July issue 2016

By | Economy | Published 3 years ago

 

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Pakistan’s economy has been hobbled by energy shortages over the past decade, seriously affecting foreign investment and hurting productivity. Prime Minister Nawaz Sharif’s government has made reducing energy shortages a top priority, embarking on construction of new dams, coal-fired power plants and renewable energy projects. Khawaja Asif, the federal water and power minister, has claimed that midway through June this year Pakistan hit record power generation of 17,350MW, though production shortfalls varied between 1,500MW and 4,700MW.

If the PML-N government manages to eradicate loadshedding, which leads to several hours of scheduled outages every day, it would significantly boost its chances of securing another term in office. Electricity shortages were among the main election issues in the 2013 poll won by the party.

Keeping in view the current gap in demand-supply of power in the face of GDP target, the government plans to bring 7,000MW on stream besides setting up 3,600MW LNG-based projects. By December 2016, the government aims to bring 10,600MW in the system. Beyond December 2017, other projects such as Dasu, Diamer Bhasha, Karachi Civil Nuclear Energy and many other projects will also be completed.

Negligible progress: Electricity generation and distribution as well as gas distribution have registered a growth of 12.18 per cent during the fiscal year 2015-16 as compared to 11.98 per cent growth in the previous year. During July-March FY 2016, the installed capacity in the PEPCO system remained 23,101MW compared to 23,212MW during the corresponding period in the previous year with hydro making up 7,027MW, thermal 15,324MW, and nuclear 750MW of the total. During the period under discussion, electricity generation through thermal remained 45,252 Gwh compared to 43,611 Gwh in the previous year, posting a growth of 4 per cent while electricity generation through hydel remained 24,544 Gwh compared to 23,478 Gwh in the previous year, posting a growth of 5 per cent. Thus, in total there was an increase of just about 2 per cent in electricity generation.

The China-Pakistan Economic Corridor (CPEC) is expected to add 10,400MW to the grid by the year 2018. The projects include coal, hydro and wind. It will also significantly change the energy mix, replacing expensive oil and resulting in a reduction of the average cost of generation. It is believed that with the sincere efforts of the government, it will be possible to build a power-generation capacity that can meet Pakistan’s energy needs in a sustainable manner.

When asked at a recent news conference if loadshedding could be eradicated in two years, Werener Liepach, country director of the Asian Development Bank, which has been lending more than $1 billion over five years as part of efforts to end Pakistan’s chronic energy crisis and implement reforms such as privatising parts of the sector and improving transparency, was categorical: “Yes.” He added that it could be done even sooner depending on other factors, such as global oil prices.

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The best way to kick-start the economy is to make investments in projects producing the commodity in greatest demand in the country — electricity. But fossil fuel-fired power has proved to be our undoing because most of our fossil fuel needs are met through imports and therefore, we are forced to subsidise at least half of the doorstep cost per unit of electricity. This is what leads to the never-ending circular debt. Hydel power has been known to be the most economical cost-wise. In Khyber-Pakhtunkhwa alone, there are scores of hydel sites, which can be exploited for short-gestation power projects producing as much as 40,000MW with relatively smaller investment and by using appropriate indigenous technologies. In view of the prevailing investment climate, it would be too optimistic to expect the private sector to take the risk and that too, in the most militancy-infested province. Moreover, our own experience, and also that of most developing countries, has shown that private sector involvement in power generation and its transmission have only pushed electricity out of the reach of most of the population, including the middle classes. So, there is a compelling reason for the state to enter the business of generating electricity.

Another point to keep in mind is that all through the years we have been trying to solve our power crisis we have been putting the cart before the horse. There is no authentic documented estimate of losses of power produced from costly imported fuel on its way to the end users. According to various studies, transmission and distribution losses are somewhere between 30-45 per cent of total generation. But for decades now, instead of trying to reduce these technical as well as non-technical losses, we have been expending our energies and financial resources on power generation and subsidising the escalating bills of end-users.

According to one study, Pakistan ranks in the top 14 among 131 countries sustaining a high rate of power transmission and distribution losses. Another study claims that while such losses amounted to 16.95 per cent in Bangladesh, 14.6 per cent in Sri Lanka, 6.7 per cent in China and 3.8 per cent in Malaysia in 2011, these have been around 23 per cent of the energy generated by state-owned power distribution companies (Discos) and, additionally, about 35 per cent of output of the privatised K-Electric. The world average is said to be 8.8 per cent while transmission and distribution losses in the range of 6-8 per cent of energy generated are considered normal.

Another major problem afflicting the power sector is said to be not adhering to the international standards for calculating these losses. As a result, we have at least three figures for such losses for the year 2011-12: 19.6 per cent, 16.6 per cent and 22.42 per cent.

So the focus now should be on overhauling transmission and distribution systems. To start with let us first agree on an internationally-recognised formula for calculating these losses. Next, let us introduce smart pre-paid meters to all end-users to curb theft and wastage. Meanwhile, let us conduct a complete survey of the transmission lines, identify and remove all technical and non-technical faults to reduce losses to at least around 10 per cent.

Not that we don’t need to add to our generation-capacity but it looks like a Sisyphean endeavour in the absence of a national effort to first curtail the huge losses leaking through transmission and distribution systems.

Electricity generated in power stations before reaching the end-users passes through large and complex networks like transformers, overhead lines, cables and other equipment. While traversing through this intricate journey, some power gets lost due in part to technical reasons, and in part because of theft, pilferage and the inefficient management of distribution.

The power lost on the way to the end-users is generally known as transmission and distribution loss. However, the financial cost of these losses is more often than not passed on to the end-users’ bills because otherwise the generating company would either need to bear the loss or at least suffer a substantial reduction in the margin of profit. And if the generating company is in the public sector, the loss is usually covered by a hefty budgetary subsidy to protect the consumers’ home budgets.

Technical losses are due to energy dissipated in the conductors, equipment used for transmission lines, transformers, sub-transmission line and distribution line and magnetic losses. The major amount of losses in the power system is in primary and secondary distribution lines. Therefore, the system that manages these lines must be properly planned to ensure that the resulting losses do not cross the technical limits.

There are a number of reasons for technical losses like lengthy distribution lines, inadequate size of conductors of distribution lines, installation of sub-transformers away from load centres, low power factor of primary and secondary distribution system, bad workmanship, load factor effect on losses, transformer-sizing and selection, balancing three phase loads and switching off transformers.

So without taking our eyes off the generation problem, the focus should be on overhauling transmission and distribution systems.

The government considers Thar coal development its flagship project and believes in it as a means to energy security. Thar Coal Projects have been enlisted as early harvest projects by the CPEC (China-Pakistan Economic Corridor), Sindh Engro Coal Mining Company (SECMS) and Sino Sindh Resources (Pvt.) Limited (SSRL) have been prioritised as top priority projects to be financed by Chinese institutions. Complete synergy between the federal and Sindh government is required to bring these projects to fruition. Total power generation anticipated from these three projects is 2400MW by 2018.

Other mentionable progress in coal sectors are: the China Machinery Engineering Corporation (CMEC) submitted to PPIB a formal proposal on 27th October 2014 for the development of a 300MW indigenous coal-fired power plant at Pind-Dadan Khan, Salt Range, Punjab (the ‘Proposal’) under the Energy 245 ECC approved ‘Guidelines for Setting up of Private Power Projects under Short Term Capacity Addition Initiative – August 2010’ (the ‘Guidelines’). Lucky Electric Power Company Limited submitted its proposal to PPIB for development of 660MW imported coal-based private power project at Port Qasim Karachi. After successful evaluation of the proposal by PPIB’s consultant, PPIB on 15th January 2015 issued Notice to Proceed (NTP) to the Sponsors. Upon fulfilment of all requirements according to the guidelines, including the submission of site confirmation letter from the Power Purchaser, PPIB on 11th February 2015 issued Letter of Intent (LOI) to the Sponsors. Lucky Electric Power Company Limited is now required to approach NEPRA for grant of Generation License and Tariff Determination. Siddiq-sons Limited submitted a formal proposal for the development of 350MW imported coal based private power project at Port Qasim Karachi. The proposal was forwarded to PPIB’s consultant for evaluation. After necessary evaluation, the consultant declared the proposal responsive as per the criteria prescribed down in the Guidelines. Accordingly, on 19th January 2015, Notice to Proceed (NTP) was issued to the sponsors. Issuance of Letter of Intent (LOI) to the Sponsors is expected soon.

While the coal route to power self sufficiency appears to be the quickest route, as well as being highly economical because of the massive indigenous coal deposits in the country and the availability of cheap imported coal, there are a number of ifs and buts that need to be looked into closely before putting so many eggs in the coal basket.

