Genesis of ‘Pakistan’s current power crisis’ by economics

By Iqbal Sheikh

The Planning Commission now reckons that load shedding cannot be eliminated in the next decade or so. When we look around and inside the pipeline, we see the reason for this despondency. The mood on the street and the corridors of power is not entirely unjustified. Besides the power sector seems to be in a race to the bottom with the state-owned enterprises (SOEs) as to who has higher cash, taxpayers and burn rate.

Memories of this June’s dry, relentless heat and powerlessness-power for only four hours a day are now seared into our minds, though we are now living through the second sweet spot of the annual electricity supply and demand cycle. This scribe can only envy those benign climes of Defence, Karachi, in June, which, us Lahoris, and the rest of Pakistan, can only daydream about. It had zero load shedding when I visited family there in June! This tale of two cities puts the problem in bold relief. In power realpolitik, one can almost discern the two Pakistans, Karachi Electric Supply Company (KESC) and the rest.

Six hours a day of ‘demand management’, as pros call it, is considered a good day today in Lahore. Twice during a year-once before when summer heats up the plains and then when the rains have cooled them during late monsoons and onwards- power deficit takes a dive as rising and risen rivers boost cheap supply. These two periods, before and after summer peak, are the two sweet spots where nature provides relief to harried ratepayers. We are now living the second sweet patch. Even a broken clock is correct twice a day.

Shortfall has been varying roughly between 5,000 and 4,000 megawatts (MWs). These missing megawatts are nothing but lost man-hours, lost production, lost revenue, lost taxes and lost promise. This anguish, however, is not the result of a catastrophe, an act of God or a couple of turbines getting knocked off. It was presaged and conveyed to the literate via flaming letters in the sky. The key deciders apparently did not read the morning papers.

It did not come to us by chance.

There is not enough power to go around and what we have we cannot afford. The system cannot recover full cost of generation and servicing as it has not been able to price it properly and recover it. So what is the solution? But before that what is the problem? Here is a hint.

According to National Transmission and Despatch Company (NTDC)/Central Power Purchasing Agency’s May, 2012 Energy Purchase Risk (EPR) report, presented to National Electric Power Regulatory Authority (NEPRA) in June – NTDC submits monthly EPR report to NEPRA summarising energy purchases it bought 7.561 gwhs from all, hydel, residual furnace oil (RFO) fired boilers, imports, nuclear etc. Of these 34 percent were RFO generated in independent power plants (IPPs) and GENCOs, acquired for Rs 45.568 billion, 77 percent of the total energy cost, at a rate of Rs 17.5 per Kwh. One third of the purchases constitute 77 percent of the cost!

The balance, 66 percent, 4.955 gwh costs only Rs 13,921 billion at an average rate of Rs 2.81 per Kwh. This Rs 2.81 is primarily because of ridiculously cheap Water and Power Development Authority’s (WAPDA) hydropower at Rs 0.08 per unit, in one of the better months for hydropower, gas fired power and nuclear power. High input cost and system’s inability to raise tariff and effect recoveries are just what we need for a perfect storm. We seem to have nailed the sucker. Or have we? Besides, what is the solution?

With the same level of technical losses, theft and bad debts, cheaper power, would make the losses more bearable in terms of absolute rupee loss amount! If RFO prices were halved, the losses would go down by more than 50 percent! More realistically, if the share of RFO power is reduced to 17 percent, from May’s 34 percent, by adding incremental capacity where the energy cost is less than that of Rs 17.5, system becomes ‘viable’ even with the same loss parameters. In short, it is an investment crisis. By not investing in cheaper power generation, read coal, we have made the situation worse. It is imperative to increase coal fired power generation from the current, May 2012, .0003 percent of the total to 50 percent! India, Thailand, China, USA and many more have it in that league. Without this shift in energy mix, the cost of reliable cheap electricity cannot be brought down and crisis is unlikely to end.

Just to be fair, along with these RFO IPPs, Private Power and Infrastrucutre Board (PPIB) had been working on two imported coal fired IPPs of 1,200 MWs each. If only one had materialised the situation today would have been much better. Not many can undertake a $2 billion project. Without bringing in mega coal-powered power projects, the fundamental issue of base-load, reliable and affordable power cannot be addressed. Nuclear and gas platforms can help but are they real options? While we can wait till kingdom come “for a savior to rise from these streets’ to raise us to economic heaven, following are some of implementable initiatives.

A shift to cheaper, read more efficient, sources of supply within each fuel class, essentially RFO, is the first step. The public sector RFO GENCOs are guzzlers and use more fuel per unit as their efficiency ranges from early 20s to early 30s compared to newer IPPs’ 45 percent.

It is not unexpected. Many of these like Jamshoro, Muzafffargarh etc were installed in 70s and 80s, even earlier. Bad management, lack of funds, political interference and sheer age has resulted in de-rating and efficiency loss. Against per unit cost of Rs 16 at the newer plants like Atlas, Nishat etc they cost Rs 21 or Rs 22 or even more! I would rather shut them down and transfer RFO/cash to newer plants and despatch them to the hilt. Load shedding might go up marginally but doing away with the ‘quota system’ could save a lot. Each unit not generated at GENCOs now and by transferring cash to the new plants one may save up to Rs 6 per unit! It is a lot of money.

A more urgent case can be made to transfer gas from CNG and the older WAPDA facilities – if there is any gas left there- to more efficient IPPs to get more from each British thermal unit.

One can even say that the bulk of the incremental cash losses are on account of increment in power cost only. Does anybody work out dispatch regimes, expected losses and compare the latter to actual losses? What if they despatch high speed diesel (HSD) IPPs and shut down WAPDA GENCOs? What will the results be? Could HSD IPP power be cheaper than that of some GECNO output? My hunch is, yes, though it would be quirk of input price. Are asset managers of publicly owned power asset up to the task? The market has its reservations.

Why spend tax money to attempt to restore capacity and/or bring a GENCO’s variable cost down to average cost to Rs 17.5 from currently Rs 21 a tall order, when at least some more power can be had at Rs 16 or so from a 2002 IPP, wherever some capacity is available. Will it solve the problem? Better use the capital to add new capacity or conversion to coal firing.

We must appreciate the fact that the most important step in fixing the GENCO mess has already been taken by the government by effectively handing these assets over to hard-core professionals. Let us hope that government gives them the tools and the political backbone to affect a turnaround.

The author can be reached at iqbalsheikh@outlook.com.

Source: Daily Times

PART-II

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