Cost of power outages to the Pakistan economy

By Shahid Javed Burki

 

THE second annual report of the Beaconhouse Institute of Public Policy offers a menu of options for the policymakers in Islamabad.

 

Joining me as the authors of the report titled ‘State of the Economy: Emerging from the Crises’ are some of the more experienced policy analysts including Sartaj Aziz, Aisha Ghaus-Pasha, Parvez Hasan, Akmal Hussain, Shahid Kardar and Hafiz Pasha.

 

Here I will deal with one aspect of the analysis offered in the report. The year 2008 witnessed a major increase in the frequency and intensity of power load shedding or outages generally and in particular in the industrial sector. A manifestation of this problem can be seen in the large number of reports in the press of high incidence of outages and protests, by not only the domestic and commercial, but also industrial consumers.

 

During the course of the year, complaints by the various chambers of commerce and industry and other industrial associations that the level of production in a number of industries has been reduced due to the persistence of outages which apparently have fundamentally disturbed the normal rhythm of the production cycle in a large number of industrial units, especially in electricity-intensive sectors like textiles, non-metallic mineral products, basic metals, leather products, rubber and plastic products, paper and paper products, etc.

 

The economic costs of power outages in the industrial sector, which accounts for about 28 per cent of total power consumption, are having a profoundly negative impact on the economy. The magnitude of cost is a basic indicator of the benefits that could be realised from investment and improved management of the power sector. Major factors contributing to increased power shortages include: growth in demand for electricity, particularly domestic demand fuelled in part by subsidised tariffs; inadequate policy response to the increased demand, reflected in the lack of expansion and upgradation of power plants and the low priority to public sector expenditure on the power sector; lack of improvement/upgradation by the IPPs, partly because of the uncertainty created by the ad hocism in the government’s privatisation policy earlier; overall mismanagement of the power sector, reflected both in the accumulation of over Rs370 billion of circular debt and the heavy line losses and large scale theft; and short-term supply-demand imbalances due to the seasonality, in particular in hydro power generation.

 

Costs of outages consist of direct costs which primarily comprise the spoilage cost and net value of lost production and indirect costs incurred by firms to recover at least some of the output lost during and immediately after outages. The particular mechanisms chosen for recovering output lost, will, of course, be based on cost minimisation considerations. Typically, types of adjustments made by a firm include: acquiring self-generation capacity; more intensive utilisation of capacity; working overtime; working additional shifts, and; changing shift timings. A pattern of response by industrial units increasingly observed, is that of development of own sources of energy supply through investment in generators.

 

Some of the key parameters required to estimate the cost of load-shedding for this report have been collected through a survey of a pre-designed and tested questionnaire on a purposive sample, stratified (by city and industry group) of 65 industrial units.

 

The survey reveals that the average annual hours of outages per unit was 1379 in 2008. The average duration per day was four hours and 36 minutes. The highest incidence of outages in 2008 was between the months of December and January and in June. Industries which have been affected more by outages are textiles, machinery and equipment, food, glass and allied products. Also, continuous-process industries appear to have been less exposed to outages than batch-making industries.

 

Time losses during the outage plus restart time account for were over 20 per cent of the total time of operation. About 84 per cent of the sample units did make an effort to recover part of the lost production time. The highest proportion, 75 per cent, have done so through self-generation of electricity. Wherever generators have been installed, the extent of substitution has been high, at 85 per cent of the normal power consumption.

 

Firms which do not have self-generation capacity, either because it is not economically feasible or affordable, have tried to recover some of the lost output through other adjustments identified earlier. However, their level of recovery of lost output is lower, at 29 per cent.

 

The recovery of lost output is at a higher cost. The average cost of self-generation is almost two and a half times more than the cost of acquiring electricity from power utilities. Therefore, the extra cost to the industrial sector due to self-generation of electricity is about Rs32 billion. This is also an indicator of the extent to which profitability of firms is lower because of load shedding. Also, since such firms recovered about 84 per cent of the output, the cost of output permanently lost is estimated at Rs42 billion.

 

Firms adjusting through other mechanisms also incur additional costs which include overtime/ shift/changing working days premia to labour, additional wear and tear of machinery and spoilage of raw material/inputs in process. These costs aggregated to Rs6 billion at the national level. For such firms, the cost of value added lost is Rs77 billion. Therefore, aggregate cost to the industrial sector of load-shedding is estimated at Rs157 billion. This is equivalent to nine per cent of the industrial value added. The loss of industrial output is estimated at seven per cent of potential production.

 

Over and above the direct costs on the industrial sector, a change in value added in the industrial sector has secondary or multiplier effects on the rest of the economy. Adjusting for these forward and backward linkages increases the overall costs of industrial load-shedding to the country by Rs53 billion. Overall, power load-shedding in the industrial sector has cost the country Rs210 billion or over two per cent of the GDP, over $1 billion of export earnings and potential displacement of 400,000 workers. Costs could be even higher if impact on other sectors like agriculture and services are allowed for, which account for almost the same share in power consumption as industry.

 

Following are some of the recommendations we have made to deal with this situation. The high economic cost of unsupplied electricity justifies a case for expanding power generation capacity. In fact, there is a stronger case for upgrading existing power generation facilities, which can be accomplished at almost one-third the cost of new plants. This will require development and quick implementation of an accelerated generation investment programme, which includes the project to import 1000 MW electricity from Iran and a comprehensive programme to reduce technical losses and improve the reliability of the distribution system. Simultaneously, the enabling environment has to be improved so that IPPs investment plans can be encouraged and the problem of circular debt has to be resolved on a priority basis

 

Such a strategy should focus on a loss-minimising policy. The load-shedding schedule should reflect clear and transparent priorities, in consultation with stakeholders, and be predictable. Sectors that deserve priority, in particular should include export industries. There is a strong case to develop and implement customer outreach programmes to encourage energy conservation measures, steps to improve the power factor, and methods of limiting peak demand. It is also important that alternative sources of energy, in particular solar energy be explored. Pakistan should enhance its capacity to follow international developments on alternative sources and promote greater use of renewable energy for light, heating, agriculture and small-scale enterprise.

