Energy Crisis in Pakistan

Following notes on Energy Crisis in Pakistan have been taken from Fueling the Future: Meeting Pakistan’s Energy Needs in the 21st Century by Robert M. Hathaway, Bhumika Muchhala, and Michael Kugelman.

Power Generation

As of FY 2005, nameplate power generation capacity in the country stood at 19,400 MW. Hydel (33 percent of total) and nuclear generation (2 percent) are held entirely by the public sector. The public sector owns 40 percent of the thermal capacity of 12,400 MW, while the independent power producers account for 46 percent.

KESC (Karachi Electric Supply Corporation), a recently privatized utility, owns 14 percent of generation capacity.

Except for nuclear power and storage-based power generation, the government is seeking private sector investments in all types of power generation, including thermal power, run-of-the-river hydel generation, wind power, and coal-based power plants.

Power Transmission and Distribution

Power generation and distribution was entirely in the public sector until the mid-1990s, in a setup where two entities, Water and Power Development Authority (WAPDA) and KESC, were the electricity producers and distributors.

Since the mid-1990s, the government has been encouraging private investment, divesting its companies, and taking steps to deregulate the electricity market.

The first step was the approval of WAPDA’s strategic plan for privatization in 1992.

WAPDA has already been divided into four generation companies (GENCos), nine distribution companies (ESCos), and the National Transmission and Distribution Company (NTDC).

The next step is to privatize these entities, except for NTDC and the hydel and nuclear power stations, which will stay in the public sector.

In November 2005, KESC was privatized. KESC is an integrated power utility with four thermal plants producing 1,760 MW and a distribution network.

In the first phase of the deregulation process, the generation units sell power to NTDC, which, in turn, transmits it to electric supply companies.

In the second phase, all power producers will be free to sell their electricity either to NTDC or to consumers.

The National Electric Power Regulatory Authority (NEPRA) will continue to exercise its tariff determination and licensing powers.

Challenges in the Privatization of Energy sector

The Pakistani government’s plan for the privatization of the public companies in the energy sector and the deregulation of the energy market will create a level playing field for private sector enterprises.

After full implementation, oil and gas E&P, oil marketing, gas distribution, thermal power generation, and power distribution will fall completely in the private sector.

Challenges to Energy Sector:

Unexploited Baluchistan Basin: Despite its high potential, the Baluchistan basin remains to be fully exploited by oil and gas exploration and production companies. The primary obstacle is the law and order situation.

Delay in the privatization: Delay in the privatization of the public sector energy companies is another hurdle. An unclear timeline along with the continual postponement of privatization creates an uncertainty for private sector companies, which find it difficult to plan their bids.

Hydro-Politics: Even though Pakistan has a large hydel potential, and several mega-storage and power generation projects have been identified and studied, this field remains marred in political controversy and disagreement amongst the provinces. The government of Pakistan needs to address this problem and achieve provincial consensus before any large projects can be implemented.

Role of NEPRA and PPIB: Finally, there is a need to clear some ambiguities regarding the role of the government agencies, i.e. NEPRA and PPIB. The private sector, especially foreign direct investment in the power sector, can be accelerated if the PPIB is restructured as a one window facilitator for private sector investors. Moreover, tariff determination and the negotiation process can also be improved to reduce significant delay in finalizing the new projects. Rates are determined by the National Electric Power Regulatory Authority, with disputes over rate adjustments common within the industry.

Regional Integration: Pakistan’s integrated high-voltage national power grid lacks connections to neighboring systems, possibly at significant opportunity costs. It has the potential benefits from wholesale electricity imports (such as, possibly, from Central Asia). Similarly, Pakistan could benefit from imports of natural gas, as some of the world’s largest producers are in Pakistan’s neighborhood. (Iran-Pakistan Gas pipeline and Turkmenistan Gas project)

Poor Infrastructure: When Pakistan’s 1994 power policy opened up the energy sector to private investment, investments in transmission and distribution were not in parallel with those made to increase generation. As a result, infrastructure remained underdeveloped. Some of the power generated by private plants could not be properly dispatched, and had limited access. Pakistan’s poor quality infrastructure causes an estimated 30 percent loss of transmission per year. Line losses are 21.4 percent21 at the Water and Power Development Authority (WAPDA) plant and 40 percent at the Karachi Electric Supply Corporation (KESC) plant. Despite improvements in WAPDA, power theft is estimated to be Rs. 24.7 billion per year.

