Energy policy,planning,politics,economics,technology,solutions,greening and much more!
Tuesday, December 20, 2011
Pakistan's first Solar Power Plant
Please follow the link;http://www.brecorder.com/articles-a-letters/single/626/187/1260427/#comments
Monday, December 19, 2011
Monday, November 21, 2011
Upfront Wind Tariff-the issues
NEPRA has recently announced an upfront wind power tariff .In this space, we would attempt an evaluation of the scheme as announced, and apprise the readers of its pros and cons. First of all, let me explain some technical terms, which may not be readily intelligible to the lay reader. There are many types of tariff schemes; for the purpose of generation tariff, the following two types are relevant for our discussion. One is cost-plus, which means, the producer/seller IPP is paid its actual cost plus an agreed profit by the power purchasing company. Practically, it is almost risk-free to the seller, as all seen and unforeseen costs are paid for in this scheme of things including escalations of all kind, interest rates, foreign exchange and inflation. Determination of this tariff poses great responsibility on the shoulders of regulatory authorities, as the true costs have to be determined, in the face of the seller having a natural tendency to overcharge. In developed economies, cost-plus is mostly outmoded, as energy/electricity price is determined through market forces as these operate on energy exchanges, where electricity price is determined in an auction manner of a typical stock exchange. In Pakistan, this disease of booking unfounded cost has acquired unmitigated dimensions. The other tariff type is what we call an upfront tariff. This is also called a feed-in-tariff these days and is also being practiced in the West, for the purpose of promoting investment in the renewable sector. Under this scheme of things, regulators do their own investigations into the costs and competitive tariffs, and announce a tariff which aims at enabling the investor to recoup its investment and get an attractive return. In many developing countries (Brazil, Turkey and India and many others in Asia), this type of tariff has been determined through auction. This indeed is an ideal market based arrangement, which could also have been adopted by our decision makers. More on this is to come later.
NEPRA has approved a wind power tariff of 14.66 cents (Pk. Rs. 12.61) per unit levellised at 10% discount rate(We have seen tendency at NEPRA to compute levellised cost at a fixed 10% irrespective of the average cost of capital at which rate discounting ought to be made; more on this later).In actual terms, in the first ten years the tariff has been fixed at Rs 14.81 per unit and Rs.6.8977 for the next 11-20 years. Bad news for those who think, wind is free or cheap. It is elsewhere, but not in this land of pure. Today, in the US, Wind electricity is the cheapest at 5-6 cents, cheaper than any other alternative, fossil or renewable. In nearby India, it is IRs 3.50 per unit (1 Indian Re equals to Pakistani on the average).In Brazil and Turkey, it is has been auctioned recently at 7 cents per unit. In Germany, it is 10.61cents and lower and in Spain at 7.85 cents. NEPRA has itself in the past awarded tariff ranging between 9.5 and 10.50 cents, since 2006. Wind Turbine costs had increased in the intervening period with the hike in commodity price 0f 2008. However, in recent years Wind Turbine costs have come down by more than 20%.In Europe, Wind Projects (all costs including Turbine) cost around 1800 USD per kW and In India and USA, the same are at 1200 USD per kW, as opposed to USD 3000 per kW implicit in the upfront tariff of Pakistan and in other cost-plus tariffs awarded by NEPRA.
Source:NEPRA
In some respects, there is an improvement, as the Wind Risk clause has been practically eliminated. This was a relic from the past, when bankable wind data was not available in Pakistan. Now the data is abundant, reliable and bankable. Operational problems would have been there in implementing the wind risk, as underperformance of turbines, it was likely, could have been booked under wind risk. At times, it becomes difficult to distinguish. The new scheme under demand of stakeholders, does maintain an element of Wind risk issue in a guarded and circumscribed manner. Also, there is a provision of escalation on the lines of cost-plus schemes where in exchange and interest rate variations, and other inflationary formulae have been built in, making it almost as bulky as cost-plus regime. In India, there is no escalation and the tariff is denominated in Indian Rupees 3.5 per unit, not a lot of money to play around and to build in escalations. In Pakistan, Inflation is generally high and currency depreciates faster than it does in India. I wonder, if Wind tariff is denominated in US dollars at 12-14 cents(with out escalation ,which is taken care of by the average 5% currency devaluation per year in the long run)would have been more handy and simple. One has to study the option for its implication on both the sides. On the issue of Green Credits, there is confusion; at one place, it awards the same to the power purchaser, while at other reference is made to GOP policies. Under other schemes, Green credit is to be shared among buyers and seller equally.4) this very attractive tariff is to remain valid for the first 1500 MW and for projects that achieve financial closing before the end of 2012.
