A review of the Pakistan energy sector

The View of the Friends of Democratic Pakistan Energy Task Force *

With comments by Abbas Bilgrami,

Juniper Advisors (Pvt) Ltd

The price of failure is too high . Energy is the lifeblood of our high. Energy society. Immeasurable repercussions on society if we dont tackle the energy challenge. The existing energy strategy, is unlikely to achieve all the 2020 targets and it is wholly y g y inadequate for the longer-term challenges.

These are not comments about Pakistans Energy Policy Failures but views the European Commission articulated this week. The Commission does not lack grand descriptions to describe the sorry state European energy policy is in. It does not even attempt to hide its own failings. Pakistan faces a similar challenge. challenge

Executive Summary*
Pakistan's energy sector is in a crisis. Electricity shortages in the summer of 2010 have peaked at 5,000 megawatts (MW). Many rural areas have no electricity for up to 20 hours a day. Urban areas are witnessing outages of 8 to 10 hours hours. Rationing of piped gas in winter months. Increasing reliance on imported fuels, increasing the cost of electricity generation and adding to the country's balance of payments problems. There is a huge circular debt crisis in the public and private sector which is further exacerbating the energy crisis

* Energy Taskforce - FODP/ADB 2010

Executive Summary
Recognizing the magnitude of the crisis and its effect on the people and the economy GOP, has undertaken emergency measures to address, manage, and reduce the impact of the crisis. Specific measures aimed at
energy conservation to save or add about 1000 MW of electricity into the system. improve the financial performance of the sector, the government has already implemented a substantial increase in electricity tariffs between October 2009 and July 2010. National Electric Power Regulatory Authority Act allows for automatic fuel price adjustments in electricity tariffs. Tariffs have been consequently raised altogether by about 37% since the start of fiscal q y g y year 2009/10. Domestic oil prices are being already adjusted regularly in response to changes in international prices under an automatic adjustment regime. To address the problem of the stock of circular debt in the power sector, the government set up the debt holding company Power Holding Limited (PHL) to transfer Pakistan rupees (PRs) 302 billion of circular debt from the balance sheets of energy companies. With assistance from international development partners, the government is implementing major programs to rehabilitate and upgrade transmission and distribution systems to reduce technical and commercial losses in the power sector. sector Under the measures agreed at the energy summit, the government has earmarked PRs20 billion for an energy sector fund to finance critical investments in the energy sector.

Executive Summary
Ongoing structural and pricing reforms are needed in the energy sector, rigorous implementation of loss-reduction programs, and expanded investments. i t t Substantial external assistance is required from the international community to help Pakistan overcome this crisis. Electricity demand was growing by 3% 4% annually up to 2003 04 It 3%-4% 2003-04. reached reach 10% in 2007-08 in line with higher economic growth. The growth in demand was not fully anticipated by planners, and capacity fell significantly behind demand to result in the current large power outages. Gas demand is likewise currently growing at 8.5% while indigenous gas availability is projected to decline unless accelerated investments are made to scale up production. Energy shortages, while blocking growth, are also limiting employment opportunities, increasing poverty and limiting the fight against terrorism.

Executive Summary
Deteriorating security conditions accompanying the ongoing conflict have compounded the problems in the energy sector. Private investment in the energy sector has dwindled. Public investment has fallen as development spending is substituted by increased military spending to finance the war against terrorism. Energy infrastructure in conflict areas has crumbled. The financial liabilities of the sector have increased because of the failure/ inability inabilit to collect electricit bills in s ch areas electricity such areas. To overcome the energy deficit requires immediate attention to sectoral reforms and fast tracking investments targeted at capacity expansion, rehabilitating existing infrastructure, provision of short- and medium-term short medium term measures for a sustainable recovery in the Energy sector. Focus on the need to bridge the present deficit and address the widening energy gap associated with Pakistan's growing population and economy. In the absence of such measures, the present energy gap of 18 million metric tons of oil equivalent (MTOE) will grow to an unsustainable 56 MTOE by 2015-16. The energy import requirements will simultaneously increase from $10 billion to $38 billion i e; almost double the country's present export billion, i.e; country s earnings

We realize the suffering that load shedding causes our people. We are painfully aware of the darkness it spreads, how children study by candlelight, and how the wheels of industry often stop stop. President Asif Ali Zardari's Speech at the Joint Session of Parliament Islamabad, April 5, 2010

Is there truly an energy crisis in Pakistan? Or is it self inflicted

How did we get to this state

Lack of integrated energy planning due to lack of a powerful Energy Czar who could drive the national agenda. An Energy Czar who is not political and has a tenure that extends beyond election mandates in order to depoliticize energy Taking on board energy sector reforms imposed by multilaterals and implementing them half heartedly. This has lead to confused planning and policy implementation resulting in massive economic degeneration in public and state sector energy p gy producers caused by the drying up of financial resources y y g p The private sector has not been able to perform optimally to fill the shoes of the state sector due to patchy support and politics of succeeding governments and a complete lack of financial support within the country Lack f L k of confidence i the competence of i own b i fid in h f its business managers to plan, develop and properly implement policy structures The Executive Summary developed by the FODP/ ADB is another example of outsiders viewing Pakistan as a further case study case study Poorly targeted subsidies Heavy reliance on hydrocarbon based power generation gy y Complete lack of energy efficiency and conservation measures Lack of a dialogue in society which could have lead to a social and energy contract

Capacity vs Utilisation

Pakistan has theoretically 19000 MW of power generating capacity The actual power production fluctuates between 11,500 MW to 14,000 MW This is because of:

Circular Debt leading to reduction in power generating capability Derating of state sector owned power plants Climate Change leading to lower rainfall g p y j Loss of water storage capacity in major dams

Poor Delivery and Poor Recovery

The capacity problems are further compounded by the poor standards of energy delivery
Electricity theft is right of KP people: ANP senator
* Zahid Khan says province bearing extra burden of Rs 11 in power tariffs * Rejects committee on judges appointment By Zeeshan Javaid ISLAMABAD: Speaking on a point of order in the Senate, Senator Zahid Khan from the Awami National Party claimed that power theft was the right of Khyber Pakhtunkhwa because it was bearing extra burden of Rs 11 in power tariffs. Zahid expressed dismay over a statement made by Federal Information Minister Qamar Zaman Qaira regarding the incremental corruption in KP. He condemned the statement made by the minister and informed the House that the production cost of electricity in KP was not more than Rs 1.20, however, the province faces an extra burden of Rs 11 imposed by the federal government. On behalf of his party, he rejected the parliamentary committee on judges appointment formed by parliament and termed it the committee of an individual party.

High Line Losses Hi h Li L High Unaccounted For Gas Lack of investment in power distribution system Poor conversion ratios of fuel to power due to lack f i l k of investment and th f t t d therefore upgradation of d ti f plant

Due to lack of sensible energy pricing and insufficient recovery of costs Poor recovery of outstanding dues

Money misspent

TDS (Tariff Differential subsidies) dont necessarily target the lowest income brackets The TDS is targets all consumers rich or poor No differential tariff regime Industrial d domestic t iff are I d t i l and d ti tariffs poorly developed Domestic (non productive) consumption of power has been allowed to grow at a phenomenal rate while Industrial (productive) consumption has been starved Similar indirect subsidies are given for natural gas. Demand has grown and shortages are evident Poor recoveries in certain DISCOs DISCO s often the Government itself is the biggest culprit

Are we paying more then our peers? NO

The Pakistani domestic sector client pays less for their electricity then their peers in the region The TDS burden on the state exchequer budgeted at Rs. 250 billion q g is in actuality is three times as high

As the UK showed in 1990, one of the problems with the privatisation of formerly public bodies such as the power industry (the process is often called liberalisation - presumably some form of joke) is that R&D is one of the very first items that is eliminated Which is what eliminated. happened in the UK, when R&D spend by the TSO and DNOs went to zero. Only now, 20 years later, has it recovered because Ofgem has finally recognised that it is only g y g y governments (or g ( government regulators) that have an interest in energy-related R&D.
Europe Energy - November 2010

Pakistans own experience with the liberalisation of its own power sector has been at best patchy. The privatisation of KESC has been an umitigated disaster. Was this the buyers fault? NO. It was the poor privatisation policy implementation that has lead to this fiasco This doesnt mean that we fiasco. doesn t should allow Government to remain in the business of operating and distributing power.

Conclusions

Recommendations of FODP/ADB
(all in line with the Integrated Energy Plan 2009-2022) ( g gy )
Strengthen Energy Sector Governance and Regulation Rationalize Pricing & Energy Subsidies Develop Energy Finance Capability Mainstream Energy Efficiency into E i t Energy Policy P li Fast Track Investment Projects for Energy Security

Energy efficiency or lack thereof

(this is an area where the private sector needs to seize the initiative by commencing an aggressive Energy Conservation and Efficiency programme)

There are potentially dramatic gains in supply to be realized from energy efficiency. Pakistan's total energy savings potential is estimated at 11.16 MTOE. Savings from energy efficiency could reach 18% of total energy consumedin the country. This corresponds to a 51% reduction i net oil i d ti in t il imports. A t According t th N ti di to the National E l Energy C Conservation C t ti Centre (ENERCON), annual energy savings of up to 25% are possible in all sectors which translates into approximately $3 billion in savings annually. Pakistan's industry is very energy intensive. This is attributable to high energy losses, wastage throughout the value chain, and inadequate investment in replacing obsolete chain infrastructure. For each dollar of GDP, Pakistan uses 15% more energy than India and 25% more than the Philippines. The power sector experiences transmission and distribution losses estimated at about 21.9%; these are substantial and raise the cost of electricity and contribute to shortages. The legislative framework for energy efficiency is weak. Although an energy conservation and management ordinance was planned along with the development of a national energy conservation program, no substantial results have been so far achieved. The National Energy Co se a o Act o 2009 has likewise not bee e ac ed e gy Conservation c of 009 as e se o been enacted. The Pakistan Energy Conservation Council under the chairmanship of the Prime Minister has not yet been convened. There is no framework energy efficiency law and no central national energy conservation body. There are currently a number of institutions involved in gy y, y g p energy efficiency, but they often have conflicting mandates and mixed responsibilities. Consequently, implementing energy efficiency has remained limited due to the lack of coordination among key stakeholders, to weak institutional structure and capacity, and to the unavailability of financing for priority or pilot energy efficiency projects.

So On and On

This presentation includes my own personal thoughts on the report of the Friends of Democratic Pakistan Energy Taskforce. What i Wh t is needed i more action l d d is ti less t lk talk The needs are clear and dont require a great deal of debate and discussion The energy sector must be depoliticised The political leadership must leave the affairs of the energy sector in the hands of a statesman technocrat who should have the resources, ability to reform and support to turn the sector round Finally the irony is that this is one sector where Pakistan does not need to go begging to multilaterals. It is an area where once policy is clear and seen to be stable investment will flow because Pakistan has so much resource and a large market There are few frontiers of the size of Pakistan and where there are so many success stories to point to viz; telecommunications, media, mobile telephony, financial services etc etc

Thank you
The End = November 2010