Dealing with power surplus

Not long ago, Pakistan was going through 12-14 hours of load shedding. Not so long after, Pakistan may have a power surplus. But hold your horses; the equation is not as simple as being reflected by name plate capacities.

First, the availability of data on demand supply is peculiar; and nothing can be said definitely on actual numbers. The demand varies according to seasons and of course to price while supply varies in relation to water availability. Also, in days of higher fuel prices, government curtails supply to check on import bill and circular debt.

But for sure, the gap has thinned in the past two years which is also visible from near zero load shedding for industry and much less for domestic and commercial consumers. The demand usually tapers off in winters. With new capacity coming online in November and December, there might be a case of power surplus these winters.

The new plants will keep on coming in till 2021, and by that time there might be a summer season with supply surpassing demand. However, the way GDP is growing and seeing the rising consumerism and industrial expansion to cater the domestic demand, over-supply will always be short lived.

Would the tariffs also decline with higher supply? Based on economic principles, they should. But in a highly regulated sector, where all IPP are ensured capacity payments with or without any generation, the demand and supply are simply not the factors in determining price.

Another issue that haunts analysts is that with no meaningful change in distribution and transmission losses, any incremental power generation and consumption would result in higher absolute losses and in turn circular debt would keep on piling. And any upward revision in international prices could result in not only skyrocketing import bill but also an inflated circular debt. This could trigger twin deficit (fiscal and current account) and government would simply be producing and buying less electricity to curb the crisis.

The twin deficit crisis is reminiscent of 2008 triggered by higher fuel prices. Those were the days of 12 hours plus load shedding. Ever since, oil prices have come down, along with one-off clearance of circular debt, the power demand supply gap has thinned. Since, the consumer electricity prices did not change much in accordance with low input prices, the demand did not move up north. For instance, in case of petrol, low prices have triggered higher demand which is visible from unprecedented growth in petrol consumption.

That is not the case of power. In essence, low fuel input prices have lowered both the import bill and circular debt and hence part of power shortage problem was resolved without addition of power generation. Rest of the gap is being met by new supply that started coming in since 2016; and the supply would keep on increasing till at least till 2021.

The good part of new generation is that these plants are better in efficiencies than the old GENCOs. The question is what would be the fate of old GENCOS once the new plants are online. In case of IPPs, irrespective of age and generation, the capacity payment has to be made to each and every plant till the time power purchasing agreement is in effect. The first IPP’s (KAPCO) PPA is expiring in 2021 and then there is no termination till 2026.

Hence, the IPPs have to be operative for justifying capacity payments in PPAs. A viable option could be to start closing GENCOs, once generation is in surplus as the capacity payments to GENCOs are not hefty. That is a politically tough exercise as Sindh government my resist in closing Guddu or Jamshoro plants.

That said, gradual closure should be the order, to make up for any teething problems with new IPPs and for contingency requirements. The need is to slowly reduce the human resource in these entities and operate them only when the power is in shortage. And by 2021-22, when all the new 11,400 MW capacity is online, these old GENCOs should be shut down.

The fuel mix has been altered with enough RLNG (3600MW) and imported coal (3600MW). The immediate threat of shortage is resolved. It’s good to look for options for future plants as demand may grow disproportionately with high GDP growth. But the need is to have a closer look at the import bill. There should be a ban on any plant based on imported fuel and the need is to opt for indigenous fuel options.

Recent announcement by Punjab government on imported RLNG plant (1200MW) in uncalled for; and the need is work on hydel and Thar coal based power generation options beyond 2021.