Most of the times, I have been expounding the public perspective and vantage. An affordable and payable tariff, in my view, is the only guarantee that investments would be paid back with a fair return. Excessively high tariff may not be able to attract investors, as some hope that they may queue up for this kind of return as permitted by the announcement of 15 cents , perhaps the highest ever in the world. I do sincerely hope that investment does come in and we do not become a victim of double jeopardy, low investment that would have come any way and high tariff.
We have to think about reducing the energy costs and tariffs. The earning power of our people is low and there is 30% populace living under extreme poverty line. At least, it should be competitive with other countries of the world and the regions, and not 50-100 % higher than elsewhere, as the data provided earlier indicates. Overbooking the capital costs and its institutionalization in the upfront tariff is part of the problem, although a major one. Most power projects are foreign funded in debt, if not in equity. Large projects may have majority or 100% foreign equity. Foreign debt is priced at LIBOR+3% usually. After the law and order conditions improve, this mark-up may be halved in line with other countries of the region. More crucial may be the local debt, which is unaffordably high, either for industries or power sector. One wind project has asked for KIBOR+6%, which jacks the interest rate to 17-18%.In India, Power Finance Corporation charges 12% on the average, elsewhere interest rates for power sector are even lower. Except for working capital and local construction costs, it is arguable whether permitting local currency financing is the right policy. Keeping in view the enormous investment requirements of the power sector in the coming two to three decades exceeding one hundred billion USD, consideration may be given to set up a specialized financing institution on the lines of Power Finance Corporation India. Already, it is emerging on a small scale as can be seen by the initiatives of some institutional financial companies like EOBI. Renewable energy, which is the future of energy and not a very distant one in that, poses special problems; fuel costs are zero, but the capital cost may be higher. Viability of these projects is very sensitive to the capital costs, interest rates and rates of return to equity investments. RoRs of 17-18% are simply not feasible and affordable, as the impact of these rates on unit production cost is almost twice as high as it is in the conventional energy sources.
Another important aspect that should not escape the attention decision makers is the promotion and support of local content in the imported turbines. It may be unrealistic to expect 100% local manufacture. A deletion Plan on the lines of automotive sector may be developed, building incentives for the local content. Eventually, the cost of incentives would be eventually paid off by the ultimate cost reduction and employment generation effect. There is a lot of unutilized capacity in Pakistan which could be put to use through partial local manufacture. Turkey is a recent example where local content based wind tariff has been introduced. One would be able to support such a high upfront tariff of 15 cents (levellised/average), had it been based on a local content basis.
NEPRA determination appears lacking in transparency. The determination, as posted on the website, talks of all other issues but the main issues. All that has been disclosed is a table providing O&M costs, Return on equity and debt servicing component. There is no discussion or revelation on the bases on which the determination has been made. Is it market based or cost based. It cannot be market based, as it is 50% higher or even more than any other tariff, either in the region or internationally. If it is cost based, the main issues of Capital Cost and cost of capital should have been discussed and dealt with. It has been clearly avoided, which is unfortunate. One notices a trend in NEPRA proceedings and recent determinations of curtailing and avoiding the main issues, at least from consumers’ perspective. Sellers’ perspective, concerns and queries are addressed only. There are hardly any interventions representing the contra point of view. Is it general apathy or a deliberate policy on the part of NEPRA to discourage diversity of views and opinions expressed? NEPRA should make every effort that its proceedings do not appear one sided and that there is adequate representation. Clearly, all points of view cannot be accepted and adopted. However, there has to be an adequate acknowledgement and the reasons for rejection and acceptance of those. For example, why does one think that a capital cost rate of 3.1 Million USD per MW (a figure that appears to have been used in arriving at the 15 cent’s tariff) is justified which is almost twice the prevailing cost for the similar equipment in the region and elsewhere?
Concluding, it is hoped that some projects would come on stream under this excessive tariff .Reportedly the government has given a target of 500 MW in this respect, which may not be an impossibility. After this immediate period, hopefully the country may adopt an auction based competitive system which may result in a better deal for the country. Finally, there are many lose knots that have to be tightened in the energy sector. The symbiosis between fuel and electricity is to be recognized through integration of policies and institutions, be it through mergers or through other policy and administrative instruments.
The writer is the author of “Issues in Energy Policy” (in the press).
Tuesday, October 25, 2011
Thursday, July 28, 2011
Pakistan's Energy Woes :The way forward by Akhtar Ali.
