26. Pakistan's Energy Crisis

 

Pakistan’s Energy Crisis

The Main Power Players

The main power players include those who generate power, transmit it, distribute it and regulate all such activities. The generators of power are those who convert other forms of energy into electrical energy and there is no misunderstanding about them. However, the terms transmission and distribution are used interchangeably by many which is wrong. Transmission is the process by which electricity is brought from the main power stations to the sub-stations at very high voltages in the range of 132 kV to 500 kV (high voltage means low current which means lesser energy lost as heat energy). These lines form the main grid that runs throughout the country ie: they form the large distance part of the grid.

Furthermore they are bidirectional (electricity can travel in both directions) which is necessary to balance the whole system. Distribution lines on the other hand transfer            electricity  over  short distances, from the sub-stations to the final user. Traditionally these are mono-directional but this has started to change in recent years in technologically advances societies. 

1. Power Generation: power is generated by public as well as private producers. A non-exhaustive list of the main producers is given below.

a.       Public Producers:

i.         WAPDA: 

                The Water and Power Development Authority handles only the energy produced by dams. Its mandate however also includes the development of water resources in an efficient manner. WAPDA’s power wing was unbundled in 2007 after which thermal generation, 

ii. PAEC: 

                The Pakistan Atomic Energy Commission is an independent governmental authority and a scientific research institution concerned with research and development of nuclear technology and the use of this technology for peaceful purposes, including energy generation.

iii. GENCOS: 

                The Generation Companies which deal with mainly the thermal energy.

b. Private Producers: 

                    Some private entities can be grouped as:

i. IPPs: T

        The Independent Private Producers are entities that own a facility which generates electricity which can be sold to public utilities or end users.

ii. SPPs: 

      The Small Power Producers are basically private producers who generate electricity below a certain amount (normally below 50-80 MW) and usually by renewable resources of energy.

iii. CPPs: 

     The Captive Power Producers are independent person(s) who set up a power plant to satisfy their own energy needs. It could be a single person or a housing society or an industry. Setting up of solar panels with a battery bank at a house, or installing a steam turbine to produce electricity for a factory are examples. 2. Power Transmission: all these producers sell their energy to the CPPA (Central Power Purchasing Agency) which transmits it over the national grid or the NTDC (National Transmission and Dispatch Company). NTDC reports to PEPCO.

3. Power Distribution: 

                These include 10 public sector DISCOS (such as LESCO, IESCO, PESCO, QESCO, SEPCO) and 1 private sector K-Electric (previously known as KESC, involved in generation besides distribution and operates only in Karachi).

4. Independent Regulatory Authority: 

                NEPRA (National Electric Power Regulatory Authority) is an autonomous regulatory body. Its main role is to improve the efficiency and availability of electric power services by protecting the interests of investors, operators and consumers with a view to promoting competition and deregulating the power sector.

Energy Mix

In Pakistan, power is being generated by using multiple resources, though none of them is being utilized to its full potential and many resources remain largely or completely untapped. The table gives a brief overview of how much energy public and private sectors are contributing to the national gird and how much energy is coming from each of the resources being used. The figures given represent percentages. 

 

	Hydropower	Thermal	Nuclear	Solar & Wind	Total
Public Production	31	25	3		58.5 (approx)
Private Production	1	40		0.5	41.5
Total	31.5	65	3	0.5	100

 

1.  Hydropower:

Hydropower: there are 2 types of dams; reservoir type and run of the river type. The former need a large reservoir to be constructed so that the volume of the reservoir creates the pressure required to turn the turbines, while the latter are built at locations where the water flow is sufficiently fast to provide the necessary force. It has  been estimated in a few studies that Pakistan can potentially generate somewhere b/w 41000-45000 MW of power if its hydro-resources are utilized properly. As of now Pakistan generates only 7097 MW  of hydropower. Many projects are under way and many have been proposed. It is wrong to consider that        hydropower projects are shrouded  in controversy. Only Kalabagh Dam is (so far).

a.       Mangla Dam: located on the Jehlum River, this reservoir type dam has an installed capacity of 1000

MW, planned to be increased to 1120 MW by increasing its height. 

a.       Tarbela Dam: located on the             Indus      River,      this reservoir type dam has an installed capacity of 3478

MW, planned to be increased via extension projects Tarbela IV and Tarbela V. The deal on the former was signed in 2013 and will increase the capacity to 4888 MW.

b.       Ghazi Barotha Hydropower Project: made in 2002 on River Indus near Attock, downstream of the Tarbela Dam, it is run of the river type and contributes 1450 MW of power.

c.        Projects in the Pipeline: Neelum-Jehlum (969 MW), Tarbela Extension IV (1410 MW), Karot Hydropower (720 MW which China has agreed to fund out of its $46 billion investment).

