Superphysics Superphysics

TURNING ENERGY AROUND

34 minutes  • 7036 words
Table of contents

Ziad Alahdad

Pakistan’s energy sector is in crisis. Its problems seem insurmountable. Although positive initiatives have been implemented over the years many opportunities have been lost. The result is the current predicament.

Power outages of up to eighteen 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 thirty years ago, indicating little implementation progress in the intervening years while the crisis deepened.

How can this situation be remedied? In light of overwhelming evidence that 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.

244The 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

Pakistan’s policy-makers have done a reasonably good job of articulating (repeatedly through several five-year planning cycles) policy objectives for 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. Also, 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.

Before considering solutions, it is essential to briefly review the state of the sector, the gravity of issues, and why the situation has become so serious. 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 per cent, oil 32 per cent, hydroelectricity 11 per cent and coal around 7 per 245cent. Nuclea1 LPG and imported electricity make up the remaining 2 per cent. Pakistan imports a third of its energy requirements mainly in the form of oil and coal, despite huge proven reserves of coal and a significant exploration potential of oil. Over 80 per cent (17 MTOE) of Pakistan’s oil requirements are imported at a prohibitive cost of $12 billion a year, and over 60 per cent (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 per cent of the market. The transport sector consumes just over 30 per cent and households around 22 per cent. 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 per cent of the mix. Biofuels account for over 85 per cent 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 1.1: Primary commercial energy supply Energy sourceMTOEPercentage Share natural gas30.348% Oil20.132% Hydro6.611% Coal4.67% Nuclear, LPG, imported power1.02% Total62.6100% 1.2: Commercial energy consumption Consumption SectorMTOEPercentage share Industry14.840% Transport11.430% Household8:122% Commerce, agriculture, govt.3.08% Total37.3100% 1.3 : Total energy consumption: commercial plus non-commercial Consumption sectorPercentage share Household50% Industry26% Transport19% Commerce, agriculture, govt.5% Total100%

Note: Non-commercial primary energy supply not shown due to inadequate data. 247In 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 248important to strike the right balance between available financial resources and the concentration of effort.

Pakistan’s energy resource potential is substantial and remains largely unharnessed although not all of it is currently financially or technically exploitable. This potential is in the form of depleting fossil fuels (oil, gas, coal) as well as renewables (hydro, solar, wind, wood fuels and agricultural residues). Among fossil fuels, in the petroleum (oil and gas) sub-sector, Pakistan has a large prospective area (or, in geological language, sedimentary basin) covering 830,000 square kilometres. Probable reserves are estimated at twenty-seven billion barrels of oil and 282 trillion cubic feet (TCF) of gas.

Of this, 936 million barrels of oil had been confirmed and 609 million barrels produced till 2007, leaving 327 million barrels of proven reserves yet to be recovered. The reserves-to-production ratio stands at fourteen, critically low considering the high and growing level of oil imports, and compared with the worldwide ratio of forty. For natural gas, 53 TCF have been confirmed, of which 23 TCF were produced till 2007, leaving 30 TCF of proven reserves. The reserves-to-production ratio is twenty-one— uncomfortably low given Pakistan’s heavy dependence on natural gas as the primary commercial fuel, and in comparison with a worldwide ratio of 59.

Till early 2009, 725 exploratory wells had been drilled which resulted in over 219 oil and gas discoveries. This works out to a drilling density of 1.99 wells per 1,000 square kilometres—far lower than the world average of ten. However, the success rate of 1:3.3 is much better than the world average of 1:10. The success rate coupled with the large sedimentary basin implies that if the exploration level is increased, there are good chances of significantly raising the level of proven reserves and, consequently, production of oil and gas. This, however, is proving difficult since vast portions of the sedimentary basin lie in areas where security deters any significant exploration—more so as such activity is usually carried out by international oil companies with their own manpower and risk capital.

Pakistan’s indigenous coal reserves are huge, estimated at 186 billion tons, of which the Thar deposit of 175 billion tons is the fifth largest in the world. Proven reserves stand at 1,980 million tons and at the present 249production level the reserves-to-production ratio is well over 400. This signals the need to enhance production significantly. However, most of this coal is of low quality (high sulphur and ash content) and is located in remote areas. Its exploitation therefore requires expensive excavation, treatment and transport infrastructure, in areas where security is a concern. Renewable energy sources are also significant. Hydroelectric potential in Pakistan is an impressive 41,700 MW of which only 6,600 MW or 16 per cent has been harnessed till today. For mini-hydro (units up to 5 MW capacity), the potential is about 1500 MW of which only 60 MW (4 per cent) has been tapped. Pakistan’s almost entirely untapped wind energy potential, according to the USAID Renewable Energy Lab, is estimated at 41,000 MW of power generation based on areas of favourable wind regimes.

Solar energy is abundant and remains unharnessed except for a few isolated projects. If only 0.25 per cent of the land area of the province of Balochistan were covered by solar panels of 20 per cent efficiency, this would be enough to provide electricity to the entire country. However, the feasibility of generating large quantities of wind and solar power (while improving with continuing research) is highly questionable. Estimates for non-commercial sources, mainly wood fuels, are less reliable. These resources are considerable and constitute 45 per cent of the energy supply mix for the country. However, there is ample evidence that in several parts of the country, unregulated harvesting of this poorly managed resource is severely impairing its sustainability.

The current state of the energy deficit and its projected growth is even more worrisome for the future. Data from the Planning Commission, although ignoring non-commercial energy, illustrates the magnitude of the crisis ahead. It projects an annual energy demand increasing from the present level of around 60 MTOE to 198 MTOE by the year 2025. This is based on an annual economic growth of 6.5 per cent. While not consistent with recent trends, this could be envisioned over the longer term, with an abating global financial crisis and a cautiously optimistic view of Pakistan’s economic regeneration.

