Wednesday, October 27, 2010

LPG sector; has open market regime worked

LPG Sector: has open market regime helped?
20% of house-holds in Pakistan has access to natural gas . Gas supply to consumers is dictated by the availability and expansion of the gas distribution network. Some 68-83% of households rely on wood and biomass. Bulk of the natural gas goes to the non-domestic sector; 33% to power, 28% to industries and 16 % to the fertilizer production. Only 16% of gas goes to the domestic sector. For small residential consumer, the gas tariff has been kept really low, at 1.5 USD per unit as compared to the average rate of 6 USD per unit. By contrast average tariff in the US is 12 USD per unit, while In most of Europe it is twice the US gas tariff. I am recounting this data for giving the reader a perspective, and am not building an argument for increasing domestic gas tariff.
of the cheap domestic fuel is available to the urban areas. Most people in rural areas either burn woody biomass and some consume LPG .In that way LPG can be considered as a rural poor man’s fuel , while some of it goes to the transport sector , mostly in Taxis which cannot afford the initial cost of CNG installation or operate in non CNG areas. Also roadside cafes and tea-stalls and tharas use LPG for a variety of reasons of supplies related issues.
has unique characteristics, some of which make it a preferred fuel, especially its relatively easy transportation as compared to the natural gas which has to be distributed through pipeline and also cannot be stored conveniently. Despite this LPG consumption in Pakistan is very low; 2.6 Kg per capita , as opposed to 7.3 kg in India,12 kg in Philippines . LPG consumption peaked in the year 2006-7 at a level of 649,000 tons, and came down in the last few years to 500,000 tons, perhaps due to the price increases and unstable pricing regime that we would discuss in the following. This amounts to some 25 Billion Cft as opposed to 204 billion cft (12%) of natural gas consumption in domestic sector, and 1275 Bcft (2%) of total yearly gas consumption of the country. LPG market should be able to be quadrupled to 2 million tons in a matter of a few years.
We live in the gas surplus region or adjacent to it. Iran and Qatar together house % of world natural gas resources. In LPG sector also, there is a surplus which is being exported. Middle East has a surplus of more than 3.0 million tons, half of which is in Iran. Iran is facing problems in its exports due to the frequent trade embargoes of all kind. Also there is exportable surplus in Turkmenistan, which goes as far as Indonesia. Pakistan has not been able to fully exploit the potential of LPG imports from the region. Only 8% of the demand is met through imports, which is really negligible.
There is a scope for expanding LPG imports and supplies by establishing a stable and dynamic LPG market based on imports, while there are obvious limitations on domestic production. LPG imports from Iran can provide for a very significant domestic demand, if adequate transportation infrastructure is brought about and facilitated. All of this can be provided by the private sector. Ideally, rail transportation is the most economical, but is subject to many issues. For all practical purposes, road transport may have to be employed. GOP lifted price controls in a hope that it would expand supplies and attract investments in imports, storage, transportation and distribution. Nothing appreciable seems to have happened. This is despite, that there is no restriction on imports. Any body can import. Infact the sector suffers from monopolistic conduct and structure. Competition Commission of Pakistan (CCP) has levied fines and penalties on two major LPG companies, which is reportedly sub-judice.
Competition does not seem to work in Pakistan. We have witnessed this in case of sugar and cement and other areas where there are a far more number of suppliers than they are in LPG. In LPG sector, there are only 10 producers. Neither has price gone down, nor have supplies and investments increased despite significant scope and opportunities of imports from Iran. Only some smuggling takes place, and undertaken possibly by small parties who do not have the wherewithal of dealing with the practical barriers that may be involved in official imports despite an ostensibly open import regime.
There appears to be a lot of confusion in LPG policies. Apparently , the sector is unregulated ,yet OGRA is prescribing LPG producer prices of local and imported production .Perhaps these are recommended prices and do not carry the weight and support of law. The air is full of controversy Minister of petroleum and others in government have spoken against LPG price increases and profiteering of the LPG sector. A parliamentary Committee is investigating some questionable deals while OGRA keeps wondering and is usually engrossed in infighting. I have earlier in this series discussed at length the role and practice of OGRA.I would restrict myself here to point to just one issue. Why does not OGRA involve public and stake-holders by inviting proposals and holding public review? OGRA has confined itself to be a big organizational calculator. We have come across only two public hearings in a year, one on SSGC and the other on SNGPL. It is a misnomer that if there is a formula, it does not require public oversight and discussion. Except for these two cases, OGRA has not developed the culture of public hearings, which could have provided useful input and feedback and would have provided the required institutional strength required for a regulatory body. By avoiding it , OGRA has suffered tremendously in terms of its functionality and prestige.
As mentioned earlier, LPG can play a significant role in filling the demand supply gap, especially in cooking fuel sector, domestic and commercial. Pressure on Gas supplies is increasing. Due to the lack of availability of a suitable alternative, rural population is resorting to felling of trees, reducing the much needed forestry cover. Recent floods have been aggravated due to massive deforestation in the northern areas. For the 80% uncovered population, LPG seems to be the only short-term option, especially when the domestic natural gas resources are running out.
LPG has economic characteristics in between oil, a traded commodity deserving international market price regime, and gas which is often priced at local production cost. Currently, Saudi contract prices are taken as a bench mark for prescribing upper limits for the producer prices. Following are some other pricing options that could be examined;
a)Imported LPG be priced at landed cost plus taxes and duty , taking Saudi contract Price as
a bench mark.
b) Fixing LPG well-head prices according to the natural gas price formula, with some possible enrichment; where LPG is extracted from Petroleum, it could be paid as a fraction say 75% of the ex-refinery price of Gasoline; an average whole-sale/producer price to be worked out depending on the sources of gas, such as natural gas fields, oil refineries or imported. Forward prices in the value chain to be fixed by allowing gross margins/mark-ups for marketing companies and distributor. If such margins are fixed in case of gasoline and diesel, why can’t it be done in case of LPG?
c) The retail price basket of selected stations in the U.S. or EIA retail average price could be taken as a bench mark. Other prices in the value chain are worked out as per fixed margin allowed to every stage. Current retail price of LPG in the US averages around 1.25 USD per kg.
The idea of providing subsidies to LPG to targeted sectors such as domestic consumers in FATA and NWFP deserves serious attention as well. These subsidies could be shared under a trilateral programme wherein GOP, GoKP and U.S aid could share the cost. The programme should be administered under some kind of a fuel ration card system to restrict the subsidies to the intended target group. Apart from welfare and political consequences, the subsidized cooking fuel rationing would help reducing deforestation.
GOP and the Ministry of Petroleum (MPNR) would be advised to come out with an explicit policy for the LPG sector. If unregulated sector has not given the desired dividend, regulation and controls may be tried. Regulated sector often provides the stability, confidence and reassurance our business sector needs. It is perhaps not strong and confident enough to benefit from an open sector that works without assurances of return. Regulatory status has not prevented Power sector to attract IPPs. Infact it is doubtful that IPPs investment would have come about without a regulated policy frame-work. Same may be true for LPG.