d.       Early Completion Phase Projects: Diamer-Bhasha (4500 MW), Dasu Dam (4320 MW), Kohala Hydropower (1100 MW) need policy continuation to be completed in time.

e.       Kalabagh Dam Controversy: arguments against the Kalabagh Dam (KBD) and their counter arguments are as follows:

i.         KPK: the province levels the complaints that a large part of its land will be flooded due to the large resevrior of the dam. As a result, people residing in those areas will be displaced and those residing in the vicinity will be endangered due to an increased threat and high possibility of floods. This claim may very well be true and is most likely to be. The fact however, remains that because of the displacement of people, a dam that could potentially solve country's problems should not be stopped. Instead, arrangements should be made by the government to fcailitate these people and give hem compensation in the form of rehabilitation. When such concerns were put forward, the government should have right away started a rehabilitation program for these people and that program would have had their support if the people from these areas would have been employed in such construction programs for rehabilitation. Plus, we have seen that even without the dam, floods have affected almost all the concerned areas. In such a case, it does not matter whether floods affect the people in the absence of or in the presence of the dam. If they are to be affected in any way, it is better that the dam be present. The floods in these regions happen because of the entrance of the Kabul River into the channel (the channel needs to be widened instead of the KBD project being abandoned).

However, the government must take steps to control floods by taking measures that Germany and Australia have taken by automating all their river, tributary and canal gates for better water distribution and artificial re-distribution to manage water level during floods.

ii.       Sindh: this province on the other has leveled its allegations that the construction of the dam will divert all the water to the upper regions of the country, which otherwise could have been used by Sindh. Sindh also claims that this will lead to the desertification of Sindh. The fact however remains that Sindh itself has not utilized the water properly, the proof of which is a shortage of water for all purposes even in its Metropolitan. And even the irrigated land has been used by the feudals for their own advantages. However, one must wonder that water cannot be held by the KBD forever. It will have a maximum capacity and water will have to be discharged in order for the electricity to be produced. So far as using water for irrigating KPK and South Punjab is concerned, the amount of water to be diverted for such purposes can be negotiated b/w the provinces and then the reservoirs be built accordingly. However, the left bank reservoir is unlikely to be built if the claim that it lies on a fault line is true (although it never stopped Quetta from being populated). But in this case too, the studies that have been conducted seem to be inadequate.

iii.      Environmental Effects: the environmental damage is however an unfortunate consequence of progress. It could be true that the Indus river basin will be degraded if water is stored upstream and this will endanger the mangroves which provide a breeding ground for many fish species. This could also affect the livelihood of those who are economically dependent on fishing in such areas.

Some other arguments presented as facts about which one cannot be certain or which are completely false and have been put forward to mislead the illiterate people include:

i.         Feasibility: one of the claim is that enough water is not available for the dam to be viable. Early reports based on studies conducted by experts from various organizations and countries concluded that the site was suitable, the plan was technically sound and the project was overall feasible. Later studies conducted locally have concluded otherwise.

ii.       Irrational: many ‘nationalists’ try to gain political mileage by misleading the masses using irrational claims such as the ‘power’ of the water will be drained away by Punjab before it reaches Sindh (where power is used to refer to electricity generation).

Some of the arguments for the KBD are as follows:

i.          Energy Needs: Pakistan faces an acute energy crisis which needs to be solved in such a way that the cost of electricity remains relatively low. In such a situation KBD could be a boon from heaven for Pakistan as it will contribute initially 2400 MW and ultimately 3600 MW to the national grid at extremely low costs. Currently Pakistan's energy needs are a little north of 20000 MW while its production capacity is more than 24000 MW (but inefficiencies have created the deficit of 4000-5000 MW). In case we are able to make our generation, transmission and distribution systems efficient and add the produce of KBD, we can rid ourselves of oil imports and save a lot of our foreign currency reserves. Plus, the energy is not only cheap (besides the initial high costs of construction which can be covered in 9-10 years according to estimates in feasibility and planning reports), it is also environment friendly.

ii.        Irrigation: KBD will also allow a lot of agricultural land to be brought under irrigation especially the land in KPK and South Punjab via its right and left banks respectively. Critics may put forward the claim that we need to utilize water more efficiently and need better yield varieties instead of more water for irrigation to increase our agrarian produce but nearly 4 million acres of land in KPK still remain non-utilized due to nonavailability of water for irrigation purposes.

iii.      Economy: KBD can also provide employment opportunities for people as it will need labour, engineers, architects, suppliers, transporters etc in large numbers.

