Pakistan’s excess power generation capacity comes at a price

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In 2017, Pakistan finally overcame its chronic power shortage and simultaneously broke its decades-long growing dependence on imported fuel oil as the primary fuel for power generation. But the feat came at a high price.

Today, the country is in the midst of a debate over the future of its power sector as it faces huge electricity payments amid persistent blackouts due to the inability to operate all of its power plants and manage the associated costs. Partly because of this, the so-called “circular debt” of the electricity sector has grown from 31,500 crore Pakistani rupees in 2015 to over 2.2 lakh crore Pakistani rupees today.

Electricity bills soaring

Pakistan’s dilemma is excess power generation capacity – a problem it has avoided since the late 1990s. “We are producing a lot more than we need,” Tabish Gauhar told media. special assistant to the Prime Minister in charge of power, since January.

In his public remarksHe points out that the country cannot afford the new electricity that has been in its system since a series of Chinese-built power plants began commissioning in 2017. Gauhar also attributes most of the increase from costs to “fixed capacity charges”. which he says he “went through the roof”.

According to some estimates, the country has had to pay a capacity charge of 85,000 crore Pakistani rupees per year in recent years, a figure that is expected to exceed 1.45 lakh crore Pakistani rupees by 2023 – by 2023 , it will then be more important than the country in peacetime. defense budget.

Technically, capacity charges are not a budget item (they are paid through electricity bills sent to consumers rather than out of the government’s own budget). The rising cost of excess electricity generation has resulted in continued increases in consumer electricity tariffs.

This has fueled inflation, eroded industrial competitiveness, and necessitated an increasing reliance on government-funded subsidies on electricity tariffs to shield export-oriented industries from the brunt of tariff increases.

A residential area in Karachi following a power outage. Photo credit: Akhtar Soomro / Reuters

In Pakistan, the government is the sole purchaser of electricity. As reforms designed to allow more room for market forces in the electricity sector have not advanced over the past two decades, the bill for these capacity charges must be paid by consumers or shared by consumers. the government through grants.

In the first seven months of fiscal 2021, 33% of Pakistan’s energy came from hydropower.

According to Energy Minister Omar Ayub, the government poured out more than 47,000 crore Pakistani rupees in electricity subsidies last year, making it one of the main items of current expenditure that must be heavily cuts under the International Monetary Fund program that Pakistan is seeking to restart. Just two years ago, this amount was closer to 9,000 crore Pakistani rupees.

With the expected growth in capacity payments for excess electricity, in the years to come, the subsidy bill will rise even more sharply, making it unaffordable for the government and placing it in the unenviable position of having to increase tariffs even further. electricity. This will put more strain on consumers, fueling inflation and pushing Pakistani exports off world markets.

Partly in response to this, the government is trying to persuade the textile export industry to shy away from the captive gas-fired power plants it has been encouraged to install since power shortages began to hit. feel after 2008.

The government argues that large electricity consumers such as the export industry must return to the grid for their electricity needs. The move sparked an intense setback from the industry, with the argument that grid electricity is too expensive for them.

In January, the government announced an average 15% increase in electricity tariffs in all areas, arguing that this step was made necessary by the “mandatory payments” associated with the new power generation capacity installed in recent years. years. He also pointed out that the increase is less than a quarter of what was needed to offset the cost spiral it faces as more power plants come on stream.

Crisis announced

To some extent, this was anticipated and hotly debated in the previous government. In November 2014, the governments of Pakistan and China signed an agreement “[f]following the principles of openness, equality and market-based mutual benefit to develop related energy projects ”, in which 14 projects were listed as“ priority ”and seven others as“ actively promoted ”.

In November 2014, the Chinese and Pakistani governments signed this agreement under which all investments in the electricity sector were made.

In 2016, when these projects were launched, Pakistan’s power generation capacity was just under 20,000 MW, of which almost two-thirds was represented by hydel and fuel oil plants.

Two LNG plants had just started up, adding 1,673 MW of production to the system. But then government projections showed that by 2018, an additional 13,207 MW would be added to the system as Chinese power plants were operational.

