How Integrated Energy Planning Can Address Pakistan's Special Issues

Several issues in Pakistan’s energy sector, similar to those found in other parts of the developing world have been discussed earlier. IEP provides an analytical platform to address these and to test out the efficacy of a range of policy options. Some other special issues are dealt with below.

Circular Debt

The government-owned electric power system pays for its expenses from sales revenues collected from consumers and the government makes up any deficit. The latter practice runs counter to the declared objective of moving towards profitable operations and eventual privatisation of entities in the sector.

Consumer tariffs are insufficient to pay for expenses and the government coffers are overstretched. This results in prohibitive levels of arrears, including non- payments to suppliers of fuel as well as to private independent power producers (IPPs).

It also gives rise to a chain of outstanding arrears through the generation, transmission and distribution entities within the power system itself. While tariff increases and injection of government capital might be the quickest short-term remedy, these are only stop-gap measures.

Notwithstanding recent price adjustments, tariff levels have not increased sufficiently to cope with spikes in petroleum prices or low rainfall, which depresses hydel generation. Tariff increases are, understandably, hampered by affordability issues.

The other side of the equation is the cost of power delivery. Here a host of issues appea1; involving system management and structure, maintenance levels, load balancing, plant utilisation and efficiency, system losses including an inordinate level of theft, tariff collection performance and related corruption, lack of regional interconnections, and so on. System losses are a prohibitive 25 per cent of net generation and consumer payment arrears are an unacceptable 30 per cent of the amount billed.

In short, the power system is financially unviable and operationally impaired. It relies on heavy government capital injection in the form of unaffordable subsidies, which increases the fiscal deficit, promotes deficit financing and loss of reserves, and leads to the inevitable depreciation of the currency. Despite periodic capital injection, circular debt continues to grow. It is difficult to get an accurate figure of the net outstanding debt because of significant overlaps and because it is a moving target. To give some idea of magnitude, the gross receivables in the energy sector are currently estimated at $6 billion. By some estimates, the net figure has 260grown from approximately $3.5 billion in June 2009 to $4.8 billion today. In addition to the state-owned power system and IPPs, it affects virtually all entities in the commercial energy sector. For the state-owned power system alone, the government is now contemplating a $1.3 billion injection to close the current arrears gap.

Some critics consider this crisis to be self-inflicted and stemming from lack of payment discipline but, when seen through the lens of IEP, its causes can be attributed, in large part, to the absence of the IEP mechanism. This would explain the conspicuous lack of a long-term integrated approach and the reliance on stop-gap measures. The result is that, while power system capacity in Pakistan is 19,855 MW and the peak demand is 14,500 MW, the power system can only meet 70 per cent of the peak demand; hence the acute shortages, brown-outs and black-outs.

IPPs, embroiled in the circular debt issue, deserve special mention. Following the adoption of the 1994 Private Power Policy, nineteen IPP projects achieved financial closure in record time for which Pakistan was internationally acclaimed. The US Energy Secretary, after a visit to Karachi in September 1994, described it as the best energy policy in the entire world. By 1998, however, termination procedures had been initiated for eleven of the projects on technical grounds and allegations of corruption, causing a major reversal of Pakistan’s image at a particularly problematic time for the economy. A long and painful process of renegotiating the projects was started.

The technical causes were wide-ranging and complex. In retrospect, some simple lessons can be drawn. First, while incentives for private power generation alleviated power shortages in the short term, too much capacity was contracted with insufficient attention to least cost expansion. In times of depressed demand, the liability of the government-owned power system becomes particularly prohibitive. Under the provisions of the Power Purchase Agreements, the system is obligated to take the power or pay for it, guaranteeing the IPPs an agreed minimum plant factor. Second, the magnitude and nature of private investment was not in synch with the level of sector reform and national socio-economic and governance reforms. Third, it would have been prudent to stagger the competitive bids over a number of years to enable bidders to better assess the risk and reduce their bids. Rapid response times inevitably impose 261upward pressures on bids. Fourth, staggering IPP bids, thereby reducing capacity requirements, would allow the power system operator to reassess demand and adjust contracted capacity and timing of subsequent projects. Fifth, a more transparent and politically acceptable approach in accommodating changing country conditions would have helped.

Finally, contracts should be open to a mutually acceptable re-negotiation process.

Many of the above issues, particularly those relating to demand and supply considerations and optimal system expansion, would have been pre-empted had an IEP system been in place. One of the most significant benefits of IEP is the ability to quantify the cost penalty or the opportunity cost of pursuing sub-optimal plans— vital for a country confronted with so many issues, for which less-than- optimal choices often become necessary. A prime example is Pakistan’s need to address issues of poverty and inequitable income distribution. Access to and affordability of energy is a critical concern among the urban and rural poor. This inevitably leads in the shorter term to subsidies and cross-subsidisation. Some might question the use of sophisticated planning techniques if, in the end, substantial ‘deviations’ from the optimal scenario would be necessary. This is a fallacy. There is nothing wrong with subsidies if their design meets certain basic criteria. Subsidies should be clearly targeted to the poor through a system of means testing. They must be affordable to the national economy. If not, their inevitable withdrawal would have dire consequences for the very group they were meant to benefit. They must be transparent, i.e. not concealed in quasi- budgetary transactions. The moral hazard of encouraging waste would need to be minimised. IEP, complete with a range of scenarios and impact analyses, provides the tool to assess the impact of subsidies in the energy sector and to the national economy as a whole and thus make informed choices.

Pakistan is not unique in excluding non-commercial energy in its analyses. There are two main reasons for this. First, data on non-commercial energy is less reliable and errors in estimation could lead to a significant bias in the energy balance because of the large share of non-commercial energy in the total mix. Second, the primary energy equivalence for non- commercial fuels is particularly misleading because in general, they are burned at much lower efficiencies than commercial fuels and their share in useful energy consumption is consequently lower. However these are not 262plausible reasons for the omission. Without traditional energy, meaningful policy and investment priorities cannot be established for the sector as a whole. IEP would highlight the need for significantly upgrading non- commercial energy data and for focusing on the utilisation efficiency of non- commercial energy.

Energy consumption in particular sectors such as households has been defined as the energy delivered to that sector. It does not take into account the efficiency of utilisation of the delivered energy, known as end-use efficiency. IEP, in promoting conservation measures and defining conserved energy as adding to energy supply, forces energy planners to focus on end-use efficiency rather than on delivered energy alone. In Pakistan this will inevitably lead to measures such as the dissemination of higher-efficiency, tested and tried cook-stoves rather than the reliance on traditional wasteful methods such as ’three-stone’ fires.

With nearly half of Pakistan’s total requirements met by non- conventional sources such as fuelwood, the current neglect means ignoring nearly half of the country’s energy supply source and half of its population—hardly justifiable for a country fighting the scourge of poverty and trying so hard to improve its lagging social indicators. In the light of the evidence presented above, the conclusion is simple. The elusive fundamental in Pakistan’s energy sector reform is IEP and the imperative of adopting this is unquestionable. With it, Pakistan’s policy- makers can finally go beyond what needs to be done to how it is to be done. Moreover the time to act is now. Necessary skills exist in Pakistan and, with political will and a modicum of external assistance, the recovery of the energy sector can be undertaken fairly swiftly. On that will depend the country’s economic revival.