Powering Pakistan’s future: A roadmap to addressing Pakistan’s power crisis through technical and institutional reforms |7 Minute Read

Author: Zishan Mahmud
email: info@egenconsultants.com

Electricity is considered to be life line of any economy and most vital instrument of socioeconomic development of a country. Electricity is pivotal in running machinery in factories and industrial units, for lighting our cities and powering our vehicles. The challenge of ensuring electricity access for industries and providing increased access to the poor parts of the population is the key issue for any government.

 

There has been an enormous increase in the demand of energy in Pakistan as a result of industrial development and population growth, in comparison to enhancement in energy production. Supply of energy however, is, far less than the actual demand, and resultantly, a crisis has emerged.

 

Pakistan’s electricity system has historically been characterised by insufficient generation capacity to meet demand, high technical and commercial losses that contribute to “circular debt”, and an over-reliance on fossil fuel imports and hydro power. In addition, more than half of Pakistan’s population live in rural areas, and only half of those people have access to electricity.

 

According to the National Electric Power Regulatory Authority’s (NEPRA) 2017 State of the Industry report, Pakistan’s objectives for the power generation sector include reduced dependence on imported fossil fuels, increased use of renewable energy, diversification of fuel resources, and security of fuel supply. Over the last four years, total generation capacity – the maximum power output across all energy sources in the country – has started to rise significantly as the nation makes an effort to meet growing electricity demand. In addition to gas, Pakistan has been historically reliant on expensive imported oil to fuel its thermal power plants. It is now striving to reduce oil use in the electricity sector to reduce both costs and the pressure that oil imports impose on the nation’s current account balance. More recently, Pakistan has seen a reduction in imported oil-fired power generation and an incresase in coal and LNG based generation. This has reduced generation costs, however one form of fossil fuel imports is simply being replaced by others. The overall cost of fuel in power generation has actually increased this year with costs at August 2018 nearly 24% higher than the same month in the prior year. Although power generation based on imported LNG is cheaper than oil and diesel, Pakistan is still subject to fluctuating fossil fuel prices if it replaces oil-based generation with LNG and coal.

Another major issue within Pakistan’s electricity system is “circular debt” which has accumulated over the years to reach Rs1.55 trillion (US$11.7bn) as at June 2018.18 Pakistan’s Economic Coordination Committee has defined circular debt as “the amount of cash shortfall within the Central Power Purchasing Agency (CPPA), which it cannot pay to power supply companies”. The CPPA is often unable to recover full amounts from the power distribution companies (DISCOs) in order to pass those amounts onto power generators. A difference between the high cost of generation and lower tariffs for some consumers creates a deficit.

Government payments to cover the difference are often delayed. A further contributor to circular debt is that DISCOs cannot recover all billable amounts; for FY2016-17 the recovery rate was 92% against a target of 100%. Another major contributing factor to circular debt is the large transmission and distribution (T&D) losses that afflict the Pakistan electricity system. The target for T&D losses for FY2016-17 was 15.3% whilst the actual loss was almost 18%. However, the total difference between electricity generated and electricity sold by DISCOs amounted to 21.6% of generation in FY2016-17. All of this leads to cash flow problems, often leaving DISCOs unable to make timely payments to power producers. In its 2017 State of the Industry Report, NEPRA notes with concern that the DISCOs have made little progress in addressing T&D losses, and have requested higher allowable losses than previously proposed. It further identifies Pakistan’s high T&D losses as a major impediment to the power sector’s financial sustainability, undermining the bankability of PPAs, and identifying the need for government to assign a high priority to the issue.

 

ADB has been the leading development partner in the Pakistan power sector, with Board approved financing of $7.76 billion from 2005 to 2017. ADB has employed an integrated approach that has included investments in power transmission and distribution, institutional and regulatory reforms, sovereign and non-sovereign financing for conventional and renewable energy generation, and technical assistance. One of these has included the Multitranche MFF project, an initiative with which e.Gen was brought onboard to share its expertise in MFF projects. e.Gen was engaged by the ADB during the preparatory phase of MFF and Tranche 1.