Pakistan's economy faces serious challenges with overwhelming solutions. Akhtar Ali writes some solutions in this seminal article as he writes his new books on energy with special focus on its political economy and its relation to International best practices, development and economics. http://www.brecorder.com/articles-a-letters/single/626/0:/1215939:our-energy-woes-and-the-way-forward/?date=2011-07-27
Saturday, February 26, 2011
Friday, February 25, 2011
Thursday, February 24, 2011
Thar Coal: potential for Indo-Pakistan Collaboration
Thar Coal: potential for Indo-Pakistan Collaboration
There has been a long held desire in
Lack of availability of suitable projects has also been one of the reasons inhibiting economic cooperation among the two countries. Efforts have been made, in the past and continue to be so, towards building a project portfolio for possible collaboration, if and when political environment improves. SAARC project fund has been commissioning such studies. Reportedly, there is a SAARC energy initiative as well, headquartered in
Thar Coal and its vast deposits , apart from meeting Pakistan’s energy requirements, may have a potential for building and expanding regional economic cooperation .There are a number of possibilities such as; a)export of Thar coal to coal deficit adjoining states of Rajhastan and Gujrat ;b) India assisting Pakistan in developing and exploiting Thar coal resource; c) India installing coal –fired power plants in its border towns ,and exporting electricity to Pakistan produced by Pakistan exported Thar coal. Let me explain and analyze these propositions a bit.
First on
Reluctance of western countries with coal is increasing. International financing agencies are under pressure from environmental lobbies not to fund and assist such projects. Chinese appear to be reluctant as well, as reportedly; numerous attempts to revive their interest in Thar have failed. They still appear to have bitter memories from their past involvement in it and the uncooperative conduct of WAPDA that was manifested by the later.
Secondly, exports of Thar coal to
The third proposition is rather unique, ambitious and extremely profitable, all at the same time. The detail is, that
Similar ideas have been put forward earlier as well. There were proposals for exporting electricity to
Easier said than done, but it can be feasible. As for the security concerns, of large volume of goods transport and human traffic, Thar is a far-off town. Indian nationals may be allowed to come to Thar only through land route or a future direct flight from to and fro Thar. It may remain as good as domestic travel for them. Special immigration rules and status can be created for Thar coal projects. There is no major security installation or threat nearby. So security issues can be managed.
So many people and nations in the world want
Thar Coal update
Thar Coal: some submissions
Our energy crisis is so huge and worsening that one finds it only appropriate to belabor the known facts and bring forward new thoughts and solutions that come to ones mind. By this time, it should have become obvious that there is no escape from fast tracking the Thar coal project. Hydro power is also an equally viable option which solves water storage problem also , but suffers from seasonal factors . The two resources together offer optimal opportunities to meet
The bureaucratic circles tend to show that there is progress on Thar coal. But the fact remains, that there is almost none. Allocation of blocks, MOUs and even feasibility studies do not mean much, as many such things have been done in the past. Under-ground coal gasification project has raised false hopes among the public. Without casting doubts on the scientific credentials of its eminent promoters and on the technological potential of the route adopted, the problem of scaling up would remain for which there is no capability in the country of a level that would be acceptable to the lending banks. While the existing gasification would yield useful data, we would be back to the square one, which is of requisite financing.
The bad news is that under criticism and pressure from international Green lobbies, World Bank has discontinued its technical assistance program on Thar coal, amidst news that government of Sindh has persuaded them to renew it. Even if they do renew, it sends us ample signals on difficulties that we are going to face towards financing Thar coal. With time, the opposition to coal would increase. Our problem is immediate and the renewables are still to be perfected and improved to be cost effective and competitive. In any case, renewables are projected to have a share of 20% even by the year 2050 .What are we to do in the meantime. The threat is that by the time we put our act together, although fossil based power age may not be over, the financing regime may become too difficult and hostile against coal.
The residual issue as it stands today is not the financing issue of the mining and power parts of the projects, however difficult it may itself be, it is the financing of infrastructure part which is proving to be a stumbling block. Various estimates put these requirements to between 1 to 2 billion US dollars. More money is required for infrastructure, than the first coal mine and power plant itself .Government of Sindh, obviously would not have such resources, nor would the federal government. And in these days of emphasis on provincial autonomy, where is the appetite for common projects. There are also issues as to the technical and management capability of the provincial bureaucracy, as the project continues to be run from the narrow confines of the Sindh secretariat. Apparently, there is no shaft of light at the end of this tunnel, although it is not the only one.
