Friday, 7 June 2013

Escaping a crisis

The article came in money matter on 27 May 2013

Terrorism, energy shortage and economic revival are the three top tasks for the new government of PML-N. The PML-N’s manifesto has laid special emphasis on these issues, particularly the energy crisis: PML-N leaders have already announced that a solution to the energy problem will be their top priority.

Electricity is directly linked to economic growth. Rehana Siddiqui’s research at the Pakistan Institute of Development Economics (PIDE) shows that a five percent growth rate in GDP requires 4.75 percent growth in electricity supply. According to a recent USAID-Planning Commission report, Pakistan’s GDP growth rate in the last five years slowed down by two percent per year due to the shortage of energy. This implies that we have lost at least 10 percent growth in the last five years.

Energy shortage, especially in the production and supply of electricity, is due to the problem of circular debt, and if we deal with circular debt we can overcome the entire problem. Pakistan’s circular debt, which was Rs84 billion in 2006, has ballooned to over Rs800 billion. In an article, Sartaj Aziz has blamed the policy of inviting IPPs in 1994 for production of electricity. He said that the ratio of hydel to thermal was 60 to 40 in 1994 and price of crude oil was $10-15 a barrel. Now the ratio of hydel to thermal is 20 to 80 and the price of oil is more than $100 per barrel since 2008. He further said that the cost of generating one unit at an IPP thermal plant is Rs18 per KWh when produced with furnace oil and Rs24 per unit when produced through diesel. The government needs to give a subsidy of Rs9 (if furnace oil is used) to Rs15 per KWh (if diesel is used) if the average price of electricity is to be Rs9 per unit. He described this as the root cause of the growing problem of circular debt. Thus, we need to stay away from thermal energy due to its higher cost and explore other methods for production of energy at a lower cost.

In her comprehensive report on the energy situation, Afia Malik of the PIDE pointed out several institutional shortcomings. For example, DISCOs are highly inefficient. Nepra has a weak administrative structure. Because lack of autonomy and expertise it has been unable to carry out its function effectively, such as issuing licences. Moreover, unnecessary delays in the decision-making process due to lingering bureaucratic and administrative procedures discourage the private investor, which is a major sign of institutional weaknesses. One of the major reasons of the delays is getting multiple agencies involved in the decisions-making process. She further said that delays in subsidies payment by the government and non-payments to GENCOs raised the problem of circular debt.

In a report in 2007 USAID reported availability of energy falling behind demand, especially in the peak hours, and emphasise the need for provision of more energy supplies through expansion and conservation and increasing access to modern energy services to regions and population groups which lack them. The government has failed to increase energy supply either through expansion or the use of rental power plants.

Recent USAID-Planning Commission report on circular debt has pointed out several shortcomings within the system which are causing problem of circular debt. Poor governance is among the major concerns of this report. Among other problems delays in the tariff differential subsidy payment by the ministry of finance takes the top spot followed by non collections from private consumers and government, delays in tariff determination and further delays in notification by the government, poor revenue collections by the DISCOs, transmission and distribution losses and theft, and prolonged delays in fuel price adjustment are the major problems contributing to the accumulation of circular debt. They suggested two major tasks for the government to eliminate the circular debt: “(1) Move the circular debt amount to the government’s debt, reallocate in consumers tariff or place a tax on the consumer to recovery over time; (2) Undertake specific policies and programmes to improve the governance and performance of energy-sector entities to decrease costs, increase cash flow, and ensure operational/financial integrity of the sector.” It also emphasises the need for increase in hydroelectric power, renewable energy and less dependence on thermal energy. Other policies recommended by the report are quite similar to what Afia Malik has proposed in her report.

The PML-N aims to merge the ministries of water and power and petroleum and natural resources in order to avoid the policy disconnect among different policies related to energy. Moreover, certain reforms were mentioned to improve the performance of DISCOs and GENCOS, including the corporatisation and privatisation of both, ending cross subsidies of DISCOs, decrease in the transmission and distribution losses to fewer than ten percent, eradicating problem of non-payments through prepaid billing systems, and replacement of furnace boilers by coal boilers in all GENCOs. The circular debt issue is also handled by giving subsidies to only lifeline users who consumes up to 100 units of electricity.

The Planning Commission has projected a deficit in supply of electricity for the next seven years based on generation capability and change in demand. Projections show that electricity shortfalls will increase to 5,570 megawatts by 2015-16 and then start declining. This implies that power outages will continue in the next three years, and may even increase. In 2016-07 the shortage will be reduced if effective steps are taken. The shortfall will likely be eliminated in 2019. This picture was presented by Shahid Sattar, Member (Energy) at the Planning and Development Division. The PML-N government has a major task on its hands. Most of the initial reforms have already been announced by the PML-N leadership, including merger of all industries which are related to energy so that policy disconnects are mitigated to enable better policy formulation. Shahid Sattar says there is a need for building of dams, but since the sites of Neelum-Jhelum and Basha are located at disputed territories no one is willing to finance them. Generation of energy through coal is also feasible but for that Pakistan needs bigger investment. However, international agencies do not provide funds due to the pollution the use of coal will produce. According to him, wind energy has a narrow scope and solar energy has a high cost. He is in favour of civil-nuclear energy. According to him, it is the cheapest form of energy available in Pakistan. He says if we do not adopt civil-nuclear energy we will suffer in the long run, as we did by inviting IPPs to produce electricity because we did not foresee the present high prices of oil.  

It is clear that the problem of energy shortage is not just the problem of circular debt. Reforms are needed at various stages, such as giving autonomy to the Nepra and make it a better regulatory body. One of the major tasks of Nepra is to bring investment, which it has failed to do for many years. Reforms at DISCOs and GENCOs are necessary to achieve the required results. Prepaid meters are a good option for mitigation of the amount of theft. However, a comprehensive plan is needed for reduction of line losses. Better management through provision of electricity to DSICOs in accordance with their needs and provision of gas and coal instead of furnace oil will reduce the cost of electricity production and thus reduce the overall circular debt.

Do we need to stick to one kind of energy generation or produce mixed forms of energy? This is one of the major tasks for the government. If the decision taken is based only on cost of generation then we may have severe power outages for some more years.

Talking to some industrialists, I observed that they are comfortable to get electricity at Rs18 per unit if the supply is continuous. This shows that even if we are producing at higher cost—such as wind energy or solar energy—and it is distribute to the industries at matching cost they have no problems in paying for it.  The PML-N government should try to solve the problem of outages in the first two years of its tenure to escape a political crisis.

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