The positive gestures and possible steps to resolve the issue could be:

i.          Punjab: the ‘dominant’ province has agreed not to claim any royalties from the services and benefits that the dam will provide to other provinces.

ii.        Awareness: people need to be educated by the media and in schools not so that they can be convinced about the project but so that they are capable enough to make up their own mind on any issue, instead of being misled by various vested interests (feudals and politicians, the former misleading them so that they can themselves continue to enjoy their own position and exploit the masses for their benefit and the latter intentionally politicising such issues in order to appear as saviors of the people and win votes).

iii.      Nation Building: a consensus needs to be built so that provincial interests do not come in the way of national progress.

iv.       Proper Studies and Research: some points which are disputed and can be contested, should be researched properly so that they can be settled in a rational and proper manner.

v.        Governance: the decision making process should be done on true democratic principles. Any decision made, studies conducted and the costs borne should be made public so that the project is no longer shrouded in secrecy (this has been one of the major reasons for the whole controversy - initially it was this secrecy that led to the suspicion of other provinces with regards to Punjab. At first the project was supposed to be only a reservoir for irrigation and then the power dimension was also added and so on. Good governance should be a hallmark of such a project instead of trying to keep it all secret and hushed up).

2.  Oil: 

            Nearly 35.5% of Pakistan’s total energy supply is catered for by oil based thermal power stations. The product used from crude oil to produce power is the furnace oil (FO). Setting up FO-based power plant is among the most tested, safest and cheapest option. Our governments’ dealings with IPPs in the 1990s led to a boom in such power stations and the later increase in oil prices in 2002-08 led to increased generation costs. This increased cost was not passed on to the customers, and the subsidies offered and consumer tariffs were not enough to cater for the difference. Moreover, Pakistan imports nearly all of its oil from a single source – the Middle East – especially after the sanctions on Iran (while Indians bought their oil on deferred payments from Iran even during the sanctions). If Pakistan could diversify its supply, it could probably get the FO at lower rates (competition no matter how small has its advantages including a lower cost as well as a relatively more stable supply since the choking of one supply does not lead to a complete cut-off). Local refining capacity should also be increased to take advantage of the locally produced hydrocarbons (no matter how small an amount) which can be processed to get refined petroleum products.  

3. Natural Gas: 

                           Gas based thermal power stations account for up to 29% of the net power supply in Pakistan. For a new country like Pakistan the discovery of the largest gas reserves in the world at Sui in 1952 must have been nature’s greatest gift. But over the years, natural gas has been squandered away by our country as it has been used for virtually everything from providing a fuel for domestic use to making fertilizers, running industries and powering vehicles not to mention its use for electricity generation (these uses were started and promoted during the Musharraf era and many oil based thermal plants were converted to either purely gas based plants or dual fuel generation plants). The result is that the originally 12 trillion cubic feet (TCF) of gas are now depleted and the remaining reserves are estimated to be at only 2 TCF. Although gas discoveries have been made at other locations especially in Sindh, we must learn a lesson from history, though it is unlikely that we will. Gas pipelines for the import of gas from other countries, such as the IPI and TAPI pipelines were announced but became pipedreams due to internal capacity constraints and external geopolitical scenario. In such a situation, LNG could have been a viable alternative in the short term (it has internationally been used as a short term solution for power shortages) but governance issues of Pakistan did not allow the implementation of a reliable import mechanism. Plus Pakistan is yet to take advantage of SNG (Synthetic Natural Gas) which provides a direct substitute for the natural gas and is produced from fossil fuels such as coal, oil shale and biofuels. Dr. Samar Mubarakmand proposed underground gasification of coal to produce SNG but the government has gone for the more expensive option of importing LNG. The experiment of gasification may not have been successful but experimentation is not about being successful in the first go. It is about improving on what one has learnt until one achieves what one desires to. Instead of abandoning the project completely, the government could have given grants or arranged competitions b/w different interested groups so that the technology could have been improved and eventually implemented. SNG if used, will allow Pakistan to use its existing gas infrastructure and gas based power plants without radical modifications to either. Plus, the carbon emissions from SNG will be lower than if coal was used directly. 

1.  Nuclear: 

                   Electrical energy converted from nuclear energy contributes only 3-4% to the national electric power supply (around 750-800 MW). KANUPP 1 was the first nuclear power plant (and was used by PAEC as a guinea pig) and provides 137 MW. CHASNUPP 1 & 2 provide 300 MW each. CHASNUPP 3 & 4 are expected to be completed in 2016-17 and will provide 340 MW each. KANUPP 2 & 3 each of 1100 MW will come on line in the first half of the next decade. Nuclear plants are expensive to construct but provide cheap energy in the long run. However, they also pose threats to the environment and to the population as was seen in the case of Chernobyl and Fukushima disasters. Arguments have been given in favour of and against the installation of the two nuclear power plants along the coast line of Karachi (installing nuclear plants based on untested technology in an over populated city is no less than asking for a disaster to happen). Even countries like Japan, Germany and Switzerland are moving towards other options. A small earthquake or a sea storm could be enough to cause a nuclear mishap.