In all humbleness, this scribe makes the following proposals. There are two options. One is to tender for a large project of 5000 MW or so, which may be able to assume the infrastructural development costs. The cake becomes big enough to absorb all kinds of interests. This is not new .In
Certain issues related to the 18th Amendment need to be sorted out. After the amendment, Electricity sector becomes a federal only subject, as there is no concurrent list any more. Earlier Electricity was in concurrent list. Coal was and is a provincial subject. If I understand correctly, federal responsibility and role in Electrical power sector should be larger than it was prior to the amendment. Thar coal power development , therefore, ought to occupy higher priority in Federal budgeting system. It may not be a bad idea considering some kind of linkage between investments in Hydro and Thar coal power; one project in hydel, and one in Thar coal. There is a technical requirement to balance hydel power as well. Gas being no more and oil unaffordably expensive and imported, thermal energy in future should mean Thar coal energy. Politicians from Sindh can suitably make a convincing case, provided they are also prepared to readily agree to federal involvement.
Let me close with good news, if at all. Some politicians lately made a statement that Thar coal is larger than the oil resources of our rich brothers of the
The writer is a former
The natural gas controversy
The natural gas controversy
There is a general gas shortage in the country for the past few years. Known reserves and deposits are on the way to exhaustion, while the exploration activity has been at a low level. Most of the gas these days is being produced these days. Gone are the days when most gas used to come from Sui in Balochistan. Thanks to exploration activities in Sindh, many new deposits have been discovered in Sindh and production started from those wells. More exploration activity is expected to yield new gas resources in Sindh. Due to the political and law and order problems in Balochistan ,no new deposits are being discovered as no exploration activity could be sustained there for the past many years. This is a very unfortunate situation , in which no body is benefitting, people or
Shortages create many economic and political problems. A number of controversies have developed. Industries have protested and some of which closed down in protest or due to gas shortage. Earlier Sindh assembly passed a resolution demanding priority in gas allocation and a number of prominent politicians issued statements in this respect. They have complained that Sindh's gas is being taken elsewhere in the central system and that Sindh’s demands should be met first, and then the residual should go elsewhere. The issue of distribution priorities! They have argued that there is a constitutional provision in support of this stance. Now KESC has joined the debate. In a message to the public and consumers in
There is a general shortage of gas throughout the country. Power plants in Sindh are not getting enough gas and thus load shedding of electricity. Gas and electricity are distributed to user sectors and customers who pay for the service. It is not supplied to an abstract concept or entity as a province. Then gas is distributed and allocated as per priorities. For example, fertilizer sector is a priority and supposing all of the capacity is located in Sindh, allocating and distributing gas to Fertilizer sector does not mean that gas is allocated to Sindh.
If this logic of prior right of producing province is accepted, then many problems would have been created for Sindh itself. Gas exploration and abundance in Sindh is only a recent phenomenon. Previously all gas consumed by Sindh came from Balochistan and most hydro electricity came from Sarhad/KP. Very little was consumed or allocated in the producer provinces, as there was no demand or distribution investment was not justified for widely scattered insufficient demand. Similar demands and protestations were made by some circles in Balochistan, when natural gas was brought to
The issue is that Production, transmission and distribution facilities have to be invested in. Often the investment comes from private and foreign entities that have to be paid back. The revenue is generated through consumers and customers and not from provincial or federal government. Principles of economic efficiency, markets, sustainability and rate of return to investors are involved. If we do not learn to respect these principles, we are going to end up in more shortages due to lack of investment in supplies sector and higher production costs of utilities and services. The capacity of people to pay has already reached or even crossed their limits.
If there is a shortfall both equity and efficiency considerations are their in allocating priorities. Where there is no efficiency or criticality issue, equity principles of equal distress are to be applied and not a province based formula based on the ownership of resource.
As to the ownership issue of the resource , except for political ownership which does not mean much in practical sense ,bulk of the resource(88%) that has been extracted belongs to the producer who has spent money, effort ,resources and know-how in bringing out the resource from the earth and processing it and making it use-worthy. So the ownership of the extracted resource belongs to the producer, save the royalty portion of say 12%, and not to the province where the resource is located. What is in ground belongs to a people and provincial or federal government as per laws and constitution of the country, but when it comes out of ground it is a different issue.
Energy sector in
Constitutional provisions are often desires and ideals. These have to be creatively and constructively interpreted and understood. It is well-nigh impossible for the framers of the constitution to understand the implication of every sentence they write into the constitution. American constitution explicitly allows only currency, defence and foreign policy in federal domain. American courts have interpreted the constitution so broadly and in totality, that there are sixteen federal ministries dealing with 16 or more subjects. Constitution may have to be amended if too literal interpretation of the quoted constitutional clause is attempted.