Tuesday, October 26, 2010

Re-organisation Of electrical sector; the closure of PEPCO

Reorganization of Electrical sector: closure of PEPCO issue ?

Contradictory reports are coming in regarding the closure of PEPCO, which was created a few years ago in the wake of restructuring of WAPDA. Earlier WAPDA used to be the sole organization, responsible for the power sector, which was a continuation of an early power regime, where hydro power used to be a major component of the electricity supplies. Reorganization was done as under; WAPDA restricted to the dams, irrigation system and the hydro generation facilities like Tarbela etc. WAPDA happened to be the owner of these assets and facilities. PEPCO was given the ownership and management of Power distribution companies (DISCOs) and possibly the thermal generation plants. NTDC (National Transmission and Dispatch Company) was to own and manage the Transmission facilities and act as an integrated system operator (ISO) responsible for power dispatch management. There is a CPPA (Central Power Purchasing Authority) under NTDC with a low profile, which bought electricity from all the IPPs and GENCOs and sold it to the distribution companies (DISCO). The need for this arrangement was felt because of a uniform tariff regime system, under a huge subsidy. The whole system except for KESC and other IPPs was in public sector.

Under a Power Utopia, the entire power sector would be eventually privatized, there would be no subsidies and there would be separate regional or DISCO tariff and thus no WAPDA or PEPCO. Two developments have taken place recently. CPPA has been upgraded from a section under NTDC to a full-fledged company under GOP guarantee. Perhaps this was a step in the right direction. It had to be a guarantee company because, it would be entering into power purchase agreements, that had to have the benefit of GOP guarantee for the satisfaction of investors and IPPs. It is being wishfully contemplated by the Power theorists of multilateral agencies under which all reform is being engineered that the subsidies would go away along with the uniform electricity tariff in the country.

The whole electricity sector has been structured under a unified model of uniform tariff and central investment. All assets and fuel sources have been developed under it. Power sector, under 18th amendment has become a Federal subject, rather than being on the concurrent list as it was earlier. Subsidies may go, but a regional tariff is impossibility due to the baggage of the past. In a decade, the sector configuration may change appreciably due to increased contribution of IPPs. Regional tariff may then be a possibility.

Nationalists of KP, rightly or wrongly, already allege that cheap hydro electricity is bought from Tarbela, and sold back to the province through PESCO at a rate many times higher. They, however, forget conveniently that, it is the federal investment through which cheaper hydro electricity is produced. KP contribution it is of its location, which is rewarded under a royalty system. Except in Punjab, the electricity losses are 30-40% which is largely taken care of by subsidies. These subsidies are assumed by GOP were never paid off timely resulting in circular debt which leads to shortage of liquidity in the system and low capacity utilization in a situation of power shortages. The theft in Punjab is at its lowest of 15%. If regional tariff is introduced, Punjab as a whole would benefit, which in effect subsidizes the more theft prone regions of the country. Under go alone system, it would probably have a lower tariff. The utopia may, however, have some chance if all resources are priced at their true value or market worth. Natural gas according to this theory is currently underpriced and thus its price /tariff should go up.

All of this can lead to a political disaster, threatening and risking not just the sustainability of democratic system, but the very foundation of a united federal Pakistan. Federalism is popular under which the political actors and the system is ready to get rights and not the responsibility. Let the people get the putative merits and advantages under the new system for a while, and then the requisite burdens and liabilities may be shifted. No wonder some rebalancing may be demanded later.

Coming back to PEPCO, its role and its rationale, in Pakistan an administrative model has worked satisfactorily in the past of sectoral corporation controlling and administering the sectoral companies. As in the manufacturing sector, the privatization took place these corporations went away, as has happened in the case of PACO, Ghee Corporation and others. The Corporation model is of a holding company that serves as a professional intermediary between the public sector companies and the bureaucracy of the ministry, obviating a direct role of the latter in the day to day affairs of the companies. These corporations are also supposed to take care of the sectoral issues and its development, suggested policies and advised government. However, the enterprise/company management has often complained of a rigid control by these corporations, hampering their management independence and flexibility. The notion is sometimes supported conveniently by the ministry bureaucracy who wants direct control without intermediaries of the corporation. Opposition to PEPCO is to be seen in this perspective, although there are genuine issues of reconciling the roles in face of a rejuvenated CPPA. The role of a sectoral corporation and a holding company would be there in the background of the aforementioned issues. There may be no role for it in a Utopia and a totally privatized regime, which time has not arrived yet.

