is reeling under its worst power crisis, which has reduced the industrial output and economic growth of the country. Long blackouts have made the lives of 180 million Pakistanis miserable.
The country's energy shortage led to losses estimated at US$37 billion between 2007 and last year. The people are angry as they suffer from power outages of up to 18 hours in the summer. The electricity demand in the country has increased to 18,000 megawatts (MW) while production has declined to 11,600MW because supplies of fuel are insufficient.
The government of the newly elected prime minister, Nawaz Sharif, has indicated that energy security is its top priority and that it wants to give immediate relief to the people and the power-starved industry. The key to immediate relief lies in how the new government tackles rising energy sector debt, which is about 500 billion rupees (Dh31.8bn).
The liabilities to the entire energy chain or circular debt continued to increase in the absence of any plan for power-sector reforms over the past five years. The circular debt problem has emerged due to difference between the production cost of electricity and the tariff charged to consumers, which forced the government to provide subsidy.
As short-term measures, the new government will have to take the politically sensitive decision of cutting subsidies by raising electricity tariffs to bridge the gap in power production costs and the money paid by utility consumers.
The other option for the new government is to borrow money from friendly countries such as Saudi Arabia to pay the energy sector debt, but that would complicate the problem rather than resolving it.
What the power sector requires is restructuring. The risks involved in investment in the power sector need to be addressed. A fully deregulated value chain from generation down to transmission and distribution is direly needed. The sector lacks the commercial capacity and regulatory framework to become a fully liberalised market, putting private and public power producers on an equal footing.
A glance at the country's electricity generation mix shows that it comprises 65 per cent thermal, 33 per cent hydro and 2 per cent nuclear. With a hydro power potential of 40,000MW, the country has managed to tap only 6,500MW. The hydroelectric dams not only produce the cheapest electricity but also provide water storage and flood control. There has been a dual failure of successive governments to anticipate growth in demand and delay implementation of dam projects that would have boosted output.
The
-operated power generating units in the country do not run on their full capacity due to lack of sufficient oil supply. The oil companies frequently disrupt supplies to thermal power units because their dues are not cleared. Many independent power producers have stopped producing power because of the unavailability of oil and gas.
The ballooning intercorporate circular debt reflects the difference between higher power generation cost and lower electricity bills. The higher cost of furnace oil forced the government to raise power tariff, but the consumer tariff is still believed to be less than the cost of power.
Coal offers a way out.
The cost of Pakistan's hydroelectricity is almost one rupee per kilowatt hour (kWh), gas costs almost 4 rupees, furnace oil costs around 12 rupees and diesel costs 16 rupees. But the cost of electricity from coal is less than one rupee, which is the cheapest. All furnace-oil based plants should be converted to coal. Cheap power generation from coal will automatically eliminate the subsidy.
Thar coalfield is the largest untapped coal resource in the country's southern Sindh province. The energy-deficient country can achieve energy security through development of Thar coalfield, which is bestowed with 175 billion tons of lignite coal capable of producing more than 100,000MW for more than two centuries.
Unfortunately, though many foreign firms showed interest in developing Thar, they could not start coal-based projects due to unfair pricing formula for coal-fired power generation. The finalisation of a tariff rate at which power would be supplied has been the major issue between the government and the private sector resulting in delay in functioning of power projects in Thar coalfield. In 2009, the UAE's Bin Din Group agreed to develop the Thar coal project with a mine-mouth thermal power plant with 1,000MW of capacity.
The administrative issues hitting the country's power sector include distorted pricing, weak management, corruption, power theft and underinvestment in power stations. A lack of investment in existing plants and outdated grids cause line losses of 30-40 per cent.
Despite help from friendly countries, Pakistan's power crisis continues to worsen because of the lack of reforms. In 2011, the UAE gifted a power plant of 320MW to the country. The Dubai-based Abraaj Capital has already invested almost US$500 million in the Karachi Electric Supply Company.
UAE investors have been eyeing Pakistan's power sector, but the sector's managerial issues and the country's overall law-and-order problem remain as hurdles. In 2007, the Abu Dhabi Government's International Petroleum Investment Company launched the multibillion-dollar Khalifa oil refinery project in coastal Balochistan. The project is in the doldrums because of security concerns.
Syed Fazl-e-Haider is a development analyst in Pakistan and author of several books, including
The Economic Development of Balochistan