Economic consequences of shutting gas supply to industrial self-generation facilities

Industrialization is the backbone of economic growth, fueling GDP, enhancing export growth, and creating employment opportunities. Energy lies at the heart of this process. In many ways, energy is the economy, as it underpins productivity and innovation, fueling economic growth and prosperity. History bears witness to this, with the coal-powered Industrial Revolution and the oil-driven expansion of the 20th century both demonstrating the transformative impact of affordable and abundant energy on the economy, productivity, and industrial output.

In Pakistan’s textile industry, affordability and reliability of power supply are not merely growth factors but necessities for survival. The sector now faces a scenario that threatens to erode its competitiveness and lead to widespread deindustrialization. The economic consequences of disconnecting gas and RLNG supplies to industrial in-house power generation facilities would be devastating, as misguided energy policies and resource misallocation ultimately translate into substantial losses in industrial competitiveness, exports, and employment.

Since the emergence of the 1994 Power Policy, industries have been incentivized to invest in their own energy solutions, enabling them to meet production energy demands essential for growth. This shift has allowed businesses to tackle persistent issues of power outages, reliability, and quality while providing affordable on-site energy with zero line losses. No subsequent policy has discouraged or banned in-house power generation, underscoring its role in industrial growth. Export-Oriented Units (EOUs) increasingly rely on these facilities to ensure an uninterrupted energy supply and consistent production.

However, as Pakistan plans to phase out gas-fired captive power plants (CPPs) from the gas sector to meet structural benchmarks of the 25th IMF Programme, it risks stifling an essential lifeline: exports. This decision will further destabilize Pakistan’s economic foundation rather than strengthen it, as the country faces foreign exchange shortfalls of up to $25 billion annually for the next five years. With soaring grid electricity costs, increasing outages, and declining reliability, industries are grappling with significant financial burdens and operational disruptions. This policy will not only hinder industrial output but also directly impact exports and employment levels, raising concerns about potential inflation as power prices are expected to rise further.

According to data from the Ministry of Commerce, 34 leading exporters, consuming 65.65 MMCFD of gas at nearly double the prescribed rates, generated $7.51 billion in exports. Additionally, 137 firms used 98.63 MMCFD to contribute $5.33 billion. Together, these companies produced exports worth $13.31 billion in FY 2022, highlighting their substantial contribution to the national economy and underscoring the critical role reliable energy plays in sustaining export growth.

Industrialisation as an engine to economic growth:

Export-led economies like China and Vietnam prioritized industrialization to drive economic growth, increase employment, and expand their global market share. In contrast, Pakistan’s industrial sector’s contribution to GDP is on a declining trend, slipping from 19.1% in FY2022 to 18.4% in FY2023 and further to 18.2% in FY2024, indicating weakening industrial momentum and competitiveness. Instead of creating an export-friendly environment, the policies and economic landscape in Pakistan have pushed industries to the verge of collapse.

The policy to shut down gas supply to industrial in-house power generation facilities will exacerbate the situation, as the financially unviable and unreliable grid supply cannot support this transition. This move will immediately impact Pakistan’s largest export sector, risking damage to $3 billion worth of exports.

Pakistan’s textile industry is already confronting a myriad of challenges that jeopardize its competitiveness and sustainability. An overall unfavorable business environment and tax policy distortions accompanied by soaring energy prices has significantly damaged the industry’s export potential.

These challenges are exacerbated by soaring energy costs and the lack of a reliable, uninterrupted power supply essential for textile manufacturing. From FY 2019 to FY 2024, electricity tariffs for B2 and B3 categories have risen by over 100%. Cutting off the gas supply to self-generation facilities forces industries to transition to a financially unviable grid or face complete shutdown. Ultimately, the former will push industries toward the latter.

Energy dynamics in the textile industry: the importance of gas/RLNG

Gas and RLNG are essential energy sources for the textile sector, serving as the primary fuel for many industries. Since the Power Policy of 1994, in-house power generation facilities have been critical in providing the affordable and reliable energy needed for high-quality textile and apparel production. These facilities ensure smooth operations by preventing outages, interruptions, and voltage fluctuations that could disrupt manufacturing processes and damage expensive machinery, while also stabilizing production costs and ensuring export-quality products - essential for meeting international market demands. Transitioning entirely to grid power and shutting down in-house facilities would increase downtime, maintenance costs, and risk international export orders.

