Aug 182009

Dr Ashfaque H Khan

In my article, “Power crisis: misconceptions” (Aug 11), I presented facts to dispel the impression that not a single unit of power was added during the last seven/eight years. In this article, I intend to analyse the causes of the recent power crises and suggest measures to address this issue in the shortest possible time.

Pakistan was carrying a surplus power of over 2,000MW in early 2003 with all its financial implications. The issue at hand was to find out when the supply would match demand. Under one assumption (a yearly increase of 3 percent per in power demand) the break-even was to reach in 2010. Under the assumption of revival of economic growth the power demand was projected to grow at a much faster pace (6 percent) and the break-even was to reach in 2007.

Pakistan’s economy grew at a stronger-than-expected pace (7.3 percent) in 2003-07, and accordingly the power demand surged by almost 9 percent (the elasticity of power demand with respect to real GDP growth was found to be 1.3), and the break-even reached in 2005. Pakistan started facing a shortfall in electricity by the end of 2005. The government launched some 50 new power projects of 12,141MW from February 2004 to August 2007. These projects were to come into operation from October 2008 to December 2015. The projects so far completed include Attock Power (LOI issued on Dec 21, 2004) and Atlas Power inaugurated by the prime minister on Saturday, the LOI of which had been issued on April 17, 2007. The other power projects expected to be completed by December 2009 include Orient Power, Nishat Power, Fauji Marri Power, Muridke Power, Sahiwal Power and Engro Power. All these projects were launched between 2004 and 2006 of 1694MW and scheduled to come into operation by next December.

These eight projects were included in PEPCO’s advertisement in July, informing people that 3,500MW of power would be added by December. To be fair to the previous government, it did move to add power as soon as Pakistan experienced the shortfall. We must remember that it takes three to four years for any thermal power plant to come into operation. Thus, stronger economic growth was one of the factors responsible for the widening of supply-demand gap in the power sector.

The second factor responsible for current power crises is the unprecedented surge in the price of furnace oil in 2007-08. The price of furnace oil (fuel for power generation) increased from Rs21,259/ton on July 2, 2007, to Rs46,390/ton on June 30, 2008 – an increase of 118 percent in just one year. Such a massive increase in the price of furnace oil also increased the cost of power-generation by WAPDA and the IPPs. The government did not allow a corresponding rise in the price of electricity and decided to provide subsidy through the budget. Because of the financial difficulties the government could not pay the subsidy to WAPDA and the KESC in time, and subsequently they could not pay the bills to the IPPs. The IPPs could not pay in time to the oil refineries which, in turn, slowed the import of furnace oil. As part of the circular debt, WAPDA and KESC owe to the IPPs over Rs60 billion and Rs7 billion, respectively.

Since the surge in oil prices in 2007-08 was the root cause of the aggravation of circular debt, the collapse in oil prices in 2008-09 could have been used to eliminate this menace. Instead, the government earned Rs129 billion through the Petroleum Development Levy (PDL) and treated this as non-tax revenue. This money could have been used to eliminate the circular debt. In such a case, the PDL, instead of being treated as non-tax revenue, would have been part of expenditure and the fiscal deficit would have widened by this amount, thus breaching the IMF target. But the government could have persuaded the IMF about the impending serious implications of rising circular debt. This was not done and the issue of circular debt continued to aggravate, causing serious power shortages. Non-payment of electricity bills by some departments of provincial and federal governments in time and the continued accumulation of outstanding electricity bills in FATA adversely affected WAPDA’s finances which, in turn, contributed to the rise in circular debt.

What needs to be done in the short run? The government could follow a two-pronged strategy – conservation on the one hand and increasing generation on the other. On the conservation side the government may take the following measures: i) implement the prime minister’s decision to close the markets by 9.00pm; ii) disallow marriage ceremonies in marriage halls at night to prevent unnecessary wastage of power and iii) the prime minister may ask people to switch off at least one bulb in their houses and announce that he and the Presidency will switch of 1/3rd bulbs. At least 2/3rd street lights in front of Parliament building may also be switched off. These measures will save approximately 1,000MW of electricity.

On the generation side, the government can add over 1,300MW power in the shortest possible time by simply ensuring the supply of fuel, gas and furnace oil) to the existing power plants. Almost 1,700MW power from eight projects launched by the previous government will be added by December 2009. Thus, almost 3,000MW power will be available by December 2009. If we succeed in conserving even 500MW, it will lead to the availability of 3,500MW by the end of the year.

If the shortage still persists, the government can take the route of Rental Power Plants (RPPs) which can add power in the shortest-possible time. However, the government will have to make the transactions more transparent. Thus, a combination of conservation and generation will bridge the gap between demand and supply to a greater extent in the shortest-possible time.

The writer is dean and professor at the NUST Business School, Islamabad. Email:


 Posted by at 6:25 pm

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