2. Solar and Wind: 

                   The use of these sources is virtually absent (electricity from wind power contributes almost 200 MW, with most of the 50 MW power plants located at Jhimpir and Gharo, both in Sindh). Pakistan has large land pieces where for around 285 days in a year are sunny days especially in the Balochistan region and the desert areas. The wind corridors in Sindh have been estimated to have a power production potential of 43000-50000 MW. But these areas have not been invested in. No doubt that the electricity produced using these sources will come with a high price tag, but they can be used to supply electricity to small nearby areas. Pakistan has started a few wind power projects which will supply around 50 MW each and will come on line in 2016-17. Solar power is being used in developed countries to de-stress the transmission system by encouraging people/communities to install such power plants domestically. Large plants are avoided because their synchronization with the main gird is difficult (it tends to de-stabilize the central transmission system). Pakistan however has started its Quaid e Azam Solar Park at Bahawalpur which is supposed to produce 1000 MW in the year 2016 (its 100 MW Phase 1 has already started working thanks to the Chinese investment, but it has been shrouded in controversy – claiming to produce 17 MW only at a cost of nearly Rs. 24 per unit without including the transmission and distribution costs). Many experts have also warned that such a large scale solar power project should not have been undertaken (solar projects on such a scale remain untested to date). Due to synchronization technicalities, higher costs and low efficiency (solar plants can provide energy only during the day and making the grid dependent on day-night cycles is not a good idea and this may very well contribute to the fact that the average output of the 100 MW phase 1 is around 20% of the intended output), it might have been better to invest in hydropower or in smaller solar power units which could provide power to small societies. Private initiatives to use solar power for specific building could have also been an option (decreasing transmission and distribution distances will reduce line losses and rooftops of large buildings could have been used instead of using such a large area).

3. Coal: 

           On average, the world produces 41% of its energy from coal and India, China and US produce 56, 66 and 42% respectively from coal. In Pakistan however, coal contributes almost nothing to the energy mix despite the existence and discovery of one of the largest single location coal reserves at Thar. Pakistan has an estimated 186 billion tons of coal reserves in total (Thar + all others) and its extraction remains at 3 million tons a year while the demand is around 9 million tons (the gap is bridged by imports). Those 3 million are also mined using the old hand and shovel method, hence the low figure. Pakistan has some coal based power stations but most of the coal power projects have been proposed and shelved or have been inefficient due to a number of reasons. The Lakhra power station at Khanot/Jamshoro for example has an installed capacity of 150 MW (three plants of 50 MW each) but it has been producing only 20-50 MW. The Chinese designs on which the plants are based are incompatible with the coal variety available at Lakhra (1 million out of the 3 million tons is mined at Lakhra). Because of this, the boiler gets choked and only one of the three plants is active at a time while the other two get serviced. However, many coal based power plants have been proposed especially in cooperation with China, Qatar and private investors such as the Thar Coal Plant with an initial capacity of 660 MW expanded to 1320 MW while the proposed phase 2 will expand it further to an eventual 3600 MW and the Jamshoro Power Plant to which coal-based capabilities will be added. 

New Projects

Year	Name of Project	Capacity (MW)	Agency	Fuel
2014	Guddu 1	243	GENCOs	Gas
	Nandipur Power Project	425	GENCOs	Oil
	Guddu 2	243	GENCOs	Gas
	Quaid e Azam Solar Park (Phase 1)	100	PPDB	Solar
	Quaid e Azam Solar Park (Phase 2)	300	PPDB	Solar
	Guddu Steam (3)	261	GENCOs	Gas
2015	Quaid e Azam Solar Park (Phase 3)	600	PPDB	Solar
2016	Neelum-Jehlum Hydel	969	WAPDA	Hydel
	Golen Gol	106	WAPDA	Hydel
	Patrind HPP	147	PPDB	Hydel
2017	Tarbela Extension 4	1410	WAPDA	Hydel
	Coal Plant at Sahiwal	1200	PPDB	Coal
2018	Coal Plant at Jamshoro	1320	GENCOs	Coal
	Thar Coal Plant	1320	GENCOs	Coal
	Coal Plant Larkana	1320	GENCOs	Coal
	Gaddani Power Park	6600	Public + Pvt	Coal
Total Addition up to 2018		16564

As is evident from the table (source: PEPCO), some projects have been shelved by now or put on the back burner such as the Gaddani Power Park and some have been delayed such as the Quaid e Azam Solar Park, Guddu and Neelum-Jehlum Hydel Project to mention a few.

Cost Comparison

Source of Power	Estimated Cost (Rs. per KWh)
Hydroelectric Power	1.25
Coal-Fired Power	12.5
Furnace Oil Based Electricity	16
Gas Based Electricity	4.5
Nuclear Energy	1.3
Wind Power	14
Solar Electricity	22

Although coal-based power generation price is estimated at Rs. 12.5 which is only a little lower than the Rs. 16 price of oil-based power, many people have estimated that the per-unit price of electricity generated b using imported coal will be 50% that of the per-unit price of oil-based electricity.