Of these 6,900 MW, or just over half, would be represented by power plants running on imported coal and liquefied natural gas. The next round of capacity expansion would run from 2019 to 2022, adding an additional 20,380 MW to the system, of which hydel was the largest share at 9,010 MW, followed by nuclear at 4,400 MW, then local coal at 3,300 MW as more power plants arrived. online at

The Thar coal basins in the south-east of the country. By 2023, when all projects in the pipeline were to be completed, the country’s total power generation capacity would have more than doubled to 53,504 MW.

According to projections made by the government of the day, Pakistan’s electricity demand in June 2018 was estimated at 25,961 MW, which assumed that the GDP growth rate would continue at around 6% (in fact, the growth fell to almost zero in 2018). Its total generation capacity at this stage would be 30,938 MW, of which 25,590 MW would be available at any time. Projections showed an emerging surplus in 2018 even with a growth rate of 6%.

In addition, the share of electricity produced from renewable sources (such as solar photovoltaic, wind power and hydropower) would have reached nearly 43% of total production capacity, against 37% in 2016. Production coal-based is expected to reach 17%. % of the total, compared to 0.3% in 2016.

With these new additions, Pakistan was on track not only to address its chronic deficit in power generation capacity, but also to meet a long-sought goal of diversifying its fuel mix away from expensive fuel oil.

Under the old energy policies of the 1990s, Pakistan’s energy mix had deteriorated to the point that nearly 70% of all electricity production used thermal sources such as fuel oil and gas. As the period of gas scarcity began after 2005, reliance on heating oil only increased, straining foreign exchange reserves and driving up the price of electricity.

The energy mix of the Pakistani power sector changed dramatically after the commissioning of power projects funded by China in 2017. Prior to that, the country relied heavily on fuel oil and gas to meet its power generation needs. In the first seven months of the current fiscal year, on the other hand, 5% of its total power was produced using fuel oil.

Under the new capacity expansion plan agreed with the Chinese, the share of heating oil-based production is expected to decrease to 11% of the total by 2022, when all projects were supposed to have started their production. commercial exploitation.

But concerns have started to mount within the government about the impact these capacity additions would have on the fiscal account, as well as the foreign exchange requirements in the context of increased imports of LNG and coal.

The same projections, made in 2016 by the electricity division, showed that capacity payments had more than doubled by 2018.

Internal documents within the power division showed that capacity payments which amounted to Pakistani rupees 27,200 crore in 2015, or around 30% of the total cost of generation, would rise sharply to reach 63,080 crore. Pakistani rupees by 2018, or nearly 50% of the total cost of production. Instead, that figure was reached in 2019 and, according to the Minister of Energy, is expected to reach Pakistani rupees 1.45 lakh crore by 2023.

The electricity sector regulator, Nepra, however, provides a more complex picture of the spiraling costs weighing on electricity production. In his last annual report, for example, Nepra said that the cost of production is increasing due to several factors. These included mismanagement by distribution companies, the unavailability of LNG for the most efficient and newer plants, excessive withdrawals and overloads on the power grid to help government revenue efforts and transmission constraints in some newer factories, among others.

Power interrupted

China’s expansion of capacity may have helped overcome power generation shortages in Pakistan, but the more chronic problems of a creaky transmission network, poor performance in bill collection and control of bills. broadcasts remained in place.

Members of the previous government under which these power plants were commissioned argue that their projections were based on continued economic growth rates of 6-7%. With the arrival of the new government in 2018, the growth rate fell below 2% and turned negative in 2020 as Covid-19 lockdowns swept the country.

The growth rate this year is expected to be 1.5% according to the IMF, or up to 2.5% according to government projections. “You do not take recessions into account when making plans to expand the capacity of the electricity sector,” said a bureaucrat who worked under the power team of the previous government, speaking on condition of anonymity because of the heightened political sensitivities that surrounded Pakistan’s energy conversation.

Today Pakistan is embroiled in a heated debate over whether it is poor planning or management of the power sector, and the economy at large, that has overwhelmed the country with a capacity of excess electricity production. However, what is more difficult to debate is the bill that is rising.

This article first appeared on The third pole.


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