The changing energy sector

The tenure of the incumbent government in May 2013 commenced with the agenda to provide relief to the public from load-shedding. This was supposed to be done through adding more power on the grid by setting up new power plants, make electricity affordable to consumers by moving away from expensive fuel oil to coal and LNG, promote renewable energy and wipe out the circular debt inherited from the former government.

After four years of working on the given agenda, the scorecard as of December 2017 is that new power plants based on LNG and coal have been added to the grid, the renewable energy segment picked up mainly hydropower, wind and solar energy projects. The cost of electricity escalated, rather than coming down, while the circular debt escalated to around Rs 500 billion.

The shift from fuel oil to LNG and coal is the worst decision, with serious consequences to the oil supply chain.

The problem started surfacing a month ago when the government decided overnight to shut down old power plants based on fuel oil as the second RLNG terminal neared completion. In doing this it ignored the impact on fuel oil imports that PSO had already committed to and the consequences on local refineries which have to produce all oil products simultaneously.

Upon PSO and local refineries raised red flags, and realizing the serious financial and legal repercussions of its abrupt decision, the government corrected its orders and some of the fuel oil plants are back into production. Refineries secured some relief too, with Attock Refinery back to 90 percent of its production. Some of the refineries still remain closed in the country due to the reduced fuel oil demand.

It is reported that around 70 percent of lsat year’s fuel oil depended on imported oil. PSO had already ordered import of fuel oil and two ships carrying it were idling at the port for over 10 days with PSO paying demurrage on it. This can only cause shortages of jet fuel and similar shortages can take place in petrol and diesel.

Fuel oil for power plants is a fuel of the past and in not many years, little of it will be available.

Now that the government expects an end to the power crises it wants to change the rules of business for new investors in the energy sector in its favour. Being now more of a buyer’s market, notwithstanding the fact that the reality will be put to test in the summer of 2018. A shortfall of over 6000MW at peak demand is still expected.

In five years’ time there would be virtually zero demand for furnace oil in the country. The other issue is the government’s perception that load-shedding in Pakistan is now something of the past. The reality will clear in the coming summer, the peak electricity demand.

“The government would be under no obligation for any renewable project lacking firm contract by December 10 as era of load shedding ends with surplus generation capacity,” said the Federal Minister for Power Awais Ahmad Khan Leghari.

Speaking at a news conference early this week, the minister chided critics foreseeing continuation of power shortages in many parts of the country, dismissing their fears.

“I humbly stated a few days ago that load-shedding has ended,” he said. “Today, I am 10 times louder and tomorrow would repeat 20 times louder that there is no more load-shedding.” He added that the government would launch within days a computer application that would help everyone anywhere on phone to check the supply situation at any feeder.

The minister stated that the government would not provide electricity round the clock where losses were high, because that would increase the cost and put additional burden on consumers.

He said the government wanted to benefit from the cushion in higher generation to cut down on tariffs and provide relief to consumers as promised by the PML-N. “We have now entered a new phase where we feel the need for revision in policies for the power producing companies based on two to three months of serious assessments and thought process,” he said.

With the bullish approach of the government comes a change in its policy for the investors in the power sector which also appears to be as sudden as the overnight stoppage of oil based power plants.

The minister stated that the Cabinet Committee on Energy has allowed change in policy for all renewable and alternative energy sources, including those of wind, solar, biomass, bagasse and small hydropower projects below 50MW capacity.

Under the new policy, the existing upfront tariffs and those based on cost plus profit rates offered to attract private investors would be replaced with tariff based on competitive bidding.

The government is expected to announce a chunk of capacity in a specific year, based on absorption capacity, and seek bids. The government would purchase electricity from the bidder offering lowest tariff.

The provincial governments would also be consulted on promotion of renewables in proportion to the population of each province, ensuring that these generations are not concentrated in specific area.

There is expected to be no legal obligation on the government on the basis of letters of interest and letters of support issued if the implementation agreements have not been signed under previous rules of business.

Under the new Power National Policy for Power Co-Generation by Sugar Industry (Co-General Policy 2008) has been rescinded with immediate effect since this has been covered under Renewable Power Policy 2006 and amended in 2013. These had specified mandatory purchase of electricity and hydrology risk for small hydropower projects was on the power purchaser, the government.

Likewise, the renewable policy required that wind speeds and solar risks would be borne by the power purchaser. The upfront wind tariff had come down to Rs 6.74 per unit from Rs 17 per unit. Likewise, bagasse tariff was down to Rs 7.97 per unit from Rs 10.73 per unit.

The government believes that the change in policy would bring tariffs down through competitive bidding and a more competitive electricity market would emerge. It is perceived that under the revised policy, the risk of variability in speeds for wind power projects, solar irradiation for solar plants and hydrological risks for small hydro projects shall be borne by the power producer.

It is reported that the government will within a few weeks offer 400MW capacity for wind projects at Jhimpir-Sindh and 600MW solar units at Quaid-e-Azam Solar Park in Punjab for open, transparent and competitive bidding, so that a particular group does not monopolies capacity.

The Sindh government is in for a change too. It has announced its intention to launch the country’s first-ever tariff-based auction for the development of a 50MW solar power project in the province.

It is said to be the first project to implement Nepra’s decision in March 2017 to enable tariff-based auctions for solar photovoltaic power projects, replacing the previous up-front tariff regime.

This pilot project of solar auction is part of a larger programme on solar and renewable energy which is being developed by the Sindh energy department with the World Bank’s support.

The programme is currently under preparation, with plans to include development of utility-scale renewable energy projects, rooftop solar panels on public buildings, and support for off-grid electricity provision in rural areas. A key objective of the programme is to attract private investment into solar power in Sindh, including foreign direct investment.

Speaking at the One Planet Summit in Paris on Tuesday, Sindh Energy Secretary Agha Wasif Abbas said, “We are excited that Sindh is leading the way by introducing price discovery for solar power tariffs in Pakistan. This 50MW project is about demonstrating that solar power can be a least-cost generation option, and we look forward to welcoming qualified international and domestic solar power developers to bid on this project, and on subsequent renewable energy auctions.”

The government policy to move out from oil based power plants in the long run will be rewarding. The challenge is to legally and financially manage the agreements in vogue with these IPPs and the amicable suspension of the fuel supply chain specifically established in the late 1990s to feed furnace oil to the IPPs.

The government policy of award of works to investors in the power sector on the basis of competitive bidding is a good step if transparency and international norms of fair business practices are enforced.

The energy sector of Pakistan will do good if each of the provinces concentrates in the power segment in which it could maximize its value addition with Sindh focused on Thar coal, wind and solar power. The KP, GB and Azad Kashmir focused on hydropower, Punjab on LNG and Balochistan on natural gas. The challenge is to put the act together and move on as one team.