Causes of the Crisis and Proposed Remedies:

Pakistan’s current installed power generation capacity according to the Economic survey of Pakistan 2014-15 is 22577 MW (though some officials state it to be at 23928 MW) out of which hydro and thermal including nuclear powers occupy 7097 and 15480 MW respectively. Pakistan’s demand for electricity including K-Electric peaked at nearly 23000 MW in 2015. This should not have been an issue but the fact of the matter is that our actual power generation is lower than the installed capacity. Maximum power generated in the summers remains around 17000 – 19000 MW (out of which hydropower can contribute only 7000 MW and thus the country is banking mainly on thermal power) and the shortfall ranges b/w 4000 and 6000 MW. According to the PEW President, generation stands at 10800 MW while demand is at 15500 MW during most of the months (the gap would widen to 7000 MW in summers according to him). There are a number of reasons for this crisis besides the fact that the efficiency of all plants at all times cannot be expected to be 100%. Although the major issue is of governance, the problems can be broken down into three main categories: the problem of affordability (we need to find ways to make electricity consumption affordable), the problems of losses (line losses and revenue losses in the form of non-payment of bills etc) and the problem of reliance on imported fuel (this leads to foreign exchange losses due to depreciation of the Rupee and results in higher costs and an imbalanced energy mix – we need to rely more on indigenous resources). 

1. Inefficiencies: 

                     Old generators and old turbines tend to be inefficient as compared to those based on new technologies. Our system needs to be modernized in order to make it efficient. Plus inefficiencies are not only related to the technical equipment and system but also to the staff. People whose productivity is lower than acceptable and who add unnecessary delays in various processes including approvals of projects or their planning and feasibility studies, must be dealt with accordingly instead of being given political cover/backing.

2. Irregularities: 

                    Staff involved in corrupt practices such as bribery (in which virtually anyone from the line man to the general manager can be involved), reversal of meter readings (done by meter readers), politicization of issues (done by politicians to gain political mileage) etc must be checked and made an example of in order to set a precedent. In some instances, people have been exempted from paying their electricity dues in one month and that months’ units have been added to the next months’ electricity bill. This has the effect of raising the per-unit cost because of the division of the number of units consumed in categories and charging a higher price per unit in successive categories.

3. Lack of Proactive Planning: 

                   This involves an absence of or a lack of planning to deal with future needs and requirements before they transform into crises. This can happen for a variety of reasons. Not keeping records of electricity demand and supply, improper forecasting, not maintaining sufficient stocks of raw materials needed (oil and gas for example), red tape, a habit of politicians to ignore the problem until elections or even an ignorance of the problem are a few of the reasons. The results of this have already been seen: lack of a continuous supply of furnace oil and gas due to which thermal power stations during that period of shortage output only a small percentage of their actual capacity, overloaded power stations which operate near full capacity leading to their breakdowns and failures etc. Finally, the problem is realized only when it has turned into a crisis and then, the matter is used as a tool for election campaigns and/or is delayed even further (many current projects have been delayed as well such as the Neelum-Jehlum project).

4. Imbalanced Energy Mix: 

                 Currently, Pakistan is dependent too much on gas and oil. This dependence on thermal power stations (65%) has led to the high electricity bills and the problem of circular debt as well, thanks to the Power Policy 1994 (under which IPPs were allowed to operate under very lenient conditions without any regards to efficiency, source of fuel or technology and the increase in cost was to be borne entirely by the buyers). Pakistan has in the last two years tried to shift to coal which is a welcome sign (most people will say that it will add to the carbon emissions but the problem is to deal with CO₂, not with coal usage – plant more trees to bring Pakistan’s currently 5.8% forested area up to the standard 25% or just increase it to more than 10% since trees consume CO₂, encourage public transport – not mass transit systems but public transport). R-LNG (Regasified Liquefied Natural Gas) can also provide electricity in the short run. In the long run however, Pakistan needs to rely on hydropower energy due to its low cost and environment friendly nature. However, there should be no illusions about the costs. In the beginning, hydropower will be expensive as the costs of constructing the dams have to be recovered. But in the long run, hydropower will be very cheap. Solar and wind power can and should also be exploited though instead of doing so at a

large scale such as in the case of Quaid e Azam Solar Park, it will be better to promote installations of solar panels on building

roof tops and in houses where the losses will be low and synchronization issues will also not be as difficult to solve. The electricity generated by these solar panel units can be added to the main grid by a net metering system (smart grids). Wind power can also provide a good short term solution though it is expensive. But if a balanced energy mix is developed, then the high costs incurred by one or two sources can be easily compensated for by the low cost generation methods. 