As for KESC, its issue is a bit complicated due to the tariff issue, which may not be intelligible to the non-specialist. KESC runs on what is called a constant tariff, with periodic adjustments for the fuel price inflation and general inflation as well. Gas is more thermally efficient fuel than oil in the sense that in combined cycle plants, an efficiency of 50% or more is possible to day than the traditional efficiency of steam turbine plants run on oil. KESC is expected to earn through increase in thermal efficiency and reduce other losses and leakages. There are many other issues with KESC tariff formula as it exists today. Normally such formulae are agreed to for relatively short periods. It has no answers or solutions for the long run. It may cause much more serious problems in future, details of which cannot be explained in this space. A review of this formula is required, along with a number of reforms and pro-active actions. For the time being GOP has allowed Oil sales and supply in lieu of non-supplied gas, at the price of gas. Perhaps this solves KESC’s working capital problem. A longer run solution would require the following steps; KESC should be a part of the central pool and eligible to draw from the central pool as per an agreed formula ; KESC to be treated as an IPP, and allowed to make investments in generation outside
Transparency in Oil & gas sector
Transparency in Oil & gas sector
In this article, I wish to uniform my readers of something in Petroleum pricing which is almost scandalous. OGRA regulates and periodically announces Petroleum prices that includes Diesel, but that is Light Diesel Oil (LDO) which forms to be a negligible portion of the consumption. The real Diesel, HSD which is used in road transports, trucks and buses, is apparently and clearly out of OGRA’s purview. Ministry of Petroleum is fixing these prices without regulation through its own notification posted on PSO’s web-site. As mentioned earlier, LDO and its pricing are hardly of any consequence. It is such loopholes and gaps in regulatory regime that are the focus of this piece. Also the bipartisan committee which is holding session these days on economic reforms must look into this.
HSD’s latest price is Rs.78.33 per liter as compared to the regulated Rs.66.61 for LDO and Rs.72.96 for Gasoline (premium grade petrol).That means that the real Diesel (HSD) is 7.36% (higher than the ordinary petrol) and 17.59% higher than the regulated Diesel price. There are two problems here. Except in the
Ideally all prices should be determined through unhindered market forces and their competition. It requires a large number of buyers and sellers. In
Transparency in regulated sectors is measured by the following factors;
1)
1) Written and publicly available policies, rules and regulations.
2) Public participation in Tariff and pricing.
3) Un- restricted publishing of data
Measured on the above yardsticks, Oil and gas sector in
OGRA’s regulatory process seems to be only concerned with the determination of Tariff for the Transmission and Distribution of natural gas that is supplied by the two companies, SSGC and SNGPL. Measured on the above transparency criteria, the performance in this limited respect appears to be relatively much more acceptable. On the technical side (standards) also, there appears to be a reasonable OGRA activity and performance.
Oil and gas sector is worth more than twenty billion US dollar in terms of sales and output. Except for the aforementioned exception of Gas T&D and mere posting of petroleum retail prices and gas wellhead prices, there isn’t much to show by OGRA. The sector is almost totally regulated, except LPG where there is confusion as to the regulatory domain. Admittedly OGRA works within the framework of the role assigned to it by Ministry of Petroleum (MPNR) and the GOP. It cannot arrogate powers to itself, although it can build pressure towards higher domain and role for itself. The due process is lacking in the following areas: Surely there are and must be rules in the following areas which in itself is not enough. The actual application and adjudication of those rules is to be the subject of due public process, where price is not determined by the market forces. International transparency moves and initiatives these days even go beyond public tariff and pricing determinations. They are demanding Publish what you pay(PWYP)policies and regime, for it has been found that the actual payments vis-à-vis publically determine tariff may be deviating for legitimate and not so legitimate reasons. Following areas should come under some process of public input and scrutiny through the regulatory process of OGRA and the latter should not restrict to posting of results but invoke the whole regulatory input and process into these.
1) Well-head prices of oil and gas.
2) Ex-refinery prices of petroleum products such as gasoline and diesel, including crude oil imports
3) Oil pipeline tariff
4) PSO imports of petroleum products (50% of the total demand is met through imports valued at around 8 billion dollars)
5) Furnace oil pricing despite claims of being in the open sector; and most importantly
6) High Speed Diesel (HSD) pricing.
On the other hand, what little powers have been granted to OGRA, successive leadership of that organization have not chosen to make use of those. For example who stops OGRA in holding public hearing for discussions on the other constituents of petroleum prices, if the ex-refinery (wholesale or producer price) is made an untouchable tree for it?
