Turning Energy Around

Pakistan’s energy sector is in crisis.

Power outages of up to 18 hours a day disrupt the lives of people and threaten the economy in an unprecedented way.

Despite abundant installed capacity, the power system is mired in critical operational issues including a pervasive circular debt.

Payment arrears between various entities has jammed the flow of funds through the power supply-chain, and deprived fuel suppliers and independent power producers of cash to the extent that their viability and therefore output is jeopardised.

Demand is outstripping supply at a time when the country’s security situation imposes obvious constraints. But if the energy deficit is not urgently tackled it contains the seeds of dangerous social unrest.

Equally disquieting is the fact that energy policy initiatives being promoted today are the same as those proposed some 30 years ago, indicating little implementation progress in the intervening years while the crisis deepened.

How can this situation be remedied?

The absence of a coordinated energy policy remains a fundamental constraint.

An integrated approach needs to be established together with an institutional structure that supports it.

This was partially implemented in Pakistan in the 1980s but faded away subsequently with the increasing fragmentation of policy institutions and functions.

Without integration, decision-making remains inherently flawed and policy initiatives are reduced to shooting in the dark.

The country has the capacity to speedily revive the integrated approach together with the first steps of a supporting institutional structure. The rest of the institutional changes can be phased in gradually.

This will enable policy-makers to rapidly tackle, on an informed basis, the urgent and longer-term problems facing the sector, replacing the current ad hoc approach which reacts to, rather than averts, crises.

It will help pave the way for the recovery of the energy sector that can then aid the economic rebound. It is not so much the availability of resources but how they are managed which makes the difference between success and failure.

State of the Energy Sector

The broad objective is to develop the sector to support an expanding economy.

Developing indigenous resources, importing energy at competitive prices to meet deficits, expanding delivery infrastructure and improving energy efficiency and reliability, would enhance energy supplies.

Security of energy supply would be increased by greater reliance on national resources thus reducing import dependence, and by diversification of energy supplies to manage risks and external shocks.

Long-term viability of the sector would be supported by a shift in the role of government from owner to that of policy-maker and regulator, encouraging the private sector to own and run the energy companies through appropriate incentives, including attracting foreign and local private capital and deploying competitive processes.

The objectives contain consumer-oriented, eco-friendly and pro-poor elements, promoting service-provision, environmental protection and affordable energy for the underprivileged. Despite these laudable objectives the sector is in a dire state. The problem is not a lack of clarity on what needs to be done but how it is to be done.

The official Pakistan Energy Yearbook 2009 lays out the supply and consumption picture.

Total primary energy supply in Pakistan is 63 MTOE (Million Tons of Oil Equivalence) of which:

• natural gas accounts for 48%
• oil 32%
• hydroelectricity 11%
• coal around 7%
• Nuclea1 LPG and imported electricity make 2%

Pakistan imports 1/3 of its energy requirements as oil and coal, despite huge proven reserves of coal and a significant exploration potential of oil.

Over 80% (17 MTOE) of Pakistan’s oil requirements are imported at a prohibitive cost of $12 billion a year, and over 60% (3 MTOE) of its coal supplies come from overseas.

The official figure for total energy consumption is 37 MTOE, the difference between supply and consumption being the losses in conversion, processing, transmission, distribution, as well as non-technical losses, which is a euphemism for theft.

The industrial sector is the dominant consumer with over 40% of the market. The transport sector consumes just over 30% and households around 22%. The remainder consists mainly of commercial and agricultural consumers.

The Hydrocarbon Development Institute of Pakistan (HDIP) in the Ministry of Petroleum and Natural Resources produces an impressive document, the Energy Yearbook, based on input from various energy related ministries and agencies.

The quality of information and analysis is testament to the fact that, despite the serious brain drain from Pakistan, islands of excellence remain. This offers hope for the future and gives pause to those who maintain that the situation is beyond redemption. There is, however, a glaring omission, which reflects the preoccupation of policy-makers.

The data pertains only to commercial energy, i.e., energy for consumers connected to national grids and billed for services.

Estimates of non-commercial or traditional forms of energy are missing. Data in this area is sporadic and much less reliable, mainly because of the conspicuous lack of attention accorded to it.

If non- commercial energy is included, the supply picture changes dramatically. Traditional biofuels (fuelwood and other biomass) head the list, followed, in descending order, by natural gas, oil, hydro and coal. On the consumption end, again, a starkly different picture emerges. Households become the primary consumer using 50% of the mix. Biofuels account for over 85% of household energy use, of which fuelwood is the largest component followed by biomass, and crop residues.

The most egregious aspect of the omission is that non-commercial energy use accounts for nearly half of the overall demand for energy in Pakistan. By including non-commercial energy in the calculations, policy- 246makers will be forced to consider major shifts in emphasis. Supply and consumption patterns are presented in Table 1 below.

Table 1: Pakistan energy supply and consumption 2009

Note: Non-commercial primary energy supply not shown due to inadequate data. In one sense, the historical neglect of non-commercial energy seems understandable.

Commercial energy is a key ingredient for national growth and prima facie warrants the lion’s share of attention, particularly if growth has been stymied, as has often been the case in Pakistan, and there is pressure on policy-makers to jump-start the economy. There is an inherent fallacy in this approach.

While commercial energy consumers contribute significantly to GDP growth, neglected non-commercial consumers drag down national output over the longer term by unregulated and unchecked practices and technologies, which waste energy and denude forestry resources by harvesting beyond the maximum allowable cut, i.e. beyond the level at which the forestry resource becomes unsustainable.

Although the economic, social and environmental implications of the neglect requires a separate detailed study, we only need to look around us to see the disastrous effects on the degradation of forests and eco-systems, and the poverty that this approach has engendered over the past sixty-four years.

In evaluating the state of the sector in relation to the economy, three other parameters are significant. First, data from the Energy Yearbook and the Economic Survey clearly show that growth in energy consumption and economic growth have followed almost identical patterns for the last decade and a half, reaffirming that energy fuels the economy and its shortage curbs growth.

The second is Pakistan’s per capita energy consumption, which at 0.49 TOE is significantly lower than the world average of 1.78. This reflects the country’s level of development. As energy availability is a key determinant in the standard of living, this parameter is also indicative of the high incidence of poverty.

The third is Pakistan’s energy consumption per dollar of GDP growth, which is around 0.82 against the world average of 0.32. This illustrates the relative inefficiency of energy use in Pakistan and highlights the pressing need to strengthen policy initiatives that encourage greater utilisation efficiency. In a constrained energy supply situation, any improvement in efficiency means adding to the supply.

The above figures are based on commercial energy but if non- commercial energy is included, the comparisons are likely to be even more pronounced. Moreover, the household sector, which is the largest consumer and where waste is greatest, would become the focus of improving energy efficiency.

By excluding non-commercial energy, the industrial sector appears as the largest consumer and therefore the focus of attention. This does not imply that the industrial sector should be overlooked. There are many low-cost and no-cost initiatives that can be implemented here. But it is important to strike the right balance between available financial resources and the concentration of effort.