We cannot possibly afford to be reckless theorists unmindful of the consequences of policies and new regimes. The foreign advisor and theorists do not buy the same medicine for themselves as they prescribe for us. Had they done so, there would have not been much of an inefficient manufacturing sector in their countries surviving on trade barriers .Even agriculture survives there on trade barriers and subsidies. Inefficient and labour intensive sectors would have been long shifted to this part of the world promoting mutual welfare and employment in labor surplus economies. This has not happened and would happen very gradually, minimizing dislocation on the part of adjusting people, labor and sector. Same gradualism would be advised here and not the abrupt actions under the knife of IMF and dagger of project loan giving agencies. PEPCO may be allowed to continue or merged with CPPA.

Monday, October 25, 2010

Electricity for All-rural electrification ?

Electricity for All ,Rural Electrification ?



Electricity for All remains an elusive goal for the developing world including Pakistan, like many other similar goals that have defied fulfillment. Major failure has been in the rural areas, where bulk of the population still lives, which trend is fast changing. Within the rural areas, even if a village is electrified, the access to electricity may not be to all for a variety of well understood reasons. Therefore, although rural electrification is a step in that direction, it may not in itself result into,” Electricity for all “; more may have to be done to achieve that.

On a global level, 78.2% of the world population has access to electricity of sorts, as against South Asian average of 60.2% .In Pakistan, access rate is 70.4% , out of which 60% is rural and 93% urban. According to the Mouza statistics, 64% of Mouzas have electricity, 19% have no electricity at all, and the rest are in between. It may be of interest to keep in view the comparative, cooking fuel availability. Only 20% of people in Pakistan use natural gas, of which 58% live in urban areas and 2.83% in rural areas. Two-third (68.83%) of Pakistan’s population uses wood as fuel, no wonder deforestation is so endemic. Wood use is the highest in KP, up to 83% of households, a major cause of flood aggravation. There is a considerable confusion as to what is a village in statistical terms. There are some 47482 Mouzas, and some 150,000 villages (deh) in Pakistan. Mouza is a larger agricultural/population cluster; on the average, there are three deh/villages to a Mouza.



Electricity for All had to be achieved by 2007, by electrifying all the villages in Pakistan. As per WAPDA website, all villages have been electrified. , which is obviously not true and is infact grossly misleading. This may be true that quite some effort was applied by GOP, between 2002 and 2007, to electrify villages. The programme ran out of steam after 2005, perhaps due to financial and power supply shortages. There are conflicting numbers; some data suggests that out of 125, ooo villages, only 81,000 have been electrified, and 40,000 villages remain to be electrified. If that is correct, then some 31% villages have yet to be electrified, a huge task ahead indeed.

Leaving aside data controversy, it has been studied that about 8000 villages may not be electrified at all ,in foreseeable future , keeping in view the long term grid expansion plan . Rural Electrification project has targeted these villages for electrification, mostly through solar energy. The programme has been estimated to cost 500 Million USD .GOP had committed 18 MUSD, to electrify 400 villages (3200 house-holds) in Sindh and 300 villages in Balochistan.

One Solar Household system (SHS) has been assigned a Solar PV installed capacity of 50-120 Watts. For, 1000,000 house-holds in 10,000 villages would generate a demand of 100 MW of solar PV power. This would also mean, a 100 kW load per village. At a rate of 4 USD per watt for PV capital costs, it adds up to 400 MUSD for generation and a 100 MUSD extra for other costs. Admittedly cost estimates appear to be reasonable.

However, only 18 MUSD has been committed, which would not meet more than 5 % of the target, according to the afore-mentioned numbers? It is also doubtful, that reasonably sufficient funds would be available to implement this programme any sooner, esp. in the scenario of economic and budgetary difficulties in the post-flood situation.

There is one shaft of hope that Solar PV costs are fast coming down. Already, PV costs of under 1 USD are being quoted, although of solar PV Cells only. It is expected that by 2015, solar prices would be competitive with fossil power. Thus one may have to be a little less ambitious, run the program at a slow speed, and go in high gear after 2005.There are, however, a few solar application that may already be competitive and affordable. Solar Pumps with DC motors do not require expensive balance -of -the –system (BOS) ancillaries. For these applications 2 USD per Kw of solar PV costs would be competitive with expensive diesel based power. Some of such applications could be continued with whatever funds that may drip by.

Thursday, October 21, 2010

Should Coal be imported,inspite of Thar Coal ?

Should Coal be Imported , inspite of Thar Coal ?

Coal is being imported in Pakistan and the imports are increasing every year. Coal is required and used in industries such as cement, brick kiln, metallurgical industries etc.

Hard coal of good quality is also being mined in Balochistan, KP and Punjab. Production of hard coal is limited by manual and artisanal mining. The known sources are not large enough to attract capital and mechanization. Whatever is produced is consumed, and even imports are made to meet the demand.

In this section, we are concerned with a specific question. Should we import coal for power sector? There is advantage in coal. In Pakistan , there are large deposits of Thar coal, and in the world coal is the most abundant fuel, expected to afford 200 years of world consumption. It is abundant in China, US, Australia, India, Canada, and India and the lesser countries of Indonesia and South Africa. Industrial revolution in Europe took place on the shoulders of the then abundant coal there. Coal served as a backbone to progress and production in almost every industrial society.

