Integrated Energy Planning

Energy analysts and policy-makers alike agree that energy sector planning and policy formulation need to be carried out on an integrated basis. The appropriate mechanism to achieve this is known by various acronyms.

This chapter refers to it as IEP (Integrated Energy Planning). The concept and principles of IEP presented here are those advocated in Integrated National Energy Planning in Developing Countries’, amended to reflect conditions in Pakistan. In practice, as is the case in Pakistan, investment planning and pricing are often carried out on an ad hoc, crisis-driven, sub-sector basis.

Typically, as also happens in Pakistan, electricity and oil sub-sector plans are prepared largely independent of each other, as well as of other energy sub-sectors. Moreover, the powerful electric power sub-sector often dominates policy decisions on pricing, subsidies and investment priorities, which are inevitably skewed in its favour to the detriment of other sub-sectors, and the economy as a whole. In times of cheap energy, the repercussions could be relatively benign. However, with rising and volatile international oil prices and acute energy shortages, as is the case today, IEP becomes vital.

IEP, as an integral part of economic planning, enables optimum use of energy resources to achieve socio-economic development. Since energy affects every part of the economy, the energy sector is analogous to the financial sector. Some analysts describe energy as the physical counterpart of money. IEP develops a coherent set of policies covering: energy needs to meet growth and environmental targets; optimum fuels mix; conservation; energy security through diversification and reducing dependence on external sources; energy needs of the poor; foreign exchange savings; trade deficit management and revenue generation to finance sector development. IEP integrates the policies and plans of the energy sector with national economic objectives, while ensuring close coordination and consistency between each of the energy sub-sectors.

IEP is a five-stage process (Figure 1):

1. Establishing the socio-economic background and national objectives
2. Analysing energy demand
3. Identifying supply options
4. Constructing the energy balance
5. Formulating policy and analysing its impact.

The energy balance, the core of IEP, assigns specific energy sources to corresponding uses. It stipulates the supply of various forms of energy, its conversion and losses and the net available for consumption, broken down by sector. IEP yields a set of detailed energy policies and plans (including policy tools and investment) for the short, medium, and long term, under various scenarios, tested for impact on the economy. The success of IEP depends upon establishing a separate ministry or department for energy with over­arching responsibility for the sector and access to top policy levels. As an interim measure, an integrated energy cell can be set up in a central agency such as a planning ministry.

‘Integration’ under IEP does not signify the revival of central planning or building a more intrusive or manifold bureaucracy. On the contrary, the mechanism is designed to facilitate coordination, and the concomitant institutional structure streamlines and considerably reduces bureaucracy and red tape. This can become contentious because of the reluctance of concerned ministries, agencies and individuals to accept realignment of the power structure that must accompany such changes— hence the importance of political will.

International Experience

The concept of IEP was introduced in the 1970s and successfully applied in a wide range of countries, amended to suit individual country conditions. However, in the 1990s, in the wake of a major push by international development agencies to promote market economies in the developing world, it began to wane on the assumption that the free market will determine appropriate policy choices. This assumption does not hold for most countries in the developing world. It might have been ideologically motivated to counter the ‘Gosplan’ heritage of the newly independent states of the former Soviet Union. Fast-forward to today. The World Bank is preparing a global energy sector strategy. Feedback from countries has identified the absence of long-term energy planning as an emerging issue—signalling the importance of reverting to coordinated long-term planning for those countries that may have discarded the model and suffered as a consequence. Common sense seems to be prevailing over ideology to achieve a practical balance.

Through all this, most developing countries maintained some form of integrated energy planning.

Success was characterised by three ingredients: comprehensive coordinated analysis; supporting institutional arrangements at the policy level, and sound implementation. Analytical sophistication varied, but institutional structures have evolved into a central energy policy institution, configured in one of two ways: a stand-alone integrated energy ministry or an integrated energy department/agency within a central ministry. A few examples of countries which fall into one or other of the two arrangements (both supportive of IEP) include: Indonesia, Malaysia, Thailand, Philippines, Poland, Bulgaria, Romania, Hungary, Slovakia, Czech Republic, Cambodia, Viet Nam, Russia, Ukraine, Belarus, Turkey, Tajikistan, Kyrgyzstan, Uzbekistan, Uganda, and Kazakhstan. Two countries with well-managed energy sectors, which can serve as examples for Pakistan are Turkey and Kazakhstan, in terms of an integrated line ministry model and well-coordinated and successfully implemented policies.

IEP in Pakistan

Many analysts have drawn attention to the lack of energy policy coordination. ‘The Weight of History: Pakistan’s Energy Problem’ which focuses on commercial energy, emphasises the need for a comprehensive approach. On traditional fuels, ‘Energy, Poverty Reduction and Equitable Development in Pakistan’ states: ‘it is imperative that government policies and strategies recognize’ the ’near invisibility of the role of traditional fuels’, for which it advocates ‘better inter-sectoral policy coordination, and integrated development approaches’ maintaining that ’the costs of inaction are high.’ The absence of comprehensive integrated energy planning has also evoked international comment. Quoting an executive, the New York Times wrote: ‘There is nobody in Islamabad who is working on a coherent, integrated plan. The discussion just keeps going in circles.’ USAID’s energy assessment of Pakistan listed, as the first item, the following shortcoming: ‘The ability to perform system-wide planning in the electricity and energy sector as a whole, both in terms of technical analysis and ability to develop and implement plans of action.’