Privatization of State Owned Oil and Gas Entities: As part of that process, and in response to conditions laid down by lenders such as the IMF and the World Bank, the government of Pakistan continues to strive towards privatizing its state-owned companies. The government is offering a 51 percent stake of Pakistan Petroleum, Ltd., the largest exploration and production firm in Pakistan. Currently the government controls 93 percent of the company, which owns the Sui fields in Balochistan, as well as exploration interests in 22 blocks. Furthermore, the state-owned Pakistan State Oil, which holds a 60 percent domestic market share in diesel fuel and has more than 3,800 retail outlets, also has a 51 percent stake of its holdings up for sale. In addition, the Pakistani government divested a 5 percent stake of its stock in Oil and Gas Development Company, Ltd., another leader in the Pakistani oil industry, with current production around 31,350 barrels of oil per day.

Fueling the Energy: Robert M. Hathway

Today, oil and natural gas supply the bulk (roughly 79 percent) of Pakistan’s energy needs.

Pakistan currently produces only 19.9 percent of the oil it consumes, fostering a dependency on imports that places considerable strain on the country’s financial position.

Pakistan’s projected natural gas needs are expected almost to double (from 2004 levels) by 2010.

On the other hand, hydropower and coal are perhaps underutilized today, as Pakistan has ample potential supplies of both, at a time when these resources provide for relatively little (a combined total of 20 percent) of Pakistan’s energy needs.

Pakistan’s proven coal reserves are the world’s sixth largest.

Meanwhile, widespread public opposition has significantly slowed the government’s plans to build dams capable of generating electricity.

Nuclear power at this point accounts for only 1 percent of Pakistan’s energy consumption. Pakistan has two civilian-use nuclear reactors, while construction on a third began in 2006.

Observing that 40 percent of Pakistani households are not even connected to the electrical grid, Ahmed warns that over the next 20 years, the country’s overall demand for energy will increase by 350 percent.

Development of Power Sector: The weight of History- S.J. Burke

At the time of independence the country had only two power generating units with installed capacity of 60 MW: one at Malakand in the Northwest Frontier Province (NWFP) located on a tributary of the Indus River, and the other at Shahdara near Lahore that used coal.

For several months, the country continued to import electricity from India, but stopped with the 1949 War.

A hydroelectricity plant located at Warsak in NWFP was the first major public sector investment in the power sector in the 1950s.

This surplus turned into a deficit as the pace of economic growth picked up in the 1960s when Ayub Khan took steps to accelerate the rate of gross national product (GNP) growth.

Energy generation picked up in the 1970s with the commissioning of a major power plant at Mangla dam on the Jhelum River. The dam was a part of the major “replacement works” undertaken by the government following the signing in 1960 of the Indus Water Treaty with India.

The replacement works involved the construction of two reservoirs—at Tarbela on the Indus and at Mangla on the Jhelum—for storing water while a series of link canals transported water from the Jhelum to the Chenab and from the Chenab to the Ravi.

The government also established the Water and Power Development Authority (WAPDA) to take responsibility for building these massive works for generating power from the large hydroelectricity plants and for managing the entire irrigation system.

For a number of years, WAPDA was a model public sector institution in the developing world for undertaking development works.

From 1970 to 1975, installed generating capacity increased from 636 MW to 1331 MW. With the commissioning of the Tarbela dam power plant in the late 1970s, power generation capacity increased to 3000 MW and then more than doubled to 7000 MW by 1990-91.

In 1994, the government of Prime Minister Benazir Bhutto made a major decision to diversify the ownership of the power generating capacity by inviting independent power producers (IPPs) to invest in the country and offering generous incentives to attract foreign capital.

This created a heavy financial burden for WAPDA and a fiscal liability for the government since WAPDA’s losses were met from the budget.

The other long-term problem with the policy was that it preferred imported fuel oil over domestic natural gas as feed stock for the private generating plants. The assumption was that natural gas was too precious a resource for power generation and should instead be used as an input for the production of fertilizers, insecticides and other chemicals, and for household consumption for which the country had built a vast network of pipelines.

Policymakers in Islamabad assumed at the time that the price of imported oil would remain within easy limits, and the favorable terms on which oil imports were available from Saudi Arabia would be maintained. These assumptions proved wrong and very costly for the economy.

As a result of this policy, the IPPs installed almost 6000 MW of generating capacity, and accounted for more than 30 percent of the capacity in the power sector in 2004-05.

In Pakistan, an energy crisis occurred after every period of rapid growth. For example, there was pressure on the power supply in the mid-1970s following a decade-long economic expansion under Ayub Khan (1958-1969).

It was during the 1990s that Pakistan experienced the first major mismatch between economic growth and increase in power.