MPNR has traditionally being reluctant to cede powers to OGRA. In all the above areas, the closed offices of oil bureaucracy have the sway. There has been much controversy regarding the self pricing role of OCAC (Oil Companies Advisory Committee) which has since been disbanded or depowered. It is ironic that OGRA is not considered adequate enough for the role of OCAC .Who does not like power and authority? Public process absolves responsibility and implication of public servants in scams and others in a highly skeptic Pakistani society today. They should support the expansion of public process. Transparency would also encourage and promoted much needed direct foreign investment in this vital sector. And finally, it is the responsibility of legislature and public representatives to intervene and write laws and require regulation in this respect.
The writer is a former
Life after 100 USD per barrel price ?
Petrol prices: What after 100 dollar per barrel crude oil.
Brent Crude oil prices have touched a dollar 100 per barrel mark in the wake of political events in
Government of
Recent oil price increase had to be reversed by the government under tremendous public pressure and political action. The reversal has been welcome domestically and opposed by international quarters erroneously calling it a subsidy. Energy prices are also on the agenda of talks going on between the two mainstream political parties of the country. Something good should come out of it on its own merit, if not for preventing an upcoming political impasse. Energy pricing improvements and policy changes offer some opportunity towards this end.
People were quite used to the existing oil pricing arrangement linking domestic prices with the movement in international prices. This time oil price increase came amidst back-breaking inflation and rising electricity prices. Besides, the petrol prices peaked to Rs.79.96 for gasoline and Rs.70.97 per liter , which was perhaps beyond the upper limit of consumer capacity to pay, as evidenced by the enormity of public pressure. The prices have been brought down to the December level. In today’s petroleum prices, there is a very low level of tax apart from the usual GST. There is no Petroleum Levy on Diesel due to the reversal and a very marginal one of Rs. 4.27 per liter on Petrol. Due to the preponderance of Diesel in the total consumption, the small levy on Petrol would not earn the government much except the GST. Is this a permanent price freeze irrespective of where the international prices go? What are the options with government in this respect? I am arguing for a zero-energy taxation regime .I will explain this a little later, after a little perspective on energy pricing.
In India , Petrol prices are allowed to remain stable for significant periods like six months or so and the international prices are not passed on to the consumer immediately as it is currently done in Pakistan. We had the same system earlier, which was replaced by the current system following criticism .As we have seen recently, a high but temporary rise in Petroleum price has the potential of causing social order and political swing. Lower prices normally go unnoticed. There is a rationale for day-to-day pricing in open uncontrolled markets. In a regulated market, one should reevaluate as to the merits of existing monthly price adjustments. Current reversal is a step towards the earlier system of variable taxation. Simply speaking, the government reduced the Oil Development Levy, a kind of a tax. In fourth tier countries come, most of the
European taxation of Petroleum is partly a hang-over from the socialist past, wherein petroleum and cars were traditionally considered items for the rich. Today Petroleum finances public welfare expenditure in these countries. The impact is, however, only partially compensated by energy efficiency and conservation. Petroleum taxation has also been considered as a user charge of roads and transportation network. A charge of 10 cents per liter has been considered adequate for this purpose, as a recent GTZ study suggests. This comes out to Rs 8.3 per liter road tax. Infact petrol levy could be termed as Road user charge. At a consumption of 12 billion liters of consumption (85% of which is diesel), this comes out to be Rs 100.0 billion revenue stream annually. Alternatively, a subsidy at the same rate would cost the same amount. Preponderance of diesel consumption of 85% precludes any cross-subsidy option of Gasoline vis-à-vis Diesel. From the year 2009, Petroleum Levy of Rs 3.00 per liter has been charged which has been brought to zero after the price reversal. Similarly there was a constant Petrol Levy of Rs.10 per liter, which has been brought down to Rs.4.27 per liter. At crude oil prices as high as 92.40 USD per barrel, there is hardly any scope of taxation on Petroleum. Infact if it goes beyond 100 USD which is not unthinkable, GST may have to be reduced or removed , depending on the volume of crude price increase. Around the same time, we may have to consider some kind of rationing or quotas, voluntary or mandatory, however, unfashionable or unattractive that may sound.
Fortunately, the European incomes can possibly support high petrol prices and taxation. European argument does not apply in countries like ours. Secondly, Diesel a fuel used in mostly public transport and commercial vehicles used to be taxed low or none at all in many countries. Under environmental pressures Diesel is being discouraged and price differential has been reduced very significantly. In our specific situation and particularly under present conditions, this price differentiation may have to be brought back for at least next five years.