Coal is being much despised and opposed these days by the generally environmentally sensitive world of today. Pollution and Green-house gases are the two principal factors responsible for the opposition and resistance against coal. On the other hand, this is also true that most electricity in the world today comes from coal. In the U.S., almost 50% of electricity comes from coal. In China, one Coal Power plant goes up every week. India has an installed base of MW of coal power and a sizeable coal resource base. However, it has started importing coal for a variety of reasons; principal among those is excess demand due to production bottlenecks, despite a sizable resource base. In the U.S. all kind of energy is produced, imported and exported.

Why import, when one is exporting; and why export when one is importing. Trade is done for many reasons seasonal factors, location issues, transportation costs, business linkage etc. In the case of coal, imported coal may be cheaper than domestically produced due to shear logistics reasons. Coastal towns and markets may prefer imported coal for convenience and cost reasons , if domestically produced coal is far off in the inner regions. That is the reason behind energy trade in the U.S., involving imports and exports as well. In Pakistan , despite cotton abundance , it is considered wise to keep imports open to have a check on the local prices , as well as seasonal issues. Excess supply and availability in certain months may induce exports and lesser availability in others may induce imports. India, to-date prefers importing coal for coastal towns, as imports are cheaper in coastal towns due to cheaper transportation than bringing domestic coal from inner regions. At some point in time, India may import Thar coal or electricity produced from it, for its coal scarce regions of Rajhastan and Gujrat, which are adjoining Pakistan, in place of coal from south .It is shear economics, if politics permit it to operate. Often it does not. Similarly, Pakistan may import Coal from Afghanistan, in preference to its own coal in the South.

Am I making a case for importing coal for establishing power plants, as some foreign companies have proposed? Why have they done so? For almost the same reasons as we have discussed earlier. However, the primary concern is that people are generally skeptical if Thar coal resource would come on line at all? Our provincial government of Sindh and its relevant departments may not like this kind of skepticism. Every now and then they do announce their actions, projects and approvals. Engro has completed its feasibility study, which gives some credibility and optimism. However, it is still a low key affair, not befitting of a gigantic project of this nature, being largely operated and handled from a single room in Sindh Secretariat. Visibility and profile gives credibility to vendors, technology suppliers, investors etc. Unfortunately, its absence does not appear to be very reassuring. If projects are progressing, these are to be planned, monitored and co-ordinated .It requires qualified managers and manpower, training activity etc. No credible international party is yet on board. The sole public demonstration of such an association is indicted by a trip to Germany by the project authorities. World Bank is double minded, despite its technical and financial assistance project. Some very fundamental issues which may impede progress ultimately are of coal pricing and royalty. These remain unstudied and unresolved. To federal bureaucracy, the provincial set-up appears to be too tight lipped and secretive , resisting involvement of others which may be a requirement of such a huge projects. Some of them are looking forward to the ultimate failure of the provincial government and its relevant department, which appears to be the sole player trying to take it to the goal all alone. Chinese , the most befitting partners , for Thar coal do not appear to be interested at all in it , while they are interested in every thing else from nuclear power plants to dams etc. There is something missing?

However, I do not think that going for the imported coal option for new power plants would be a good idea at all. First and foremost, such a project would crowd out the investment in domestic coal, after there is a limited supply of foreign capital willing to come to Pakistan esp in the difficult political circumstances. Coal prices also increase in sympathy with oil, as has been amply demonstrated by the recent past. We are suffering from a perennial trade gap and balance of payment problems obliging us to approach IMF for loans restricting policy options for economic expansion and peoples’ welfare. Import of coal would be a luxury we cannot possibly afford. In South, we already have Thar coal. Had there been some possibilities of sourcing the same from hypothetical northern sources, there would have been a logistical rationale for meeting the requirements of the upper and central regions. In these circumstances, there appears to be no rationale for entertaining such projects, except slow progress on Thar, which it is hoped, would be speeded up by a co-ordinated action of Federal and provincial governments.

Converting Oil-fired Power Plants to Coal

Converting Oil-fired Power Plants to Coal

By Akhtar Ali

There is some merit in this proposition. Oil has become quite a risky fuel, as the recent oil price hike has amply demonstrated. While apparently , there is no substitute to oil in transportation sector , the recent trend of installing oil based power plants(IC Engines mainly) has been rather unfortunate. Pakistan now has a dubious distinction of being10th largest importer of Oil and also the 10th largest user of Oil in Power sector in the world. This may prove to be a very costly and tragic distinction indeed, if indigenization of fuel is not pursued seriously.

It is almost certain that oil would be extinct in the next fifty years and as its extinction phase starts, as it already has; its price behavior is projected to be quite volatile. Future price hikes ala 2008 cannot be ruled out. These would occur more frequently in future. Recent reliance in oil has perhaps been for no other short term alternative. Earlier oil-fired power plants have been installed in 30 USD per barrel regime.

Even Earlier oil fired power plants have suffered from low capacity utilization, although these were quite capable of running as base load power plants. A classic example is of HUBCO , which capacity utilization has improved very recently due to the power crisis. Otherwise, oil being expensive, HUBCO came in a low merit order and thus the low capacity utilization, which is ironic indeed for capital scarce countries like ours.

For the reasons discussed , oil fired power stations have been converted to Coal in Europe and ASEAN region in the wake of oil crisis of 1973 , and the trend continues. Despite general environmental dislike and opposition to coal, for instance, Italy’s major power utility ENEL has gone for conversion of a 2500 MW oil fired capacity to coal, as reported by NYT. There are other examples as well.