 

The objective of the proposed ADB Multitranche Financing Facility (MFF) was to improve Pakistan’s power transmission infrastructure and management. To achieve this objective, the program financed physical investments in the high-voltage transmission system, including the rehabilitation, augmentation and expansion of transmission lines, substations and supporting infrastructure. The physical investments would increase transmission capacity to meet growing demand, improve transmission efficiency and energy security, and evacuate additional sources of power. Nonphysical investments focused on increasing the financial management capability, regulatory relations and procurement capacity of the transmission system owner and operator, the National Transmission and Despatch Company (NTDC). The nonphysical investments were expected to increase institutional efficiency, cost recovery, competition, transparency and good governance within the sector.

 

The net addition of the 220 kV transformer capacity under tranche 1 was 3,328 MVA or 19.5% of the total NTDC capacity in 2013. In total, this was 45% of the 7,828 MVA total transformer capacity added by NTDC during FY2007–FY2013. These investments eliminated transformer overloading for the specific substations and an outage of one transmission line or transformer (n-1 condition) no longer resulted in load shedding. With the enhanced capacity of the transmission system, transmission losses were reduced from 3.8% in 2007 to 2.6% in 2016—a 1.2% decrease—while the annual input to NTDC’s power system increased from 86 terawatt-hour (TWh) to 101 TWh. As a result of the project, an additional 1.2 TWh was transmitted to the distribution networks, and the subprojects contributed significantly to the improved reliability of the country’s power supply.

 

Despite these encouraging results, it has been noted that efforts to increase the power system’s reliability and efficiency have had limited success. Efforts to address the underlying causes of circular debt (i.e., cash shortfalls across the power supply chain) and the financial sustainability of the power sector have not led to visible improvements on the ground to date. Incomplete policies and timid reforms have prevented effective interventions to fully address the underlying causes of circular debt, which jeopardizes the financial situation of the sector and the country. Continued and strong political support and guidance is thus essential to implement significant reforms. Neglecting integrated energy planning also contributes to sector inefficiencies, due to a focus on short-term fixes for structural problems. Incomplete restructuring and unbundling of the vertically integrated power utility Water and Power Development Authority (WAPDA) has also prolonged the reliance on government subsidies and bailouts to the power sector.

 

In light of these lessons, it will be important to continue to provide technical and institutional assistance to the Pakistan government to help meet its electricity sector goals. Interventions should include both strategic and operational initiatives, which could include:

  • Emphasizing support to the improvement of governance in the power sector, strengthening the regulator so it has sufficient power and authority, promoting mechanisms in sector operations that remain in effect through political changes, and supporting interagency coordination.
  • Assisting Pakistan in addressing the accumulation of circular debt by targeting its underlying causes, implementing the amended NEPRA Act, and establishing an effective system of cost-recovery tariffs.
  • Supporting long-term planning and management systems, and continuing to provide infrastructure investments in transmission and especially distribution, for being the weakest link of the power system.
  • Strengthening support to clean energy and conservation through investments in renewable energy generation and energy efficiency, as well as review the Renewable Energy Policy and associated regulations, to increase the share of renewable energies in the mix, reduce cost of generation, and mitigate impact on climate change.
  • Continuing supporting the government with advisory services towards developing a competitive electricity market and achieving financial sustainability of the power sector.
  • Promoting sovereign investments for lowering the cost of base-load power generation, building on sound integrated energy planning to increase Pakistan’s energy security by reducing its dependency on imported fuels.
  • Support implementation of an action plan for DISCO commercialization, including efficient infrastructures, energy accounting, theft reduction through ABC, improved energy accounting through AMI, area planning and coordination, commercialization and privatization analysis and steps to attract private investors.

There has been an enormous increase in the demand of energy in Pakistan as a result of industrial development and population growth, in comparison to enhancement in energy production. Supply of energy however, is, far less than the actual demand, and resultantly, a crisis has emerged.

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