracts with Gencos, PSO and fuel transporters and hold them accountable for the quality and theft of oil. Fuel procurement contracts may be made open sourced to eliminate the power of a single supplier. Leakage will be plugged by building fuel pipeline where possible and open decanting. In the event that fuel is found to be missing or adulterated, the fuel economic value of the fuel will be appropriated to the end receiver.

The electricity generation strategy focuses on establishing plant efficiency through external heat rate testing, building a merit order accordingly, and allocating fuel to the more meritorious plants. Allocations will be made public online to increase transparency. The strategy calls for the privatization or O&M based leasing of GENCOs.

Transmission Strategy: The transmission strategy is based on installation of upgrade SCADA software to optimize transmission and monitor its losses. Dispatch will be based on economic order and internal/audit control will be established on dispatch and payment. Plants will be built closer to load centers; high voltage transmission lines will be expanded; and the 220kv rings around cities will be strengthened.

Distribution strategy: In short-term, performance contract will be signed with the heads of distribution companies and their respective boards focused on reducing distribution losses due to technical reason, theft, and lack of recovery/ collection. Smart meters will be installed at the feeder level, profit and loss accounts will to be managed at the feeder level, and the accountability will be appropriated to the Executive Engineer. A regime of reward and punishment will be use to improve efficiency and decrease theft.

In the medium term, the efficiency will be improved by privatizing a selected number of distribution companies.

Financial Efficiency Strategy: The strategy is predicted on collecting outstanding receivables from provinces and government departments. The Federal Adjuster will be appointed to settle disputes. GST refunds will be collected from the FBR and a mechanism will be built to avoid future build-ups.

The financial efficiency strategy is geared towards punishing private defaulters and proposes severing the electric connection of defaulters after 60 days of non-payment and only reconnecting them to the grid with pre-paid meters. External collection agencies may also be sourced to improve cash flows. At the same time, load-shedding may be focused on areas of high theft and low collections as opposed to the current structure of indiscriminate load-shedding.

Governance strategy: The governance strategy calls for the notification of an Official Coordination Council comprising the Ministry of Water & Power, Ministry of Petroleum, Ministry of Finance and Planning Commission. This council will ensure information integration between all these ministries and will assist in policy formulation and decision making related to energy.

The strategy requires the reformation of structural and regulatory aspects of Nepra and Ogra to improve efficiencies. New business models including power exchanges and wheeling charges will be explored. Finally, the Ministry of Water and Power will be restructured to strengthen its functional expertise. Directorates will be created for key functions (i.e. generation, transmission and distribution) and key organization such as CPPA, and NTDC will be reformed.

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