A 2022 study estimated that a one-hour power outage results in a revenue loss of approximately 24% for the textile industry (Yasmeen et al., 2022). Between 2014 and 2018, high energy costs and frequent power outages led to the closure of around 100 textile manufacturing units (PIDE, 2021), causing exports to stagnate during that period. As of 2024, over 40% of spinning mills have announced operational shutdowns due to escalating energy costs. With an unreliable grid and limited access to gas, industries are compelled to rely on alternative fuels such as coal, diesel, or furnace oil, further undermining their competitiveness. Additionally, since power sector merit orders prioritize imported coal power plants over RLNG plants, shifting demand from gas-fired self-generation to the grid will increase the dispatch of these coal plants, leading to higher carbon emissions, inefficient gas usage, and a setback to climate goals and distributed generation.

A study by Socioeconomic Insights and Analytics finds that in the immediate aftermath of cutting off gas supply to industrial self-generation facilities, over 1,400 large units and countless smaller ones are likely to shut down, leading to approximately 3 million job losses and $3 billion export losses per annum. These figures could rise even further when including smaller units. This drastic measure will lead to widespread deindustrialization and socioeconomic instability.

The benefits of in-house power generation for industries, lifeline consumers and the national exchequer

Approximately 50% of industrial gas is utilized for electricity generation in in-house facilities, while the remainder supports various other manufacturing industries, including fertilizers, cosmetics, plastics, pharmaceuticals, and synthetic materials. About 20% to 22% of the gas consumed in the industrial sector is specifically used for electricity generation in facilities not connected to the national grid.

The exit of high-paying bulk consumers of RLNG, such as CPPs, is projected to create a significant revenue shortfall of PKR 390.8 billion for Sui companies, threatening the financial sustainability of gas utilities. This shortfall jeopardizes the cross-subsidy mechanism that currently allocates over PKR 140 billion to subsidize residential consumers. Furthermore, shifting bulk gas consumers to retail could significantly raise Unaccounted-for Gas (UFG) due to the negative impact on the bulk-to-retail ratio, affecting both the profitability and sustainability of Sui companies.

This situation could lead to ‘Take or Pay’ penalties on LNG cargoes because of the absence of a gas diversion plan, which is likely to cause demand destruction as these penalties are passed through to RLNG consumers per the Petroleum Division guidelines. The lack of strategic planning in the gas sector and sudden policy shifts could seriously compromise the stability of the entire energy sector. This further risks a cascading collapse of state-owned entities in the Petroleum Division, emphasizing the necessity for an integrated energy plan and strategic direction.

There are a total of 1,386 CPPs, of which 1,265 are connected to the grid. It is essential to note that not all CPPs are dual-fuel engines for electricity generation; therefore, distinguishing between the gas used in industrial processes and the gas used for electricity generation can be challenging. Consequently, in most cases, the non-availability of gas implies a complete shutdown of industrial operations.

The power generated by CPPs has been essential not only for the industry but also for lifeline consumers. As of February 1, 2024, the current notified consumer gas sale prices, revised in August for CPPs, indicate that industries served by SNGPL and SSGCL will pay approximately 39% above the average sale price, while CPPs will face costs around 193% of the average prescribed price. In addition, CPPs are receiving RLNG at a distribution tariff that includes costs from illegal fertilizer diversions and inaccurately calculated UFG in the ring-fenced RLNG price. This disparity in tariff highlights a cross-subsidy that primarily benefits the lower six slabs in the domestic sector, potentially leading to social and political repercussions. Consequently, eliminating gas supplies to CPPs will have ripple effects on lifeline consumers, resulting in increased gas prices that will ultimately translate into higher headline inflation.

In conclusion, cutting gas supplies to industrial self-generation facilities poses a grave threat to the textile sector, gas sector sustainability, and the broader economy. The discontinuation of gas to these facilities could lead to significant job losses, a decline in export revenues, and the bankruptcy of gas utilities. As industries grapple with soaring electricity prices, high taxes, and unreliable power sources, their competitiveness hangs in the balance. It is crucial for government authorities to reevaluate this policy and formulate long-term, sustainable strategies that protect Pakistan’s industrial and export sectors.

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Table 1. Export Proceeds of Industries with Gas-Fired Onsite Generation.
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Export Range            No. of         No. of         Average               Exports
                       Companies     Connections    Consumption   (US$ in billions)
                                                      (MMCFD)
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US$ > 100 million         34             108           65.65                   7.51
US$ > 10 million          137            208           98.63                   5.34
US$ > 1 million           97             120           27.14                   0.43
US$ = 1 million           81             87            12.34                   0.02
Grand Total               349            523          203.77                  13.31
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Source: Ministry of Commerce
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Copyright Business Recorder, 2024