In the U.S already, coal based power is abundantly installed to the extent of 50 % of the total installed power generating capacity , providing cheap power ( 5 cents or lesser per unit) from cheap coal .Apparently ,the U.S. has no reason to increase the already high predominance of coal , while other resource options are there like gas and nuclear.

Coal , however, is not immune to unruly price behavior. Recently, its price also hiked in the international market in sympathy with oil, to three times its usual level. Therefore, while imported coal could be a short term option, the longer term option has no escape from utilizing our domestic Thar Coal (lignite).Optimally Lignite is better utilized at mine-moth power plants. However, Lignite can be transported to a few hundred kilometers quite economically, comparatively speaking, as is being done in (hard) coal scarce northern regions of India like Gujrat and Rajhastan. We can therefore look forward to utilizing Thar coal up to southern Punjab like Muzaffargarh.

Transportation is an important and significant component of the total received cost of coal and can add as much as 50% to the at-mine cost. Interestingly for some coastal towns, imported coal and its transport can be cheaper than domestic coal. This is one of the major reasons in India today for resorting to imports of coal. Unfortunately, Pakistan will ultimately be having two major energy resources at two geographical extremes, while most of the market may be around the center; hydro power in the north and coal (imported or domestic Thar) and Wind in the South. There would be no other option, but the universally available solar energy , which may ultimately balance out the situation in due course. Reportedly Afghanistan has significantly large Hard Coal resources. Both Pakistan’s and Afghanistan’s economies are going to benefit immensely, if these resources are developed also. These ideas should be kept in view, while planning for reconstruction in Afghanistan and returning of normalcy in the region.

For a variety of reasons, Thar coal cannot be adequately utilized with Thar based installations alone. By 2030, our famous Energy Security Plan (2005) envisages 25000 MW to come from Thar Coal; even more, if the unrealistic projections of gas are taken into account. All of this capacity cannot possibly be installed at one location, whatever be the dictates of transport optimality. There are many issues like security based dispersal, water, ecological limitations, demand location, manpower etc.

For the time being, it is imperative that the proposition of converting Oil-fired power stations to coal be given consideration. It is a long cycle issue, and may take some 3-5 years to materialize .Already, new power plants based on imported coal have been proposed for Balochistan coast, near Hub Power Plant, and regulatory approval obtained in this respect. However, keeping in view the eventual potential conversion to Thar Coal, it is suggested that coal power plants be based on Sindh coast. There was a proposal earlier, mooted earlier in 1988, to install imported coal power plant at Keti-Bandar under the auspices of ADB. Infact, whole of Sindh coast extending from Bin-Qasim to Keti-Bandar is quite opportune for such siting keeping in view the closeness to Thar Coal.

Technically speaking, there are no limitations to the proposal. This is possible in today’s technology. In steam turbine based power plants, Oil fired boilers are to be replaced with coal fired boilers, although not a cheap proposition, as 30 % of the power plant investment may be in the boilers itself. Capital cost component in the unit product cost, do not exceed 15-20 % , bulk of it being the fuel cost. In the long run, even Gas fired combined cycle plants could be converted to coal based IGCC, a technology that would be commercially available in next five years. But let us not just delay action today for options of tomorrow.

Case for a socially sensitive merit dispatch order for power plants

The Wasteful gas operated power plants:

Case for a social dispatch order in running power plants.

By Akhtar Ali

Too technical? Let me explain. Utilities or Electric System Operators have a merit list of power plants .The cheapest source/power plant is put at number one and the most expensive at the very last. As power demand increases, plants are ordered to send/dispatch electricity; the cheapest one comes on line first, and then the next cheapest, and so on and the most expensive one in the very end. The rationale is obvious; to buy minimum from the most expensive source and the maximum from the cheapest. There are two variants of this system, depending on whether it is a competitive market environment where market price is determined through demand and supply as determined in a real-time auction in electricity exchanges which these days operate in most developed economies. In these systems, total unit price of electricity (fuel +capital cost + O&M+ profit), is used as a criterion to decide as to which source is expensive or which one is cheaper. In cost-plus or regulated environments, long term pricing is agreed to according to a certain formula. Essentially, an electricity vendor or generator is paid for all his costs plus an agreed rate of return on his equity .Payments are made in two streams; one is the fixed annual costs paid usually in monthly installments. This stream of payments is to be made by the purchaser or the distribution companies or their agent, irrespective of whether , the purchaser orders electricity or not. It is a fixed liability on the buyer to be discharged as per agreed schedule. The buyer therefore treats these costs as sunk costs. Variable component of the price is to be paid at actual according to an agreed rate determined by a formula that includes fuel costs and O&M costs. Meters are installed , which record electricity units(kWh) received , and payments are made by the distribution companies to electricity vendor or generating companies , as an ordinary consumer pays for the electricity. This is the cost-plus system that operates in Pakistan, as it does in other developing countries, where electricity markets do not exist.

Coming back to the merit dispatch order, in cost- plus environments like ours, merit dispatch criterion is set at the unit variable cost. Purchaser would only compare his variable costs, (which for major part is actually fuel cost) for every incremental unit it buys, as his fixed costs are sunk costs.

There is another peculiarity in our energy and electricity systems .All fuels are not priced at their true worth and in this case their energy content, technically termed as Calorific Value. Oil may be inordinately expensive as it is mostly imported, while gas may be cheaper because it is locally produced. Reverse may be the case in most oil producing countries in the developing world, where often petrol prices are cheaper than crude oil.. to the extent of being literally free ,as is the case in Venezuela. False economies and comparative trade advantages and industrial base is established in such pricing regimes. On the other hand there are social constraints. Energy is an essential commodity and is required by the rich and poor alike, directly or indirectly. Usually some kind of trade offs is made. Normally, international financing agencies are opposed to these trades-offs and pressurize the policy makers to reduce or eliminate cheaper rates of energy than these are worth essentially, they argue for a uniform pricing. It is not the time and place here to examine the merits and demerits of uniform or optimal pricing in general and philosophical terms. We will examine here the implications of energy pricing policies on merit order dispatching, especially in Pakistan perspective.

