For decades, Pakistan’s energy landscape has been plagued by a growing reliance on captive power plants (CPPs). Initially introduced to address power shortages, CPPs have become symbols of inequality, fiscal drains, and environmental burdens. It’s time for a decisive shift towards a more equitable and sustainable energy future.
Globally, captive power is often a temporary solution for industries facing unreliable grids. However, as energy markets mature, there’s a gradual shift towards interconnected grids offering greater efficiency and resilience. Countries like Germany have incentivized grid connection, resulting in robust energy systems.
In Pakistan, however, CPPs fuelled by subsidized natural gas have proliferated. Today, according to NEPRA, they consume around 20% of the natural gas supplied to the industrial sector. This heavy reliance has distorted the energy market, where select industries enjoy preferential treatment at the expense of the wider economy.
This preferential treatment has created deep-seated disparities. Captive industries enjoy cheaper energy, subsidized by taxpayers, while grid-connected businesses face higher tariffs and struggle to compete. This stifles competition, hinders industrial growth, and fuels resentment. A 2023 PIDE study estimated that CPP subsidies cost the national exchequer over Rs. 100 billion annually. A 2022 World Bank report highlighted that Pakistan’s industrial electricity tariffs are among the highest in the region, partly due to supporting captive power. Beyond economic costs, CPPs contribute significantly to air pollution and greenhouse gas emissions. According to the Ministry of Climate Change, the industrial sector, including CPPs, accounts for nearly 40% of Pakistan’s total greenhouse gas emissions.
It’s essential to address two common misconceptions: unreliable power supply issues faced by captive industries stem from reluctance to invest in grid-compliant plants and machinery, not grid inefficiency; and claims of significant foreign exchange earnings are exaggerated, as many captive industries are non-export sectors, and export-oriented industries keep earnings outside Pakistan.
The IMF’s call to phase out captive power subsidies is crucial for fairness, efficiency, and environmental responsibility. The government must phase out subsidies by January 2025, following the IMF timeline, strengthen the grid to enhance reliability and capacity, ensure transparent energy pricing and resource allocation, and incentivize renewable energy adoption and prioritize indigenous fuels.
Shifting captive industries to the grid will reduce national average power tariff by an estimated Rs2/unit, address soaring power tariffs resulting from falling demand and increased fixed capacity component, and support captive industries in modernizing plants and equipment to comply with grid codes.
Moreover, this transition will unlock opportunities for Pakistan to transition towards cleaner energy sources, reducing dependence on fossil fuels and mitigating climate change impacts. By promoting grid connectivity, Pakistan can attract investment in renewable energy, create jobs, and stimulate economic growth.
Ending preferential treatment for captive industries is not just an economic imperative but a matter of fairness and sustainability. The government must recognize that implementing this reform is crucial for Pakistan’s economic survival. Delaying this reform risks jeopardizing the IMF’s $7 billion bailout package and exacerbating the economic crisis.
Pakistan’s energy future hinges on equitable access to affordable, reliable, and sustainable energy. By phasing out CPP subsidies and promoting grid connectivity, Pakistan can break the chains of inequality and build an energy future that benefits all Pakistanis.
The time for action is now. Pakistan’s policymakers must demonstrate resolve and commitment to this critical reform, ensuring a brighter energy future for generations to come.
(The writer is an energy sector analyst with keen interest in the power sector especially renewable energy, policy development and challenges)
Copyright Business Recorder, 2024
The writer is an energy sector analyst with keen interest in the power sector especially renewable energy, policy development and challenges
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