5. Non Utilization of Indigenous Energy Resources: 

                  Most of the furnace oil used by Pakistan is imported and just last year $11.7 billion worth of oil was imported by Pakistan. Large local coal reserves have been virtually ignored (Pakistan has 186 billion tons of coal reserves in total while its annual demand is 9 million tons out of which only 3 million tons are mined locally), hydropower potential estimated to be b/w 41 & 45 GW and some even say 60 GW has been also wasted, and solar and wind power have not been utilized either. We should try to increase our oil refining capacity and local oil production capacity, mine our coal reserves and utilize other resources mentioned as well. 

6. Line Losse Including Thefts: 

                   Statements of former GM planning WAPDA    and         former   Managing

Director PEPCO indicate that line losses cannot be in more than a single digit unless the system is out dated, thefts are rampant and other technical losses are present. They say that up to 10% losses can be written off as line losses, but if the transmission and distribution system is up to date, then the rest must be assumed to be technical

losses and thefts. From the chart then one can see that Pakistan is marred by electricity theft and probably losses due to out dated systems. Solution for the latter is simple but costly, while for the former, we have to deal with the problem on multiple fronts. First, the smart meters that have been installed should be utilized properly which can only be done after a proper reformation and up gradation of the system (smart meters allow billing information to be communicated to the supplier automatically without the need for meter readers and they also allow a constant monitoring of electricity usage and any abnormalities in the trend of usage can help to curb theft of electricity). Meter readers will be eliminated with smart meters and this will reduce the irregularities of meter readers who may be complicit in many crimes related to electricity theft, under billing etc. But till the time that these steps can be taken, it is imperative to do the best with the system we have. People should be made aware that reporting theft of electricity instead of just ignoring the people who indulge in such criminal acts. In this regards, the Qaumi Razakar and community policing systems of police can be used to our advantage. Such criminal acts must be brought to the public’s knowledge immediately before the criminals can get political cover. Strict action must be taken against all industries that indulge in illegal activities, irrespective of who owns the production units (a single production unit’s theft can amount to the electricity used by 1500-3000 households on average and the gas theft can amount to the gas used by a greater number of houses). Moreover, there are whole communities and housing areas of up to 500 houses each where electricity is being used without any proper payment (many allegations have been made against the residents of the Green Town area in Lahore). People need to be made aware that the non-billable electricity and decrease in revenue due to nonpayment of bills (according to estimates 15% of the total billed electricity remains non-paid for) has to be paid for out of the tax money collected by the government (the tax collected from the people among whom are included those who are involved in the theft) and that had the theft not taken place, the same tax money could have been utilized for something better. 

1. Increase in Demand: 

                Firstly, population explosion is a major problem not just for Pakistan but for humanity as a whole. Overpopulation exacerbated the basic economic problem (that of scarcity) and this leads to greater competition for the limited resources available. In a lawful society, those with access to the resources survive while those without access either learn to live without such resources or use them only sparingly. In a lawless society however, there are no rules for the competition and people see theft, bribery and such practices as tools of competition (instead of competing economically). Population grows in an exponential manner while the supply of commodities and products can at best be expected to increase in a linear fashion on average and as the supply is unable to keep up with the demand, the economic problem worsens and results in turn in an increased lawlessness and/or exploitation. Secondly, despite the overall under-developed state of the country, we have been promoting a culture of consumerism and lavish life style due to a number of factors. Non-essential products have become an important part of our lives and even the essential ones have been misused and abused (the UPS for example installed in virtually every household actually contributes to the energy crisis instead of helping to deal with it). Plus we have not been able to promote a culture of using energy saving devices. Thirdly, the growth in industry and agriculture has also led to a rapid increase in demand for electricity. Commercialization of the urban areas has also played its part. While these activities must be promoted for the economic growth, we need proper checks and balances to deal with the irregularities and thefts in all three sectors.

In short, we need to improve our energy mix so that we rely more on low cost hydropower in the long run, shift to smart grids instead of the out dated system in place today, cut costs by reducing and ultimately eliminating irregularities and inefficiencies including line and technical losses, thefts, over-billing and in some cases non-billing. Moreover, we need proper and proactive planning, policy continuation (one government should not discard the projects started by the previous governments and should take action based on national interest rather than party politics), and utilization of our local resources such as the Thar coal. Many CPP units have been installed in Pakistan but they have been working at low efficiencies due to a number of reasons. Instead of banning such practices, the government must encourage efficient captive generation of power and incorporate the excessive power into the national grid using net metering.

 

Circular Debt

1. What is Circular Debt: 

                  Circular debt is a situation in which a string of debtors and creditors exists in a fashion such that the net final creditor in the string is indebted to the first creditor. Every member is both a debtor and a creditor. In simple terms, say we have three people A, B and C and each owes another person to complete the circle. A owes B who owes C who owes A. There can be multiple types of circular debts:

a. Net Balance of Zero: 

                   For example, A owes Rs. 100 to B who owes Rs. 100 to C who owes Rs. To A. The net balance is zero since everyone’s receivables are equal to what they owe to another party.

b.       Reconciled Positive Balance: 

                  For example, A owes Rs. 100 to B who owes Rs. 50 to C who owes Rs. 100 to A. The final simplified situation is that C owes Rs. 50 to B. This is a non-zero net circular debt.

