Energy reform plan: Déjà vu all over again?
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According to recent data publicized by the government, the energy sector’s circular debt will increase by Rs436 billion by June 2021. This implies that the total stock of circular debt at the end of the ongoing fiscal year will amount to an unprecedented Rs2.6 trillion.
Key components of the energy sector’s circular debt include losses in transmission and distribution, inefficiencies of both operational and financial nature at distribution companies, non-payment by K-Electric, and higher than expected subsidies. These factors are bound to keep the electricity rates high for industry — currently faced with 9 cents/kwh compared to an average of 7 cents across the region. Given the situation, it comes as no surprise that the government was left with no choice but to agree to a further increase in power tariffs — expected to cover the circular debt — in a staff-level agreement with the International Monetary Fund.
Meanwhile, the existing shortages of electricity continue to cause an annual loss equivalent to four percent of the national income. A recent power supply failure led to a country-wide blackout lasting for over 24 hours in several parts of the country, another example of uncertainties associated with the transmission system.
The most ironic part of this puzzle is that Pakistan currently has a surplus power of 8,000 MW. Getting this surplus to reach consumers via the national grid has remained challenging, with volatility in frequency and voltage hurting industrial competitiveness. The use of captive power plants has also lately been discouraged by the government.
The most recent liquefied natural gas contract with Qatar is not free from the risks which any other take-or-pay deal has presented in the past. This risk is typical of countries where governments try to forecast demand and procure supplies instead of leaving the decision to the private sector that can do the same once they have a buyer. What is not clear is how the government will convince the buyers to pay a high price for LNG and address the existing terminal handling problems that have frequently resulted in demurrage.
Perhaps it is time to consider a single energy regulator in the country to improve regulatory coordination, harmonize the pricing structure in both gas and electricity sectors and address consumer woes.
Dr. Waqar Ahmed
The recent deal struck with the Independent Power Producers is not expected to deliver fruits in the short term and certainly not in this tenure of the Pakistan Tehreek-e-Insaf (PTI) government. The goal of affordable and certain energy supplies will remain a distant dream unless bolder decisions are considered.
It is clear that regulators in the energy sector have not been able to check the distribution and technical losses which continue to breach the allowed limits. Both the National Electric Power Regulatory Authority and Oil and Gas Regulatory Authority have not delivered a competitive market for electricity and gas, respectively. Regulators also seem to be clueless about how to make the government comply with a medium-term plan which eventually brings down energy tariffs in line with peer economies. Perhaps it is time to consider a single energy regulator in the country to improve regulatory coordination, harmonize the pricing structure in both gas and electricity sectors and address consumer woes.
Grid supplied electricity needs urgent improvement through maintenance and modernization of select industrial areas to start with — something which is also possible through public-private partnership in case the government is cash-starved.
The privatization program in the energy sector lacks clear timelines. Entities such as the Oil and Gas Development Company Limited, Pakistan Petroleum Limited, Guddu Power Plant, Nandipur Power Plant, Balloki Power Plant, and Haveli Bahadur Power Plant have already been in the list of organizations being offered for privatization, though any progress achieved toward their disposal is rarely reported. The cause for greater concern, however, is that the energy sector entities with much larger losses, high contribution to circular debt, and weak hope for a turnaround are not seen in this list. With the Sarmaya-e-Pakistan holding entity model now termed dormant, it is not clear how the government wishes to turnaround these entities in both financial and operational terms.
The two casualties of the above-mentioned milieu are (a) the ability to attract foreign investment and make technology transfer possible in the energy sector, and (b) expedite a transition toward alternative and renewable energy. The private enterprises wishing to invest are weary of a broken overall supply chain in the energy sector and expected inability to realize returns in the future. The government for one is not known to be a reliable pay master.
Any change in the management plan will be as good as the ability to bring about improvements to capacities, financing, and governance in gas and electricity sectors. The current energy reform plan seems devoid of all three as in recent months financial recoveries in this sector seem to have deteriorated and transmission and distribution losses are once again on an increase.
*Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed
