Power Policy Have Talked, Now Work!

The PML-N expunged two P’s from the PPPP in general elections and brought forward another two P’s’ the Power Policy. Bitter truths are not easy to tell.

It is said, particularly, of politicians speaking to their constituents. Yet, one cannot help but commend the new government to tell the masses what their predecessors were unable to for the past six years of pompous rule: the electricity supply in Pakistan cannot be both cheap and uninterrupted.

Nawaz government took some time in crafting its strategy, rather than rushing to meet an artificial deadline. And it is also commendable that government seems to be resisting what must be enormous pressure from several powerful lobbies, opposed to the policy of prioritizing the power sector for natural gas supply.

In announcing the national energy policy, the government was remarkably candid about the need for a rise in power tariffs for almost everyone in the country. And, by stating explicitly that even households would see their electricity bills go up, the energy minister laid to rest what had been some disturbing initial reports that the burden of higher energy costs would be shouldered disproportionately by the industrial sector.

The laid-out energy plan contains some good ideas. It focuses on reducing the weighted average cost of producing electricity. The aim is shifting to cheaper fuels and cracking down more forcefully on theft. It proposes charging higher rates from industrial and upper-middle class household consumers, who have heavy electricity use and for whom the higher tariff, coupled with a guarantee of uninterrupted supply, would still be cheaper than running backup generators And it proposes privatization of state-owned energy companies to reduce the influence of corrupt labour unions. These all are sensible strategies.

The policy strikes a reasonably fair balance between the need to eliminate subsidies while also ensuring that electricity remains affordable for the poorest of our fellow citizens. Retaining the subsidy for households that consume less than 200 kilowatt-hours of power every month seems like a good approach.

‘If the government is able to restrict its subsidy to just this group, its overall subsidy bill is likely to go down by over 80 per cent’, according to an analysis conducted by the World Bank.

National Power Policy highlights the paradigm shift of energy mix with increasing focus on coal, hydel and alternative energy resources as compared to oil-based generation. In addition, the government is also considering the conversion of current residual fuel oil based generation plants to coal-based. These steps will significantly reduce the burden on end consumers by controlling per unit cost of electricity.

A continuous shift from hydel to thermal has made electricity generation very expensive. Currently, the hydel generation is about 30 per cent of the total generation which was 60 per cent in 1980. At present, oil-based thermal generation stands at around 44 per cent of total power generation.  Residual fuel oil based generation cost is around Rs 17 per unit. Whereas power generation is about Rs 23 per unit for high speed diesel, leading to an overall average generation cost of approximately Rs 12 per unit. After incorporating transmission, distribution and collection losses, this cost reaches to a level of around Rs 15.60 per unit. End consumers, being unable to pay such an escalated cost, are subsidized by the government. This power subsidy of Rs 340 billion in current fiscal year is a major drag to national exchequer.
 How does it make any sense to have a reduction in economic activity as part of the energy policy? As usual, the bureaucrats have got it backwards and it is disappointing to see that the government appears to be going along with their hare-brained schemes.
 Likewise, 23 to 25 per cent transmission and distribution losses are the result of inefficient power system. This translates into an impact of around Rs 2.70 a unit, leading to a total delivering cost of nearly Rs 14.7 per unit to end consumer. The power policy introduces various steps to minimize these losses. Some of these include:
‘Installation of SCADA software to optimize transmission and monitor its losses
‘Incentives to private sector to build transmis sion infrastructure
‘Redesigning of national grids to minimize line losses
‘Signing of contracts with Discos’ heads to re duce distribution losses
‘Development of wind & coal corridors in Sindh
‘Utility Courts for dealing with electricity and gas thefts
‘Penalties for power theft

The recent retirement of circular debt by the Nawaz government has blessed the national grid with about 1700 megawatt electricity from existing production. However, this step fails to completely fill the demand-supply gap and an energy shortfall of 4500-5500MW that is still there. In order to bridge this demand-supply gap and to meet rising energy needs of the future, the power policy identifies a number of power projects in the pipeline and various others that the government is planning on to eliminate this energy shortfall. In addition, the government is also poised to announce a coal corridor with a generation capacity of 6000-7000MW in near future.

The policy, however, is not without flaws. The absurd idea of shutting down commercial areas at night to conserve electricity appears to be making a comeback. This is an absolutely nonsensical suggestion that is a favourite of the bureaucracy. Such a proposal comes from the absurd notion that the purpose of the energy policy is to reduce power cuts, a remarkably short-sighted and poorly-thought-out objective. No, the real purpose of the national energy policy must be to eliminate the gap between demand and supply and to ensure adequate supply of electricity for economic activities in the country. How does it make any sense to have a reduction in economic activity as part of the energy policy? As usual, the bureaucrats have got it backwards and it is disappointing to see that the government appears to be going along with their hare-brained schemes.

There are, however, important areas that the policy ignores completely. For example, while there is a commendable emphasis on using more technological tools to isolate areas of theft and crack down on pilferers, there appears to be no effort to improve the government’s analytic abilities in the realm of energy pricing. The decision to move to coal, for instance, is based entirely on today’s relative prices of coal and oil, not how that relationship might change over the next few decades. The major side effect is: The tariff hike will largely be inflationary and will strengthen the case for early reversal of monetary policy. And the challenge is: A strong political will is required to counter the anticipated street protests that may spark in reaction.

Yet, for all its shortcomings, the manner in which the energy policy has been handled politically by the administration is an exercise in statesmanship on the part of the prime minister. It is rare to see such leadership on matters of such critical importance to the economy. Hopefully, the implementation of this grand vision will be just as well-managed. Those who have better understanding of power crisis in Pakistan, expound that the power policy, if implemented in letter and spirit, has the potential to pull the country out of the dungeons of darkness. As per the policy, the energy shortfall is expected to be completely eliminated by the end of 2017. Besides, the transmission and distribution losses will be reduced significantly.

By: Asad Kaleem

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