 

Some of the policy recommendations enunciated above can be implemented immediately while others have a medium-term perspective, given the gestation period required for completion/execution of investments. But one thing is clear. This is a crisis that cannot wait for too long to be sorted. The costs to the economy and to society are very high and their political consequences could be exceptionally grim.

Courtesy: Daily Dawn

One Comment

  1. Cost of power outage to Pakistan Economy
    I would like to commend Mr. Burki for articulating the problem power outages so
    eloquently, and more importantly, suggesting concrete solutions. Pointing out the
    obvious problems (that are actually symptoms of underlying issues) is very easy and
    therefore frequently discussed. Thus, when I read Mr. Burki’s article in opf blog
    (http://www.opfblog.com/8073/cost-of-power-outages-to-the-pakistan-economy/), it
    inspired me to praise it as well as expand on a couple of items. And since I didn’t see any
    reference to socialism, I am basing my analysis on assumption that we are talking about
    market economy and democratic Pakistan.
    When we see obvious, that is power outage and loss of production – our gross national
    production (GNP), and lack of stability in government policies, the answer is –
    government should increase the power supply and our problems will go away. Some of
    the people go a step further and suggest government to build more power plants and
    reduce line losses. I hope you noticed the common theme – government should be more
    efficient and should solve our problems. And as long as we are going to stay with this
    theme, the results will speak for themselves.
    If we are (I hope few of us are) interested in
    solving the problem of power outage and its
    effects on loss of production, we will
    have to find the root cause, identify proper
    Corrective Actions, take actions.
    Furthermore, this need to be done by: planning
    (identifying corrective actions), taking these
    actions, verifying the results, and then
    monitor/modifying these actions. This is
    known as PDCA cycle and it brought Toyota
    from a “no-name” small automaker to
    world’s number one auto maker, and lack of
    this had taken GM (General Motors) of
    USA from World’s number one automaker
    to an about to be bankrupt company who
    is on life support, costing US tax payers over one billion $/month. My point: PDCA is a
    good tool to use and had we followed it, we could have seen things a lot differently. In
    next few paragraph I will like to present few of the root causes and recommend corrective
    actions that doesn’t involve waiting on government to make and implement policies.
    First, let’s realize that we (the Pakistani people who are not happy with the outages) have
    a problem – lack of electricity. This is the symptom of larger underlying issues that need
    to be removed, if we’d like to fix the problem. Here is a brief list of those issues causing
    this problem:
    1. We, the Pakistani people, have a very narrow definition of responsibility. If you
    try listening to any group complaining about anything, you will hear the word
    “government” in almost every sentence. It is about time, we take responsibilities
    of our actions and “in-actions”. That is, you don’t close your mouth – fly will get
    in, and it is not municipal office’s problem – it is yours.
    2. For too long we have been receiving subsidies on electric power (as well as other
    things) and don’t know the “real” cost of it. Hint, the real cost of some thing is
    not the current price, or cost of producing it. For example, price per unit at the
    time of “peak demand” should be higher than price per unit during “off-peak”. It
    is time tested demand and supply principal and not a new government’s trick.
    3. Because of the above two causes, there is a lack of “empowered” entrepreneurs
    introducing projects to increase the supply of electricity, while demand has been
    increasing steadily. Simply, our supply of electricity is a lot less (3500MW) than
    our supply of electricity.
    Now, I am sure that a lot of you will disagree, question, and even call me some names for
    saying what I said. But, can you think of a logical reason and argue with me against
    these points? Once we move beyond this, my solutions are as follows:
    1. We should find the real cost of electricity; that is, what the cost of power outages
    (in KWh) is. In simplest form, if your loss was Rs. 100,000 for not having 1000
    KWh of electricity, then the cost is about Rs. 100/KWh. This may be
    significantly higher than what you pay to Utilities Company like WAPDA. Thus,
    you should try to find “off-grid” electricity that will cost you less than
    Rs.100/KWh and not the “grid” power which may be Rs.10/KWh. Also, you
    should demand, to have option of having alternative tariff rate that will give you
    incentive to use more power during “off-peak” hours
    2. Take charge and generate your own power. This can be done by installing
    alternative energy (wind, solar power) systems and/or diesel/CNG generator. The
    cost of not having power (in-action) far exceeds cost of “self generation” (action).
    Of course, self generated power is more expensive than “grid-power”, but is it
    true during power outages?
    3. Have a long term view; conserve energy! It goes far beyond changing the light
    bulbs, your decision on purchasing of any equipment should have consideration of
    its’ power usage. This goes back to principal of “real cost” vs. “purchase price”.
    Would you like to save Rs.1000 on purchase price or Rs.10,000 on operation cost
    (over ten years)
    In conclusion, I would like to emphasize that there is no “short cut”, and no magic bullet.
    There is medical term for people who expect improvements without having to do “hard
    work”. What did Alama Iqbal said about certain flower seeking beauty…? There are
    solutions and people all around you ready to assist, you just have to look up, stop
    complaining and expecting someone else to solve your problem – they can’t- they are too
    busy waiting on others to solve their problems.
    Author Aziz Khan is a Continuous Improvement and Alternative Energy
    consultant and can be reached through his blog
    http://solarpoweredpakistan.blogspot.com/ , and http://www.linkedin.com/in/khanaziz

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