Turning around energy sector

In its 16th August edition, the Business Recorder reported that a 25-member body of experts suggested government through an open letter on energy sector problems and a set of comprehensive solutions. The experts belong to the energy sector comprising of practitioners and academia. The paper reported that the experts covered six prominent areas such as:

1. Overhauling governance and building institutional capacity;

2. Energy conservation;

3. Harnessing indigenous resources;

4. Electrification of energy use;

5. Energy efficiency and removal of price anomalies; and

6. Deregulation and privatisation.

These are crucial areas. More importantly, the suggestions are pointing in the right direction. Pakistan can’t overcome its energy crises in the long run unless it implements the measures suggested.

The experts have rightly pointed out that the energy sector is holding back Pakistan’s economy and is a cause of imbalances in the current account and foreign trade. They have rightly pointed out that we landed in a mess due to misguided policies in the past.

To be fair to policymakers of the past and present, the critique launched by experts though ideally correct, has ignored some fundamental realities. The management systems in a country do not work in isolation. These cannot be separated from the overall economic and political milieu. The management systems, whether good or bad, evolve under economic and political constraints. The energy sector management and regulatory regimes evolved under specific economic and political constraints and are still working under these compulsions.

Let us dissect all the suggestions the experts give and see the underlying economic and political factors shaping the energy system in Pakistan. The suggestions given by experts would automatically come into practice once the underlying economic and political constrains are removed. Without addressing the economic and political constraints, we can’t move significantly ahead in reforming the energy system.

The number one (1) area of governance and institutional capacity pointed out by experts is no doubt crucial for reforming the energy system. However, bringing efficiency and professionalism to regulatory and energy managing organisations has a financial and political cost. Introducing competent, efficient, and professional staff to regulatory and management institutions needs money that is always frowned upon whenever a government goes for hiring. The restructuring also faces political resistance from within the institutions and from larger political groups and parties.

The political government is mostly in a precarious condition under attack by opposition and courts and can’t afford to open other fronts. Unless there is a deep urge for reforms in the system, including in opposing forces and a powerful government, the constraining economic and political factors will always trump reforms.

The second proposal (2) about energy conservation is sound and highly effective in the short run due to the unbearable energy import bill in dollars. We have seen that formula presented by Finance Minister Mifta Ismail has worked in curbing imports and has brought down import bills.

The suggestions regarding conservation are sane and can be tried in hard times, but conservation and less energy spending cannot be a suitable model in the long run. If we switch to indigenous sources, then optimal energy consumption is the ultimate goal until the law of diminishing returns touches zero returns. In the long run, a conservation strategy is highly detrimental to economic growth.

Energy consumption is the engine of economic growth. Energy consumption contributes to GDP differently in different sectors. The chances of negative marginal return are never negative in a growing economy like Pakistan. In the long run, energy conservation is always at the cost of hindering growth. Conservation’s economic and political price is not desirable in the long run, though in short run it is advisable.

The third proposal (3) about using indigenous resources is highly consequential. If fully acted upon, it will not only solve balance of payment issues. Still, it would provide a reliable, stable stream of energy compared to fluctuating prices and the supply of international markets. Indigenous resources would positively impact our economy in the medium term. We would have to integrate with clean and green global energy sources in the long term. A focus on creating indigenous resources will solve nearly all our energy-related problems.

However, this has an initial financial cost and huge investments are required by the public and private sectors with uncertain rates of return. It will also ensure a struggle against the fossil fuel system that has vested interests and is ingrained in our social habits. Striving for clean energy is an effort worth pursuing as the health, wealth, and prosperity of our coming generations rest on switching to secure green clean, indigenous local energy sources.

The fourth proposal (4) of electrification of energy is in line with green and clean energy sources initiatives. However, the cost and economy of electrification will determine the adaptability of the electrification of energy. The social habits and entrenched vested interests will also be a hurdle to fully adopting the electrification of energy.

The last two proposals, (5) price anomalies and (6) deregulation and privatisation, are connected to the regulatory framework and developing a free energy market. Energy markets are mostly regional instead of nation-specific. The ultimate solution to energy problems is a free, open, and private energy market with minimal necessary regulation. All developed countries adopt this model.

We as a nation prefer to control markets. Our experience of open markets is cartelization, hoarding, and unjust profits, so we want the government to interfere. The result is crony and restrained capitalism that is not letting us flourish. We must open up to free market forces slowly but constantly as that is the ultimate guarantor of efficiency and professionalism.

We must overcome many financial and political hurdles to privatize and deregulate. More importantly, we need an economically integrated region to get benefitted from economies of scale in energy ventures and extensive energy trade.

The article’s purpose is not to discourage the highly valuable proposals given by the experts but to extend the debate further, bringing to light the implementation issues. We have to overcome all the economic and political costs to reform as the proposals forwarded by experts are the only way ahead.

Copyright Business Recorder, 2022