What is happening in Pakistan is as following. In Pakistan, generally, gas is priced at half the rate of oil in terms of Rupees per unit of energy content, technically called Btu. There are a number of plants which are thermally very inefficient and consume a lot of gas , yet these plants are most frequently employed because the commercial cost is low due to cheap gas. Had gas been priced higher as per its energy content, these inefficient plants would only be used scarcely for peak requirements. Currently these double up as intermediary base load plants. Technically speaking, these come up higher in merit order.

Then what should be done. A simple and straight forward solution as would be practiced in rich countries would be to retire these inefficient gas guzzlers. We probably cannot do that , as we are already suffering from load shedding. But the irony is that due to pricing anomalies , even in the periods when there was no load-shedding , these inefficient plants were utilized much more ,and the most efficient and new and costly power plant like HUBCO remained under-utilized . It is now that there is a shortfall of 4000 MW that HUBCO is being utilized as per its availability and capacity. This is another matter that now there is funds issue and the circular debt that may prevent its fuller utilization. NEPRA has recently taken KESC to task for not utilizing its available capacity, which perhaps was for similar reasons.

Coming back, what to do then? Increase gas prices and thus hike electricity tariff, which the public is already crying horse against. More of tariff increase is in pipeline for other reasons, most important of which has been the recent Rupee devaluation. Our textile industry and exports are weaned on cheap gas prices and are quite used to wasting gas as well. Wasting habits go away gradually, but tariff increases may make the exports suffer causing unemployment and balance of payment difficulties.

Theoretically, price increase would discourage waste and bring about what the economists call optimal resource allocation, a Utopia indeed. Energy consumption is already quite low, and people are close to being pushed out of the energy market altogether. There are larger questions, but we would restrict ourselves to the problem of inefficient power plants wasting gas unnecessarily. We can’t throw these away and nor increase the gas prices to be brought in line with those of expensive oil. What to do ? Let us examine the following proposition.

The proposition is simple. Bring these plants out of the merit list and operate these for peak requirements and in emergencies as back up power. I wrote a long preface for this simple solution, but the effort perhaps would be well spent, if it makes our power sector operators respond to it positively.

Tuesday, October 19, 2010

The role and performance of regulatory bodies like OGRA

The role and performance of regulating agencies like OGRA

OGRA is in news these days. Its parent ministry MPNR is criticizing it in public and other senior parliamentary leaders from the ruling party have led onslaught on it. Earlier OGRA chairman came into limelight when public heard of its board members being fired by the latter. Is it a personality syndrome or conflict and infighting or there is something more germane into it. ? What is the role of OGRA and for that matter any regulatory agency of this kind. What role it has been given and what role it could have carved out itself by creative maneuvering and internal negotiations with its main stake-holder which is the Ministry of Petroleum and Natural Resources itself. Its counterpart NEPRA has been more successful in having a working relationship with its parent ministry.

First of all, a regulatory agency may be associated administratively with a ministry, but for all practical purposes it is independent. However, its independence may be circumscribed by the statutes and the rules that are usually made by the Ministry itself. Sometimes the issues are multi sectoral and multi-ministerial and are thus to be handled by the PM himself and his Cabinet Division. It is through the statutes that ministries can control or dictate their way and policies and not through administrative orders. Regulatory agencies can strengthen themselves by bringing in public discussions and hearings and oversight and making it more effective and integrated with their processes. Public consultation process may at times be overbearing and impeding speed and convenience in decision-making , but it is worthy enough to be welcome and built into the decision making process. It is perhaps the only defence and support the regulators have to fall back upon in performing their function.

As to the regulatory agency’s independence, it can vary greatly from country to country and its relevant legislation and from sector to sector. The most powerful regulatory agency in a country is normally the Central Bank or State Bank as we call it here in this country. Obviously, it is much less independent than its US counterpart, in theory and as well as practice. Energy regulatory agencies are more powerful in India than these are in Pakistan. Perhaps size and multi-polarity matters, and makes central organizations more powerful and effective. Even after 18th amendment, all regulatory agencies and functions have been given under federal domain. Conflicts are going to arise, when the implementation begins .It would be highly debatable, if except for Punjab, any smaller province can have the resources to run these agencies, technical and financial both.

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It has been alleged that OGRA has not been able to perform its function. The latest case that is cited of is the unduly rising prices of LPG. A broader criticism, and perhaps legitimate, is that it has not been able to carve out space for itself. Space is granted by the legislation and statute but the statutes themselves are influenced by the lobbying and input of the regulatory agency itself. In Pakistan, perhaps it would be too much to expect from the retired bureaucrats for whom these positions are lucrative parking places. The salaries are too high to be risked? Ministries generally would like to maximize their power for legitimate and not very legitimate purposes and commercial interests would also not like to be constrained. The maximum support should therefore come from the legislature and the public.