Coming to Electricity Tariff which remained somewhat affordable till 2008-09 for a variety of reasons such as reasonable exchange rate, lower oil prices, and lesser share of oil in electricity generation combined with subsidy. For several years during Musharraf period, electricity Tariff was not raised despite rise in cost of electricity generation and increasing theft. At the time of Musharraf’s exit, electrical subsidies amounted to around one rupee per unit. Falling exchange rate and rising oil prices gave rise to unfunded subsidies which gave rise to what we call Circular debt starting from a Musharraf periods level of more than one hundred billion rupees. Rising circular debt has substantially reduced working capital of utilities and Energy industries resulting in shortage in electricity production which also results in higher costs due to interest charges and higher unit fixed costs due to spread of fixed costs on a decreasing number of units produced and sold.
Thus Electricity used to be cheaper in
In this rather long perspective let us revert to the zero-energy taxation regime. Simply put this means integrating the energy sector and its taxation; pooling the taxes and subsidies to balance and cancel each other. This would allow withdrawal of electrical subsidies and reduction in petroleum taxation resulting in falling petroleum prices with the rise in Electrical tariff. This may be acceptable and affordable to all parties; lower prices to consumer, no budgetary loss. Above all, it would be sellable to lenders and donors which pose a major constraint in independent economic policy making.
Petroleum taxation is a major cause of inflation in
The writer is a former
Curing the ailing Energy sector ;some humble submissions
By Akhtar Ali
Pakistan is facing the worst energy crisis of its history.Perhaps no other crisis or difficulty has caused as much damage to Pakistan’s social and economic conditions as energy issue has.It has caused trade and foreign exchange deficit , currency devaluation , decline in economic out and exports and has caused massive unemployment.The Energy issue merits highest attention of the government in developing and implementing short term and long term measures.Here are some of the suggestions in this respect.
1)Development of Local Energy Resources
Pakistan has imported 10-11 billion USD worth of oil per year over the past few years.High and volatile oil prices have damaged Pakistan’s economy. The continuing reliance on oil for producing electricity is a highly dangerous trend. Most projects that have come on stream in the last few years and the ones in pipeline are IC engines running on RFO. The danger stems from three directions; one is increasing cost of generation of electricity (COGE) and the other raising the foreign exchange import bill. The oil price hike of 2007-8 virtually destroyed the economy and damaged electricity / energy sector. Thirdly ,oil based IC engines are less efficient than other options.
Thar coal is larger than the oil resources of our rich brothers of the
2)Financing Thar Coal
The residual issue as it stands today is not the financing issue of the mining and power parts of the projects, however difficult it may itself be, it is the financing of infrastructure part which is proving to be a stumbling block. Various estimates put these requirements to between 1 to 2 billion US dollars. More money is required for infrastructure, than the first coal mine and power plant itself .Government of Sindh, obviously would not have such resources, nor would the federal government. And in these days of emphasis on provincial autonomy, where is the appetite for common projects. There are also issues as to the technical and management capability of the provincial bureaucracy, as the project continues to be run from the narrow confines of the Sindh secretariat. Apparently, there is no shaft of light at the end of this tunnel, although it is not the only one.
. There are two options. One is to tender for a large project of 5000 MW or so, which may be able to assume the infrastructural development costs. The cake becomes big enough to absorb all kinds of interests. This is not new .In
3) Importing Coal
Uncertainties over Thar Coal implementation have compelled investors to think about imported coal.Several projects have been proposed in the past based on imported coal. Imported coal although cheaper than oil , it is no less volatile than Oil in terms of price variability. In the oil price hike of 20007-8 , coal prices also rose proportionally and came down proportionally. It is not coal per se ,but the local resource development and controllable prices offered by local coal that is to be a preferred option. If at all , permission may be granted for imported coal for an interim period , and conversion be required to be built in when Thar coal becomes available.
Permitting imported coal project would send a final signal for closing off Thar coal resource.
4)Conversion to Coal
Many oil-fired (Steam Turbine) power plants were converted to coal in the wake of Oil crisis of 1973, and the trend continues till todate despite heightened environmental opposition. The dilemma that,however,is to be faced is whether it is local coal or imported one.Coal is already being imported for non-utility industrial purposes and local Hard coal is being mined locally as well,although under low productivity and inefficient environment.Hard coal production ,although with smaller deposits , could be fast tracked by installing modern mining equipment and management practices. Utilities use of this coal would spur such conversion.In Punjab ,50 MW coal based power plants have already been proposed under provincial domain. Conversion to imported coal should also be subject to the same provisos as has been proposed in the earlier para.