The total indigenous supply over the same period increases from around 40 MTOE to only 75 MTOE. Oil and gas supplies are assumed to increase only slightly in line with constraints on future exploration 250activities. In contrast, indigenous energy from coal, hydroelectricity, nuclear and non-traditional renewable sources, are assumed to increase significantly in an attempt to offset limitations in oil and gas. The resulting deficit grows from the already disquieting level of around 20 MTOE to a staggering 122 MTOE by 2025. These figures, perhaps more than any other, underscore the fragility of the energy sector, implying a long-term dependence on external sources. This is neither a viable nor affordable scenario.

Three characteristics of Pakistan’s energy sector take on special significance. First, the indigenous resource potential is substantial, not- withstanding some critical exploitation issues. Two, the energy deficit is prohibitively large and expanding. Three, nearly half the population, mainly the rural poor, is not connected to the commercial grids and relies on non-commercial energy. This combination often tempts policymakers to promote the harnessing of all forms of energy available. This is a common trap, particularly in a severely cash-strapped environment such as Pakistan. In this approach, for example, undue priority is given to renewable forms such as solar and wind, since they are considered free and able to reach poor, remote localities. Such forms of energy are indeed ‘free’ since they are constantly renewable, but they are not necessarily cheap. Moreover, they do little to close large deficits. Even compared with nuclear power generation, itself an expensive option, wind power is around 60 percent more expensive and solar about 30 per cent. Nevertheless, to support poverty alleviation objectives under severe budgetary constraints, all options should be on the table but a mechanism needs to be in place to strike an affordable balance. The degree of departure from the optimum can make the difference between success and failure of energy policy.

How did we get here? How this dire state of affairs came about is analysed in a noteworthy work, which traces the history of the downward spiral and milestones along the way. The path is characterised by ‘stop-go’ reforms, policy reversals, bureaucratic delays and missed opportunities and, over the last decade or so, a growing security crisis. Through all this, there were some sound and well-intentioned policy initiatives and concerted efforts towards implementation. However, these efforts could not yield the desired results in a policy environment, which lacked the necessary fundamentals.

251A few examples illustrate the dilemma. In the early 1980s, there were four international oil companies, which had been granted concessions for exploration in Pakistan. Such companies commonly deploy their own capital for exploration, relying on satisfactory profit sharing or production-sharing agreements with the government to recoup their expenditures once commercial production begins. Drilling conditions were difficult and expensive with deep wells in high-pressure areas but discovery prospects were good. However, a major oil company, on the verge of a significant discovery, decided to suspend drilling operations and leave the country. The net effect was to discourage further exploration at a time when at least ten companies were considering the possibility of exploring in Pakistan with their own capital for the first time—a possibility that could have turned around the country’s energy future.

A combination of factors led to the oil company’s departure. Among them was the inflexibility of the bureaucracy to address glaring anomalies in the tax structure, which severely eroded the cash flow of the company especially in areas with high exploration costs. The second, more significant reason was that, under the prevailing policy regime, oil and gas prices could only be negotiated after commercial discovery. This was a major disincentive for a company deploying its own capital in expensive operations. Rising expenditures in an uncertain post-discovery regime was enough to warrant a pull-out even on the verge of discovery, to the detriment of Pakistan’s economy. Pakistan’s policy­makers failed to understand that the country was competing with others across the world in attracting scarce exploration risk capital. For this, it needed to make its pricing regime as attractive as possible. If there had been a mechanism to rapidly assess the economic penalty of the policy, which traded immense long-term benefits for short-lived financial gains, the story would have been different. It is a credit to subsequent policy-makers that these retrogressive policies were amended. This is now reflected in the government’s exploration promotion and investment promotion documents. However by the time this was done conditions had changed. The security situation became a key deterrent to exploration. This underscores a lost opportunity, one of many policy actions offering too little, too late.

At around the same time, another petroleum company involved in a joint venture with the government had decided to sell to the government its shares in a natural gas field development operation, which provided valuable nitrogen-rich gas feedstock to the fertilizer industry. It took over a year to negotiate the sale price and government inter­locutors were able to reduce the 252purchase price by a significant amount. This could be considered a major gain but for one serious repercussion. Through the protracted negotiations, the field expansion program was put on hold, resulting in immense losses in revenue to the joint venture itself, as well as to the fertilizer industry, and in terms of lost agricultural productivity due to lack of fertilizer. Again, a mechanism to assess the penalty could well have prompted speedier negotiations with less immediate financial gains but with vastly greater financial and economic benefits in the longer term.

Perhaps the most significant example of lost opportunities relates to Central Asia in the early to mid-90s when all six of the newly independent republics, under immense internal economic pressures, were actively seeking avenues to export their surplus energy. Strong consideration was given to the southern corridor through Pakistan to tap the large energy- starved South Asian market as well as gain access to ports on the Arabian Sea for further extending export. This was well before the security situation in Afghanistan had begun to deteriorate. As expected, there were competitors promoting alternative routes. The Great Game was on again, being played with higher stakes and at electronic speed.

Central Asian authorities and international consortia made several attempts to pursue discussions with Pakistani authorities but progress was elusive. One thing was evident. The level of interest and effort of the competitors drowned out the lukewarm response of the Pakistani government and private sector. The rest is history.

One can only surmise how the trade corridors, had they been established, would have transformed the regional scenario. Revenue from trade and from transporting energy across the region would have brought immense benefits to Afghanistan and Pakistan. Both countries, as well as India, would have also benefited from greatly enhanced energy supplies. The resulting prosperity and trade links would certainly have strengthened interdependence among the three countries and helped mitigate the conflict which currently engulfs the region.

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.

How IEP 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 259below.

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.

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