Now coming to the two specific charges on OGRA; LPG prices and the charge that OCAC performed better. LPG is a fuel for the poor. Its prices have been going higher and higher, whether it is justified on some grounds, is a separate discussion. The real policy issue is that LPG has been kept out of the regulatory process and thus it is beyond OGRA’s purview. The culprit is the classical phony and na├»ve argument of freeing the pricing and the misconception that opening up prices leads to market efficiency and would ultimately lower the price. There are several reasons that these ideologies do not work in societies like ours, for the following reasons:

1) We are always supply scarce countries. Only population and demand is abundant .Supply is usually restricted by a germane shortage of capital. Price signals are not strong enough to attract foreign and local capital. There are other factors such as political instability and the law and order whish over-ride economic factors and signals.

2) The regulatory and legislative processes are weak. Consumer is poorly represented in the power structure. Producer is powerful and integrated into the power structure.

3) Anti-competition and price collusion behavior is rampant and generally well entrenched. Competition protection legislation is weak, ineffective and perpetually sabotaged as we have been observing in the case of Competition Commission of Pakistan.

4) We can not wait for the ultimate rationalization and resource allocative process to show its promised results. It may never happen or may be too little too late. Our consumer is poor. One-third of our people lives in abject poverty and cannot get the minimum nutritional requirement. And others are only marginally and slightly better off except for a very thin minority.

Thus the price unfreezing and letting it to be decided by the market and in fact by the producers does not seem to be working and resulting into lower prices. Price decontrol of such things as energy and LPG is a fools’ paradise. It should be shun at the first opportunity indeed immediately. Only when price decontrol is lifted by the ministry of petroleum, OGRA cannot do any thing in this respect. People can do it in the long run, but they rise only occasionally and randomly and such processes are only disruptive, as there is ample history to suggest.

Now coming to the case of oil pricing, it is alleged that OCAC (Oil Companies Advisory Committees) has performed and could perform better than OGRA. I have no mandate or axe to grind with OGRA to defend its performance. As for OCAC, there could not have been a more shameless and disgusting name for an entity that is to set prices; a producers club setting prices for consumers with the support of the ministry. This may have been valid in military oligarchies of the past but it is very disturbing to find support for this coming from the ministry of petroleum .Oil prices used to be set on a cost-plus basis earlier and supported an essential but basically inefficient oil industry which made huge profits in the past. Now that the more saner policy of oil pricing based on landed price parity with imports , the oil industry is crumbling .It would need support like many other inefficient but essential entities. OGRA’s’ job today is implementing a formula, calculate the price and publish it. There are many ifs and buts in it, which OGRA should have made a practice of discussing in broad day light in public hearings than adjudicating on these quietly and slipping into the pricing system. No wonder it has not managed to attract a lot of respect from the stake-holders and the public.

Ingredients of Public Policy

Ingredients of Public Policy

Somebody said it well : our policy is to have no policy .Policy can be a drag and a liability , if it tries to be too ambitious , attempts to lay down ground rules for every micro issue ,does not have openness and flexibility ( too much of which can be counter productive to a policy , nullifying the very purpose of issuing a policy ) , is prepared without consultation of stake-holders ( without being a hostage and victim of powerful vested interest) etc. Policy can be annoying to all as it tries to optimize and balance the interests, and consequently every body may not get its desired want and objective fulfilled. If it tries to be hunky-dory, it may be an exercise in useless journalism as many policies really are.

Energy Policy can be a thankless job, as it may try to reconcile producer and consumer interests; producer wanting to have more profits and returns for share-holders which may maximize investments and supply; and consumers with their limited means and general poverty in this country, would want to have it dead cheap. Expensive energy may otherwise lead to widespread stealing bordering looting, as is the case with Electricity in most parts of the country except Punjab. Ironically in Punjab, natural gas theft is the highest than in any other province, perpetrated, not by the poor house-hold but by industrial sector. Then there are supply chain dependency and linkages. If the policy satisfies primary energy sector, it may leave little margin for electricity producer, sending a chill wave to them. All problems are for a sensitive and conscientious policy maker and government functionary. For those who don’t care, there is no issue. People don’t expect much from them, lose hope and look forward or pray for their exit or ouster.

Policy has to have a heart, and not mind only. It has to consider the weak and the poor, who cannot often defend it, and is not adequately represented and lobbied of. It should provide for pay-off and compensation of sorts to the intended and unintended policy victim. A dam may be a public good, but may displace a lot of people and deprive them of their livelihood. Alternative accommodation and resettlement, sharing of the output (free or near free electricity), sharing of royalties, preferential employment etc are the usual ways and means to broaden the acceptability of projects and policies. Opposition to Kalabagh dam in Sindh could be ameliorated, if the claimed loss of land and livelihood can be internalized in project costs.

A policy makers and a functionary must integrate himself with stake-holders intellectually, but insulate from stake-holders/vested interests socially. In our set up, secretaries and officials routinely wine and dine, attend marriage ceremonies, travel on the expenses of the company with family and entourage, have their son’s tuition of foreign universities picked up and to harmlessly stay in London apartments of the business friends. There are apparently no rules regulating the social conduct of officials except ISI regulating foreign mission’s contacts. These kinds of officials are usually very popular among all kind of people, bosses, juniors, clients, public, friends and family. The one who has some qualms about propriety and has some principles, is often disliked and abhorred by almost every one and even suffers from the contempt of his family, particularly of the spouse. Often he may not be that suave and welcoming and receptive open-door type, as his life is often difficult. He cannot and does not invite and entertain. Such a person is awarded various names and pejorative like Khushka ,Be-faiz ,non-practical etc..

