One of the most talked about subjects on every forum these days is the crisis in the power sector. Everyone seems to be presenting a solution according to his or her own understanding of the challenges this sector faces. However, it would be prudent to first comprehend the core issues, as only a clear understanding of the real problems would lead to relevant, all-inclusive and multi-phase solutions that are needed to turn around this ailing sector of the economy.
Growing cost of generation
The biggest issue is that of the continuously growing cost of generation, as our power sources have shifted from low-cost to the most costly. We used to have predominantly hydro-based power generation, which is the most economical way of generating electricity. The good work of the '60s and the '70s on development of water resources was not followed and this was our first strategic mistake. The second strategic mistake was that we did not do much practically to develop the huge coal reserves of Thar. The possibility of importing coal was also not considered as an option, though it would have been a viable alternative in the interim. Even then we had the natural gas available that should have been utilised for power generation, but our myopic policies resulted in wasteful use of this precious natural resource on transport and private power plants. The gas was diverted from power generation companies to these less productive sectors, not realising the adverse impact this would have on the power sector and consequently on every other sector of the economy. Ironically, this diversion occurred in violation of the government's own gas allocation policy, which clearly stated that captive power plants would be supplied gas only if power and other sectors' needs are met. As a result, today we rely heavily on furnace oil for power generation, which is the most expensive fuel and at least three times costlier than coal or gas. We largely import furnace oil and hence we are vulnerable to international price fluctuations. Our fundamentally wrong policies and practices have resulted in a significant increase in consumer-end tariff due to even higher increase in cost of electricity generation. Had adequate volume of gas been diverted to the power sector, we could have avoided this highly inflationary trend.
Tariff subsidy
Since our cost of power generation increased exponentially due to incorrect policies and ineffective implementation, the government had no choice but to keep the tariff artificially low by not passing on the full increase in cost to the end consumer. According to safe estimates, the government has to pass on Rs 25 billion every month under this head. Again, this additional burden on the national exchequer could have been avoided if we had not messed up our power source-mix.
Circular debt
Consumer tariff subsidy is passed on to the end user by distribution companies, who then submit their tariff differential claims to the government. The government generally takes months to settle these claims and the delay results in acute cash flow issues for distribution companies, whose ability to pay to the generation companies is severely impacted. The generation companies then fail to make timely payments to fuel suppliers, who in turn fall short on payments to refineries and other local and international fuel providers.
The cash flow and operating performance of the power sector is also adversely affected due to electricity theft and non-payment of bills by both individuals and institutions. These issues only add to the problems of the already distressed power sector.
The way forward
The vicious circle of circular debt continues as fundamental issues are not addressed and our cost of electricity generation remains one of the highest in the region. For things to improve, the tariff subsidy has to be abolished, not by passing on the present inefficient cost of generation, but by bringing it down. The power source-mix has to be optimised if we intend to sort out the present state of affairs. The electricity tariff is already very high and any further increase would only worsen the situation as incidence of electricity theft and non-payment would also increase.
Reduction in cost of generation can be accomplished by taking short, medium and long-term measures. This achievable strategic goal will not only help us come out of the circular debt issue but also eliminate the need for tariff subsidy, improve the cash flow position of the power sector and ultimately eliminate the power supply constraints.
Short-term measures
We have to immediately increase the gas supply to the power sector in line with the "Natural Gas Allocation and Management Policy 2005". The gas allocated to the captive power plants in violation of the said policy has to be diverted to the power sector so that the benefits of this shared national resource are passed on to the common man. We also need to reconsider our policy vis-à-vis gas usage for private transport. The current gas allocation policy needs to be revised and due importance and priority has to be given to the needs of the power sector. Supplying the required volume of gas to the power sector will have an immediate positive impact. The tariff subsidy amount will go down drastically and electricity supply would also improve significantly as the improved cash flow position of the sector would allow full utilisation of available generation capacity.
Non-payment of electricity bills is a major issue being faced by power distribution companies. According to safe estimates, government institutions owe over Rs 125 billion to electricity distribution companies in outstanding bills. More or less the same amount is to be recovered from private consumers. The government must ensure payment of its own entities' unpaid bills through a direct adjustment mechanism that already exists in the form of the federal adjuster. While distribution companies need to collect money from private consumers, they also need support from the legal system, which is not very effective and helpful at the moment.
Electricity theft is another big loophole that results in the loss of billions of rupees to the power sector. Appointment of professional and empowered managements and human resource reforms are the critical firsts to control this menace. These, along with stringent laws and their effective implementation through electricity courts, can bring about major improvements in this area. One would expect that as these companies' cash flow situations improve, they would themselves invest in technical solutions to control theft as well as non-payment.
All of these steps can be taken in the short-term and would provide much needed respite to the struggling power sector. It is in our own national interest to fix this core issue and the government must make the requisite decisions, no matter how tough they are.
Medium-term measures
LNG import should be pursued on priority basis to meet the ever-growing demand. There are fast track infrastructure solutions available that can be deployed before we build our own LNG terminals. Power plants that are currently running on furnace oil must be given a lucrative package to convert to coal-fired generation. New coal-based power projects must be incentivized.
Policies need to be simplified and pending issues must be addressed with respect to renewable energy sources, eg, solar, wind and bio so as to provide the much-needed impetus to the potential investor. The current pace of work at Thar coal should be accelerated to exploit the huge energy potential that it offers. The desired development work in this area would stimulate investment in large-scale power generation projects. Similarly, various small-scale hydro projects that are currently under way need to be completed on war footing for the obvious economic and social gains.
Long-term measures
It is imperative that we tap the enormous hydropower potential in the long-term by starting work on both large and small-scale dams. The long-term impact of these cannot be overemphasised for the power and agricultural sectors. Again, Thar coal reserves need to be exploited and the infrastructure work has to be completed on top priority. The gas pipeline project with Iran is of great value to us and must be pursued aggressively by all means. We have to accelerate our oil and gas exploration initiatives as well. There are known gas reservoirs that are not being utilised at the moment due to legal issues. Whatever the constraints, we need to resolve them and increase our gas output by exploiting every available source.
All of the above steps are critical for the long-term survival and development of our country. It is, therefore, imperative that a comprehensive and well-integrated plan is developed and executed with full force. Power demand would only increase with time and we have to ensure that we add the required capacity at the right time using the most economical sources of power. Both availability and affordability of power are of strategic importance. Only a vibrant and viable power sector would guarantee sustainable economic and social development of Pakistan and that is reason enough for the government to build this sector on a sound and robust footing.
(The writer is Chief Marketing & Communication Officer, Karachi Electric Supply Company)
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