As soon as it came to power, the PML-N government came out with a grand plan for a 6,000MW imported coal-based power plant at Gadani in Balochistan. This was to accompany construction of a seven-km long jetty. The Sindh government opposed the project, demanding the relocation of the complex at Keti Bandar where the Benazir government had proposed a 5,000MW coal-fired power plant based on imported coal to be sponsored by a Chinese business tycoon, Gordon Wu. The Nawaz government bulldozed the objections but the Chinese company invited to take up the project proposed that the project be divided in phases, starting with the jetty followed by the power plant. Anecdotal evidence indicates that the PML-N government lost interest in the Gadani project when it found out that the completion of the project was not possible before the next general elections.

According to a forthcoming book by senior journalist Shahidur Rehman of Kyodo news agency who has already written two well researched books (Who Owns Pakistan and Long Road to Chagai), the Sindh government has proposed revival of the Keti Bandar project and its inclusion in CPEC. The proposal called for development of a port including a jetty, 5000MW imported coal-based power park, transmission line from Keti Bandar to Jamshoro, and a 425 Km Railway track between Keti-Bandar and Umer Kot in Thar, adjacent to the Thar coalmines where coal reserves of 150 billion tons of coal, having heating value in excess of oil reserves of Saudi Arabia, have been found. However, lack of water in Thar is hampering the development of coal-based power plants near the coalfield.

The provincial government had also proposed that imported coal-based power plants should have a provision for switching over to the indigenous Thar coal. The plea was rooted in the experience of the 150MW coal-fired power plant set up by WAPDA in 1984 at Lakhra in Dadu district, which has operated erratically in the last 30 years as specification of coal on which it was based was different from the Lakhra coal.

As the PML-N government was toying with the idea of an imported coal-fired power plant at Gadani, it asked NEPRA to notify upfront tariff for the plant in IPP mode. NEPRA was reluctant but did so. No private power producer came forward and the federal government again approached NEPRA to revise upfront tariff based on 30 per cent return on equity against 17 per cent return provided to the IPPs. NEPRA refused but was again forced to announce a revised upfront tariff based on 27 per cent return on equity with some reservations about imported coal-based power plants in Punjab. In its decision, it observed the following:

“Most of the large coal-fired power plants around the world are established along the coast primarily because of ease of access to abundant water resources and because coastal projects avoid costly road-rail transportation. Currently, neither is there a sufficient railway track nor enough railway carriage to cater to a typical imported coal-fired power plant in Punjab. Keeping in view these factors, including the long distance from the port to the proposed power plants to mid-country, the transportation is going to add significantly to total fuel cost.” By some estimates, it might be as large as $80 per ton for the first 10 years.

NEPRA was not alone in cautioning against inland imported coal-based power plants. In early 2000 WAPDA had wanted to convert GENCOs to coal and commissioned Hagler Bailey (HB) as consultant to conduct the feasibility, HB noted that a 1,200MW plant would require 10 trains of 2,500 tons each per day which was seen as beyond the capacity of Pakistan Railways.

The proposed Chinese-sponsored 1200MW Sahiwal power plant had signed an agreement with a Pakistan Railways subsidiary, Pakistan Railways Freight Company, for delivery of coal on site. But as early as January this year, Railways Minister, Khawaja Saad Rafiq said that $3.78 billion allocated for railway under CPEC were not sufficient to meet the upgradation and other requirements of Pakistan Railways. It seems a disaster is in the making because the Pakistan Railways, in the absence of the required financial resources, is likely to fail to meet its transportation obligation for the Sahiwal project.

The following editorial in Dawn on May 19, 2016 (CPEC Coal Projects) renders the argument in an even more telling manner:

“The decision by a Chinese sponsor to withdraw from a coal-based power project in Punjab reminds us of two crucial factors. First, the investment arriving in Pakistan under the CPEC bouquet is entirely commercial. These come on commercial basis and are not entirely a ‘gift horse’ they sometimes are referred as. Second, at least in some respects, the government’s much vaunted push towards coal as the fuel of choice for Pakistan’s power generation could have been conceived in haste… Locating a coal mining and power project in the Salt Range, given the peculiarities of the coal and issues with water availability, appears to be a problematic proposition to begin with. In fact, one wonders how much thought went into the decision to include this initiative into the list of ‘actively promoted’ ventures under the CPEC umbrella in November 2014. ”