In Pakistan, we have special and additional sets of problems. The department secretaries may be coming from totally irrelevant departments like Hajj and Auqaf depending on their lobby and clout with the government in power and other landed interests and connections. On the other hand experts from line departments such as WAPDA etc may be to narrowly focused, specializing in only wire and cable and transformer. Consequently, except for Hajj policy, all policies are usually made with a heavy dependence and input from international agencies. Some times, local bureaucracy cannot even write the TORs for such studies and input. Often this dependence also stems from the loan conditionalities. Quite a few of these consultants often are strong disciples of John Adams who try to implement all economic principles of user charge ,pricing ,resource allocation, and efficiency etc. ,trying to specify treatment without much regard and sensitivity to the condition of the patient. A patient can die of the right medicine due its side effects.

So should we have policy for policies? We certainly need to train our bureaucracy well, introduce some sensitivity to specialization and expertise in recruitment and placement policies. We need to involve and develop think-tanks, NGOs, foundations etc. The political parties should get deeper into policy making while being out of power, by instituting the shadow cabinets, not for being an alternative for military dictators but for developing expertise and capability. We see that finance ministers invariably come from outside having a lobby in the World Bank or IMF. One can be acceptable to these veritable international institutions and yet be honed in the domestic political process. Unfortunately, in today’s circumstances, these are mutually exclusive attributes.

Competition, competitive pricing, decontrol of prices, market development are the usual catch phrases and prescriptions of foreign consultants and their parent institutions. Competition, except among the poor and the labor, has seldom worked in countries like ours. Often it is collusion and conspiracy among the producers and of the controller which may hold sway, which kind of behavior may attract severe penalties including prison sentencing. We have noticed the difficulties of Competition Commission of Pakistan. Penalties are resisted tooth and nails and not paid; if at all some officials are stupid enough to risk their jobs and even safety. Policy makers have to be watchful of such often external advice. Conspiracy theorists may go as far as blaming the donor agencies for conspiring against our national interest and for having an agenda to keep us begging and underdeveloped.

The need to have an overall Energy Policy

The purpose here is to discuss Energy Policy, although in Pakistan there is no Energy Policy issued as a single document, but is spread subject wise into separate sub-policies. There is Petroleum Policy, Power Policy, renewable Energy Policy etc. It may not be a bad idea to issue an Energy Policy document, that integrates the residual , remaining and interfacial issues and defines vision ,goals and objectives , while introduces the sub-policies. There are multi-ministerial issues connected with ministries of Petroleum and Water & Power and even of Environment where in joint determinations are required and are lacking at this moment, some of which have required prime-minister’s interest and intervention in the recent past, although the latter may have been done foe stressing and emphasizing the need to fast-track processes and solutions.

There are specific issues that may have to be answered by such policy such as the following: 1) Although energy or electricity for all may be a good slogan or vision, Some quantitative target and schedule should be included not of the rural electrification, but also for thermal/cooking energy need, in which context LPG policy and its pricing become a major issue. Also of concern is gas distribution network’s expansion. Bio gas is also an important component of rural energy policy. Electricity and gas distribution to Katchi Abadis is to be an aspect worthy of attention in policies. 2) There is today confusion as to the role of regulatory bodies. IN this respect OGRA‘s performance and conduct has received external criticism. Where do the Ministries’ role end and regulatory bodies begin? There are extreme cases of liberty and control at the same time. For example, NEPRA is at almost unlimited liberty at approving capital costs without defining limitations or guiding principles and criteria. In fixing rate of return, NEPRA has arrogated authority to itself, while it should be given in an energy policy announced by GOP. On the other hand, NEPRA has been constrained to waste its time and energy in Quarterly Tariff determination of DISCOs , in addition to the monthly announcements of Energy prices. NEPRA cannot do anything about it. People are crying hoarse that excessive profiteering is being resorted to by the LPG companies and that LPG prices are unreasonably jacked up. Ministry of Petroleum criticizes OGRA for inaction and inefficiency, while OGRA argues that it lacks jurisdiction.3) although there is a renewable energy policy, there are serious issues of Capital costs. Infact, jacking up of capital costs are a perennial issue; NEPRA does not seem to have guidance in this respect. They are resorting to common sense or/and looking the other way, in place of a policy guidance.4) There used to be a uniform tariff, irrespective of costs, subsidies filled the gap. As subsidies go, what is to be the policy and criteria or the principles forwarding the costs to the regions? Some rules of Tariff differentiation among user groups and the cross-tariff subsidy; 5) some policy on T&D losses and their reduction, schemes and incentives; 6) Royalties issues on hydro/Tarbela, gas royalties and well-head prices , resolving the grievances of producer provinces like Balochistan.7) The policies of appointing Regulatory bodies’ management such as members and chairmen of NEPRA and OGRA remain either unimplemented or seem to suffer from gaps and aberration. One has never come across the advertisement for recruitment of chairman or members of NEPRA , although one would have noticed advertisements for OGRA members. Chairman NEPRA’s appointment is under litigation, with claims that he does not have the right qualifications, although I do not really believe in rigid qualifications parameters. For such positions, selection committee’s determinations should get priority. Similarly members keep lobbying chief ministers nominations of provincial quota. These senior appointments should be done on merit. Any way now with the 18th amendment, all regulatory bodies being Federal Subjects, should mean that such provincial requirements would no longer apply.

Surely there may be some rules and procedures, but these are a patch-work requiring integration and consolidation and removing gaps and writing out un- written arbitrary practices. Users and stake-holders should know about it, removing monopoly and undue discretion and thus obviating the abuse of power and its associated manifestations. Lastly, announcing a Policy is a good way for politicians and ministers to take charge of their portfolios and greater say in affairs than the day-to-day determinations of the bureaucracy. It is a good way of getting known and publicizes their work and acquires respect and credibility among the public. Time to put an end to kuch nahin ho raha criticism and syndrome.