In Pakistan’s case however, the situation is a bit different since C does not owe anything to either A or B and the circle is not completed. A better name would be a “linear debt chain” or a “linear chain of receivables” but since the term has become common, we will keep on using it. We now move on from ABC to the actual situation in Pakistan.

2. Circular Debt in Pakistan: 

                          Most of the crude oil is imported and the foreign suppliers have to be paid for them to maintain their supplies and there can be no debt beyond the terms of agreement. The oil refineries then sell the refined oil to oil marketing companies who sell it to the IPPs or the WAPDA owned GENCOs who in turn sell the produced electricity to the DISCOs. The tariff at which the electricity is to be supplied to the consumers is decided by NEPRA, after receiving government approval. In 2009, Power Holding Company Limited (PHCL) was formed by the government to pick up the debt of DISCOs and GENCOs, so that their accounts could be cleared. The transfer was on paper from the accounts of the distribution and generation companies to that of the PHCL and no cash payment was made so that for some time now Rs. 335 billion have been parked with the PHCL which means that the net circular debt is Rs. 335 billion more than what the government announces it to be. The figure announced by the government as “payables to the power sector” is called the stock of the circular debt. Circular debt of Pakistan:

a.  Pre PML-N Situation: 

                Over the years, the stock of the debt had gone up to Rs. 503 billion. In June-July 2013, right after the PML-N came to power, it cleared Rs. 480 billion out of this stock though many IPPs contested that the amount that the government claimed to have paid was different from what had actually been paid. Plus it was also alleged that the whole exercise was illegal as the government had paid the dues without having an audit conducted first. However, the remaining stock was of Rs. 23 billion.

b. The Situation Today: 

               In March 2015, the stock was announced to be Rs. 280 billion while in October 2015, Ishaq Dar has announced that it has increased by 11.78% to Rs. 313 billion. The total arrears are therefore Rs. 648 billion (313+335).

3. Causes and Recommendations: 

                       Various causes and remedies of circular debt are as follows:

a. Tariff Deciding Mechanism: 

           This is where the problem starts. The tariff decided upon has two flaws:

i. Uniformity: 

   The government is still influenced by a legacy system that supported a single postage stamp for all consumers and a single generation cost for all producers. This has primarily been due to the reluctance to promote an open market system and to ensure a maximum role of the government in economic regulation. ii. Static, not Dynamic: the tariff does not change according to the changing costs of operations and international oil prices and is therefore unable to cover all the costs incurred by the power producers. The issue then is essentially that of revising the tariffs upwards in a timely manner.

To deal with this issue effectively, implementation of differential tariffs determined by the regulator of the DISCO territory must be allowed so that tariff can be determined with the main aim being covering the costs incurred rather than the main goal being political popularity (tariff is kept down by the government in order to not lose its voters and even to increase its voter base).

b. Subsidy: 

          There comes into the equation then as a result of the flawed tariff determination process, an element of subsidy the cost of which the government has to pick up (whatever the difference b/w the cost of production and the tariff charged is, has to be paid for by the government of Pakistan to the DISCOs). By failing to foot this bill, the government builds up the circular debt. The payment is often not paid on time or in full and is allocated primarily on the basis of a ‘just in time’ response to the power sector. If steps taken to improve the tariff decision making procedure are implemented, there will be no need for a subsidy and the same tax money will then be spent for something better.

c. Fuel Price Adjustments: 

        The price of electricity varies on a regular basis due to changing cost of fuel. The FPA is a mechanism by which monthly variations in the fuel costs as compared with the reference amount determined in NEPRA’s tariff are passed on to the end user. There are two problems with this mechanism in Pakistan:

i. Delays: 

        NEPRA delays the implementation of this adjustment often by 2-6 months. When fuel prices increase, these delays cause the DISCOs and GENCOs to incur more than the charged price and thus they contribute to the circular debt.

ii. Using the Past Data: 

        Instead of using projected fuel consumption and cost, NEPRA uses historical data and an annual reference amount. The method does not include a process for looking ahead as global fuel prices change and the country’s fuel mix ratios differ from the reference values. So when fuel adjustment prices change, they swing rapidly causing unrest among the consumers.

d. Inefficiencies of GENCOs and DISCOs: 

