Pakistan’s Energy Crisis (Page 2 of 2)

Experts blame many of Pakistan’s problems on the “circular debt,”  which mainly arises because of the poor recovery of receivables by the distribution companies. It is estimated that for every 100 units of electricity provided by a distribution company, it gets paid for 30. Of the remaining 70 units, nearly 40 are pilfered and the bills for the remaining 30 go to long-term receivables. Corrupt utility executives and workers contribute to this dismal state.

After privatization, KESC’s new management tried to right size the company, but the move was resisted by employees, who enjoy significant political support. At any rate, analysts acknowledge that human resource costs may be high but it is transmission and distribution losses that really trouble KESC. These losses currently hover at around 35%, mostly because of theft. A one percent improvement would improve the company’s cash flow by Rs1.5 billion per month.

To overcome its electricity shortage, Pakistan has to come up with policies for the short, medium and long terms. The first step for the short term has been taken by clearing outstanding debt. Now, supporting policies must be prepared and implemented to ensure that circular debt does not rebuild. This requires containing theft and improving recovery. A hike in the electricity tariff could improve cash flow at distribution companies, but opponents argue that a higher tariff itself provides an incentive to pilfer electricity. They say the government should ensure an uninterrupted supply of electricity at affordable cost.

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As a medium-term policy, all power plants operating in the public sector need to be refurbished to improve efficiency, which will help bring down the cost of generation. However, the focus should be on achieving the highest possible output from hydro power, where the cost of generation is still Rs2.00/units, compared to the bulk power purchase tariff of US$0.70/unit being paid to IPPs, mostly being run on furnace oil.

Simultaneously, efforts should be made to switch power plants from furnace oil to coal. Gas should be avoided. To begin with, power plants could use imported coal, but ultimately they will need to use an indigenous source. In this endeavor, Lakhra Power Plant near Karachi, which has been closed for some time, must be reactivated as soon as possible. It uses coal produced at nearby mines.

Under long-term measures, the government must prioritize the completion of the Thar Power Plant. Thar has more than 185 billion tons of lignite coal, suitable for mine-mouth power plants. It is estimated that Pakistan could generate more than 50,000MW of power from Thar coal alone.

Experts say Pakistan should focus on hydro generation as the country has the potential to produce 40,000MW by constructing small and midsize dams and run-of-the-river projects. Two of the latter type (Ghazi-Broth and Laraib) are already in operation. The advantages of these projects are minimum displacement of people and minimum areas under water. An added advantage is the renewable aspect.

Pakistan also has the potential to get electricity from sugar plants located across the country, especially in rural areas. Some industry experts suggest that sugar mills could deliver up to 3,000MW to the national grid. This option is very lucrative, because sugar mills will mostly use very low-cost bagasse to heat the boilers, using furnace oil only as a supplement.

Yet another advantage of sugar mills is that they have the capacity to produce ethanol, which can be added to motor gasoline to produce E-10 (petrol containing 10% ethanol). This will help contain oil imports and conserve compressed natural gas.

As the saying goes, there is opportunity in crisis, and this certainly applies to Pakistan’s energy sector. Notwithstanding the significant challenges, a large market and an enthusiastic government could entice bold investors, local and foreign.

Shabbir H. Kazmi is an economic analyst.

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