Building capacity requires coordinated interventions at three levels: training at the individual level; building appropriate institutions to effectively utilise trained manpower; and establishing a policy environment which provides incentives for institutions to function efficiently. In the energy sector Pakistan has relatively good access to training both within the 256country and overseas. Despite the gradual erosion of trained manpower, the sector retains a modicum of quality. Weaknesses in the policy environment have been discussed. What warrants a closer look is the organisational structure of policy institutions especially the lead ministries, main regulatory bodies and planning institutions in the energy sector. The Ministry of Petroleum and Natural Resources heads the oil, gas and coal sub-sectors. The Oil and Gas Regulatory Authority regulates petroleum product distribution including CNG for vehicles, sets safety standards and equalises prices across the country. Coal exploration and development are undertaken by the Pakistan Mineral Development Corporation through leases granted to the private sector, administered by provincial governments. The Ministry for Water and Power is responsible for the electric power sub-sector. The Pakistan Atomic Energy Commission oversees nuclear power generation. The National Electric Power Regulatory Authority is charged with ensuring fair competition and consumer protection. The Private Power and Infrastructure Board was set up to improve investment incentives in the power sector as a one-stop facility for investors.

The Ministry of Urban Affairs, Forestry and Wildlife oversees the wood fuels sub-sector. The Ministry of Food, Agriculture and Livestock handles other biomass including agricultural residues. The Alternative Energy Development Board is the central national body for renewable energy and is also charged with rural electrification in areas remote from the power grid. The SAARC Energy Center is being set up to address regional issues, to facilitate energy trade within SAARC and promote more efficient energy use within the region. The Ministry of Finance, Planning and Economic Affairs is involved in energy pricing and taxation policies. The Ministry of Production and the Ministry of Industries deal with industrial energy conservation in the public and private sector, respectively.

Thus, responsibility for the energy sector is highly fragmented and there are major overlaps. This is clearly not conducive for IEP, despite the best efforts of HDIP to compile and analyse data or of the Planning Commission to coordinate plans emerging from so many institutions. IEP is not unknown in Pakistan. To trace its history, it is necessary to turn the clock back to the early 1980s when it was introduced, albeit partially and briefly. The government of the time was firmly committed to establishing IEP and, as an interim step, had established a planning unit within the Directorate General of Energy Resources (DGER) in the Ministry of Petroleum. Recognising that this location strengthened the dominance of the petroleum sub-sector over other vital areas such as non-commercial energy, a decision was 257taken to move the expertise to a central neutral location. The ENERPLAN Cell was created in the Planning Division and charged with the national energy planning function. Relevant government administrative orders were issued and budgets approved. Funding was secured for training and technical assistance to start the analytical work. An Energy Policy Board, with top-level representation from all energy-related ministries, was instituted to provide ‘a central coordination forum for policy decisions, program guidelines, monitoring and evaluation of all components of ENERPLAN’. Integration with national plans was to be carried out at this level. Decisions having nation-wide impact were to be referred to the National Economic Council or the Cabinet.

This was a good start. However, the risk was that the location in the Planning Division would eventually dilute the importance of the energy sector, given the Planning Division’s involvement with the whole economy. These arrangements were intended as interim measures till a ministry of energy emerged. For a while the arrangements worked but then began to falter. International institutions such as the World Bank continued to provide loans and advice to the energy sector but policy reform had slowed down. Emphasis on IEP was lost perhaps because of the misplaced notion that market forces would compensate. It is significant that the World Bank’s last comprehensive energy sector review for Pakistan dates to the early 1980s, despite the recognition that energy is a critical impediment to economic development. Even the last sub- sector (oil and gas) review dates to 2003. USAID did issue an energy sector assessment in 2007, identifying the absence of integrated planning as a primary weakness. However, it did not elaborate on what steps needed to be taken.

The unravelling of IEP was inevitable since there was no follow through on the necessary organisational changes. Instead of moving towards a simple integrated structure, there was a gradual expansion of the network of policy institutions, compounding the complexity and confusion. So the situation in the energy sector today should come as no surprise. Under these conditions, the ineffectiveness of seemingly well-conceived and well-intentioned policy initiatives was inevitable.

IEP now needs to be re-introduced, this time in a comprehensive manner, supported by an appropriate institutional framework. The seeds of IEP remain in Pakistan and can be revived quite rapidly to restart the 258process. Documents establishing the various bodies are in the records, together with elaborate administrative and technical studies to back them up. Moreover, many of the processes and skills already exist, such as sophisticated national planning and budget processes and the know-how for preparing energy balances. The expertise in HDIP can be transferred to an energy planning cell in the Planning Division, strengthened by expertise from the Ministry of Forestry, the Ministry of Agriculture and Livestock and the Alternative Energy Development Board, to give due importance to non-commercial and other renewable forms.

The necessary institutional restructuring can take place on a phased basis to minimise disruption. The first phase of restructuring, the establishment of a planning cell with access to top policy levels, can be done very rapidly. At the same time, plans would need to be initiated towards forming the ministry of energy with the planning cell at its core, and amending the structure, functions and decision-making processes of the current energy-related policy bodies to facilitate the initiative. While maintaining the independence of regulatory institutions, they should be put under one roof to facilitate coordination. To minimise disruption, these changes would need to be carefully designed and phased in. A firm commitment towards this end, cemented with an up-front public announcement, is vital. The cost of not doing so could, once again, result in an un-raveling of the process and history will repeat itself.

IEP is not the panacea for Pakistan’s energy problems. It is the essential starting point without which informed policy decisions in this sector cannot be made. It provides the ingredients of good data, information and analysis, eliminating guesswork and lobbying by special interests, which have tended to dominate the scene. Pakistan can finally begin to optimise the sustainable exploitation and utilisation of energy within its financial constraints and economic aspirations, addressing overwhelming issues such as prohibitive and ever-widening energy deficits.