                 Overstaffing, corruption, outdated equipment and obsolete technologies, poor maintenance of plant equipment and free provision of electricity to WAPDA employees (estimated to cost more than Rs. 100 million per day to other consumers) all contribute to the cost of electricity that consumers are being constrained to bear. These factors contribute to the tariffs remaining high and to their increasing trends. The problem of affordability, high operational costs and lower production capacity than the installed capacity are thus directly related to the inefficiency and irregularity issues of the GENCOs and DISCOs. Privatization of DISCOs has become essential to solve this problem. Many have proposed the privatization of the GENCOs and eventually, it might have to be done but that of DISCOs is more important and should be done as soon as possible due to the need to take actions that ensure cash flows to the GENCOs. Once privatized, the DISCOs will decide the tariff according to the monetary needs as mentioned earlier, non-productive staff will be replaced and unnecessary staff will also be done away with. Helping people get away with thefts and irregularities will also be checked. As the concern shifts to recovering all costs, the problem of cash flows to the GENCOs will be resolved. Only then can one expect the GENCOs to operate as they are supposed to (if what is owed to the GENCOs is paid to them, they will be able to pay for the required fuel, produce electricity according to their capacity and then sell it). Once this gap in the debt chain is bridged, oil marketing companies will be able to buy oil from the refiners and so on. Moreover, privatizing the GENCOs right now without a proper structure and without the privatization of DISCOs will be of no use because it will essentially be a scam with a government liability being created in the shape of a capacity payment which never had to be discharged when the GENCOs were operating under PEPCO (during the past few years, IPPs have been giving the government ultimatums that either their dues be paid or they will wind up their operation. In such a scenario, where the same problems exist in the private sector due to the inabilities of the DISCOs, no one in their right will invest in generation or they will just receive the minimum capacity payment with the express knowledge that the required fuel will not be available).

e. Electricity Theft: 

                  This happens in a number of ways and in a number of sectors (domestic, industrial, commercial and agricultural) with and without the complicity of government officials and employees. But people who protest and cry “provincialism” but do not pay for the electricity they, use must also be identified, arrested, tried and punished if found guilty.

f. Poor Collection of Electricity Bills: 

                  In collusion with officials and employees and even without their help, many people and organizations/departments have been able to avoid payment of bills. While some of the DISCOs are relatively better at collecting the receivables, some are not. This can be gauged by a USAID report according to which, four of the DISCOs (HESCO, SEPCO, PESCO and QESCO) were responsible for 83% of the total non-collected amount in 2012. The reasons for poor collection are as follows:

i. Poor Collection from Private Consumers: 

      Some of the DISCOs performed poorly while others did better. The problem is not uniform throughout the country (at some places it is worse than at others, though it exists virtually everywhere). The main reasons include political interference, DISCOs’ lack of accountability, failure to disconnect defaulting customers, lack of modern technology for revenue collection (even modern metering methods have not been employed properly) and fear of protests.

ii. Non-Payment by Provincial Government and AJK: 

       DISCOs supply electricity to various government departments, schools, hospitals, police stations etc. Many of them do not pay their dues on time with the excuse of insufficient budgetary allocations etc.

iii.      Non-Payment by Federal Government, FATA and Agri Tube Wells: 

       Federal government departments, government owned corporations and autonomous bodies often do not pay their bills in full or on time. Due to poverty in FATA and palatable attitude of the government towards the people in that region have made collection of bills from FATA a challenge. Balochistan is the only province which receives agricultural tube well subsidy.

4. Recent Steps Taken by the Government: 

                  Analysts had recommended the payment of dues even by means of printing money if necessary since 2012 but they had also given as pre-requisites, the reformation and reorganization of the power sector along the lines given above (checking inefficiencies, privatizing DISCOs, changing fuel adjustment and tariff determination mechanisms etc) and had warned that solving the circular debt problem by such large capital injection would be a one-time solution, thus the necessity of taking all the recommended steps simultaneously. But the government did so without implementing the necessary reforms and we have seen the results – accumulation of the debt once again. However, the government of Pakistan and IMF have in May 2015 agreed on a plan to deal with the circular debt. The plan includes privatization of power distribution companies and bringing the energy sector to full cost recovery. These are welcome steps but their implementation is yet to be seen. Ishaq Dar too has announced the steps that the government will be taking (some of which will be useful but only if implemented properly and timely):

a.       Reduction of electricity subsidies to 0.3% of the GDP (Rs. 90 billion) and the allocation of additional 0.1% for arrears clearance.

b.       Improving collections and reducing operating costs, losses and price distortions in the tariff structure.

c.        Taking advantage of low ate payment surcharges and higher system losses were incorporated in 2014-15 tariff costs in order to arrest a portion of the build-up of the circular debt and improve cash flow of the system.

d.       The government has promised the IMF to move the debt of PHCL to the balance sheet of the DISCOs where privatization will take place (IESCO, LESCO and FESCO are to be privatized in 2016).

e.       Performance contracts have been signed with the Board of Directors of 9 DISCOs to improve efficiencies and regulations. Their performance is to be monitored on a monthly basis as per the agreement.

f.         The government has been working with the Ministry of Law in order to develop an effective system to deal with cases of electricity theft and this was expected to be operational and implemented by the end of 2015.