Between 1977 and 1988—the third time the military was in control—GDP increased by 6.5 percent per year and GDP per capita by 3.5 percent. But the energy supply failed to keep pace with the increase in demand caused by growth. The predictable happened, and the economy slowed down. Constraint on energy supply was one of the many reasons for sluggish performance of the economy during the 1988-1999 period.

However, as already discussed, the rich incentives provided to IPPs by Benazir Bhutto’s government brought in external finance. Within five years the country moved from a serious power deficit to power surplus.

Pakistan’s economy picked up in 2003 and since then has grown at an average annual rate of 7 percent per year, touching 8.4 percent in 2004- 05. But, as happened before, the supply of energy did not keep pace with the sharp increase in demand. Consequently, the country was once again faced with a serious energy shortage.

The Weight of History: Pakistan’s Energy Problem- S.J. Burke

Agriculture as a cheap source of energy:

Agriculture has the potential to contribute to the solution of the developing energy problem.

If the country adopts and develops a technology for turning sugar into fuel for vehicles.

A considerable amount of work is being done—in the United States and Brazil, in particular—to turn sugarcane into fuel for vehicles.

Finally, when the cane is harvested the tops and leaves are often just left in the field. But this biomass is rich in cellulose If the sugar locked away in cellulose also could be unlocked— cheaply and easily by a chemical process—this biomass could also produce tons of sugar ethanol.

Ethanol, produced from sugar, is being used extensively in cars that are equipped to use it as well as gasoline.

For an agriculturally rich country such as Pakistan, policymakers must also take note of one other technological development: the use of cellulose instead of sugar from sugarcane for producing fuel. The sources of cellulose are grasses that are commonly available in areas such as the katcha lands on the banks of rivers. Scientists working with this source of energy are confident that once they have developed the needed technologies, grass could become a much cheaper source of ethanol than sugarcane.

These then are some of the technologies that need to be adapted and used in order to turn agriculture into a resource for energy. Therefore, creating public-sector technology institutions for undertaking research such as the above should be part of the strategy to tackle the energy problem.

Social and Gender Issues in Pakistan’s Energy Sector-Dorothy Lele

Energy for Poverty Reduction:

One third of Pakistan’s population lives on incomes below the national poverty line (36 percent in rural areas).

Poor people usually pay a higher proportion of their expenditures on energy, and much more per unit of useful energy service than the rich.

They cannot afford the capital costs of more efficient energy sources, start-up equipment and appliance costs, or even to buy the energy they use (i.e. fuel wood and kerosene) in higher volumes.

Another key issue is that existing subsidies, that are meant to promote access of those with a low capacity to pay, do not always achieve their purpose. Natural gas, for example, is by far the cheapest source of modern fuels once a household is connected, with over 90 percent of the gas sold to households under the subsidized tariff of the first two slabs. Because of the high costs of connection, it is the higher income groups that are benefiting from this subsidy.

Even as private sector involvement is being welcomed as a means of providing energy services more efficiently, there is a serious potential that privatization could limit the access of poor households to energy services. Private companies have little motivation to provide services to the poor, with their precarious incomes, low consumption and inability to pay the full cost of service.

User Participation

Many of the customer-related problems encountered by large energy providers are directly related to their lack of accountability to users. Most state-run electricity utilities in South Asia, for instance, have major problems with revenue collection and power theft that are very difficult to solve under their existing management models.

These accountability, service and financing problems have been solved by management models that directly involve the users. The active participation of customer representatives is a crucial feature of successful models of central grid-based rural electrification, such as Bangladesh’s Rural Electrification Board and rural electric cooperative societies in India, as well as off-grid centralized rural electrification, such as Village Hydro cooperatives in Nepal and Sri Lanka.

The traditional model of a utility-based centralized grid has also been challenged by the advent of new technologies. Gas-turbine generation has begun a trend toward smaller generators closer to users, changing electricity systems away from the traditional centralized configuration to a more decentralized one. Village level mini-grids utilizing the most appropriate resources available—wind turbines, for example, or small-scale hydropower or diesel generators—may provide a more cost effective alternative, especially for compact, high-density settlements.

Decentralized, user-managed systems have several advantages over centrally-managed ones. The users are known and accountable to each other; responsibility for breakdowns and repairs is easily assigned; decision-making is close to the users through their own representatives; and unreliable grid power can be supplemented by backup systems. Decentralized systems allow local control over choices between supply options and community priorities, improved billing and collection, direct accountability and increased control over illegal use. For a utility, selling to one local-level distributor at a bulk rate eliminates many billing and collection issues.

In order to maximize efficiency and to provide appropriate choices for consumers, the planning process should start with the needs and end uses of different user groups and take into account locality, local resources and users’ situations in setting policy frameworks.

For complete Pakistan Affairs notes click here.