How the crisis happened

Pakistan is currently facing the worst power crisis in its history, resulting in power cuts through loadshedding, which frequently last between 12-18 hours. These power cuts have served to constrain economic growth and development and adversely affect the lives of the people – rich or poor.

Why has the power crisis worsened in recent years? First, the cost of generation increased drastically in 2007-08 with an unprecedented surge in international fuel prices. Fuel prices have remained at an elevated level since 2009-2010. Sharp depreciation in the exchange rate (the Shaukat Tarin phenomenon) has also increased the rupee value of imported fuel. Heavy reliance on the petroleum sector for tax revenue, after the NFC Award, has further compounded the difficulties.

The price of furnace oil (fuel for power generation) increased from Rs21,259 per ton on July 2, 2007 to close to Rs75,000 per ton today. It takes about 215 grams of fuel (on average) to produce one unit of electricity. Accordingly, the fuel cost of generating one unit of electricity increased from Rs4.57 per unit to Rs161 per unit – an increase of 253 percent. The government did not allow the price of electricity to rise proportionately.

Second, the increase in generation, transmission and distribution (T&D) losses along with power theft have also contributed to the building up of the crisis. Third, growing circular debt incurred largely due to exchange rate depreciation and decline in the recovery of electricity bills has reduced the production of electricity.

Fourth, and most importantly, the substantial decline in the availability of gas for power generation significantly lowered the production of electricity and at the same time increased the cost of generation manifold. In 2005, 504 billion cubic feet (BCF) or 43.5 percent gas was allocated to power generation but the share declined to 358.4 BCF or 27.8 percent in 2012. Gas allocated to the transport sector, on the other hand, increased from 24.4 BCF (2.1 percent) to 119 BCF (9.24 percent) during 2005-2012.

What have been the implications for electricity generation? Due to sharp reduction in the availability of gas to the power sector, 15.9 billion units less of power were generated from natural gas in 2012 as compared to 2005. Electricity generated from furnace oil stood at 13.5 billion units in 2005, which increased to 33.5 billion units in 2012.

On the other hand, electricity generated from gas stood at the peak of 43.5 billion units in 2005 but declined drastically to 27.6 billion units in 2012. In other words, Pakistan moved from relatively low cost of electricity generation (Rs5-6 per unit from gas) to high cost generation (Rs16-17/ unit from furnace oil) in the last seven years, thus multiplying problems manifold. As power generation from natural gas is about Rs10-11 per unit cheaper than furnace oil, a decrease of 15.9 billion units from natural gas translates into an annual incremental cost of Rs150-175 billion.

The higher cost of generation had forced the previous regime to increase the price of electricity by more than 100 percent. Empirical evidence suggests that a strong positive relationship exists between the rise in power tariff and power theft. Increase in power tariff in badly governed utilities has encouraged power theft with little impact on revenue of the utility companies. My position has always been that raising power tariff alone is not a solution and will never be a solution. Hike in power tariff, if required, must be accompanied by improving governance in utility companies.

What can be done in the short-run to address power crisis? First, as we have seen that the diversion of gas from the power to transport sector has aggravated the power crisis, it is therefore essential that we discourage the use of gas in the transport sector either through administrative measures or through price mechanism.

In budget 2013-14, the government may impose heavy central excise duty to bring the price of CNG slightly above the motor gasoline price. People will have no incentive to use CNG in their vehicles. Second, the gas so retrieved from the transport sector must be diverted to efficient power plants operating at over 50 percent efficiency level. In so doing, the country can add an additional 17.5 billion units of electricity.

Third, about 500 million cubic feet per day of gas – nearly12 percent of the country’s current gas output and equivalent to production from Sui, has failed to enter the system due to long outstanding litigation involving the OGDC. It is recommended that the new government must resolve such cases commercially at the earliest so that additional gas, equivalent to the production of Sui, can be brought into the system to produce relatively cheaper electricity.

Fourth, there are 3500 CNG stations in the country. The government may consider buying out all the stations at Rs10-20 million each. It will cost the exchequer between Rs35-70 billion but such measures alone could yield a saving of over Rs100 billion in power subsidies annually.

Fifth, the provision of free electricity to the employees of utility companies must be withdrawn forthwith as this has become a major source of power theft. Sixth, the government must bring a new team of professionals in as directors and heads of Discos with clear performance targets. Seventh, Nepra, a regulatory body of the power sector must be revamped by bringing in professionals who are tasked to undertake the technical audit of the IPPs and KESC. Finally, the finance department of Pepco/Wapda must be strengthened by inducting professional finance experts.

All these measures can be implemented in 100-180 days to reduce loadshedding, if there is a strong will. Thus far, the new government has expressed its strong willingness to address the power crisis on a war footing. Those assigned the task may find these recommendations useful.

The writer is principal and dean at NUST Business School (NBS) Islamabad. Email: ahkhan@nbs.edu.pk