5)Controlling High Cost of Generation of Electricity(COGE)
2- All efforts must be made towards controlling the electricity cost and tariff. The full brunt of high cost projects has not yet been felt, due to the availability of one –third electricity form old hydro project like TARBELA at Rs. 1.30 per unit. There are three aspects that need special attention.
1. Capital costs esp of power generation projects.
2. Thermal efficiency
3. Reduction of technical and non-technical losses.
6)Capital Costs;
There is a general consensus among experts in Pakistan that capital cost of generation projects are high. In the adjoining table, we provide data on comparative capital cost, which is self explanatory.There may be both technical and commercial reasons for this.Regulatory effort and capability in this respect need a lot of improvement. In developed companies of all market size ,electricity generation prices are market driven.In India there is a big market and local industry and sufficient domestic market data is available.CERC India is able to announce bench mark rates for capital cost with much less difficulty.In Pakistan NEPRA does not have recourse to such inputs. Neither does NEPRA seem to have made adequate efforts to enhance its capability in this respect. It relies on simple brow beating the proponent into some down ward adjustment based on some input form in adequately informed interveners, and EPC quotes.
In this respect, we make the following recommendations :
1. NEPRA announce bench mark capital cost for three years (indexed) based on external / foreign consultant recommendations.
2. EPC for turnkey projects is replaced by a package approach, where by a project is tendered in 5-6 packages.
3. PPRA procurement rules must be made mandatory for all regulated projects, including energy and electricity.
4. NEPRA invests in acquiring and subscribing to 3rd party data source on capital costs, intead of constructing buildings for its offices.
A case in point is the remarkable difference in capital costs and COGE of wind power, among India and Pakistan. In India the capital cost of wind projects is half that of Pakistan, 1200 USD per kW vs 2500-2700 USD per kW in Pakistan. A part from potential and ubiquitous padding, local production of wind turbines in India and total imported content in Pakistan, many have resulted in such a large cost differential.
7)Opening up of electricity market
Consideration may be given for introducing an element of open market and liberalization in the electricity sector. Some of the feasible steps may be the following:
1. promoting consumers choice for large customers (1MW+).
2. opening up electricity transmission by allowing 3rd party access on pre-determined wheeling tariff.
3. doing away with generation licensing requirements for up to 3-5 MW. Mandatory filing many be continued for 1M and upwards.
4. promotion and permission of open market operations among producers and large consumers on mutually negotiated tariff utilizing open transmission regime.
5. promotion of independent electricity marketing companies.
8)Royalties:
8.1)Hydro royalties:
A permanent solution to hydropower royalty / net profit issue should be finalized. Ideal and most practical solution may be giving 12% free electricity ( ala- India) to the producing province with provisions for sharing with local governments. An alternative is to compute royalty dues at the rate of 12% of CPPA price ;both options are almost equivalent.
8.2)Wind power royalty:
It is unfair and even unconstitutional to drive benefit from provincial lands without adequate compensation or royalties. No royalty is being included in the NEPRA tariff calculations yet. A policy must be announced in this respect. Wind power royalty is to go to the land owner/ lessor. If a government is the owner,Federal, Provincial or Local. that government may get the royalty. If it is a private land, private owner gets it. A rate of 2% of sales has been popular in many western countries. This is also compatible with royalty formulae in mineral sector. At this moment only Sindh province would benefit from it. Wind potential is there in other provinces as well, esp in NWFP and Balochistan and FATA who would benefit from it eventually. It may be worth noting that Wind Turbines use only 3-5% of the WIND FARM area, which can continue to be utilized for agricultural purposes. Based on 150 million kWh per year of electricity sales per year of a 50MW wind power plant, a royalty of 2% would mean an royalty income of 1.5 million USD per year, that could be shared among local and provincial governments depending on the ownership status of the land. Fortunately wind power / costs are coming down due to emergence of solar option, and unsold inventories are building up. The additional 2% incidence of royalty would be tolerable now than ever before. NEPRA would be well advised to revise its determinations on WIND POWER in the light of recent downwards trend in wind power equipment prices world-wide
9)Reorganisation of the Energy sector
Recent Energy Summit deliberations and its output have indicated the need to take a total and integrated view of the Energy sector,be it short term emergent needs or longer term planning and management.Following steps are recommended in this respect :
1)Merger of the Ministry of Water & Power and Ministry of Petroleum into one Ministry of Energy.After the 18th ammendment, there is not going to be much federal involvement in mineral sector anyway.Except for India , many Federal countries have adopted this approach.
2)Merger of NEPRA and OGRA , which would enable the two organisations to learn from each others strength , cross pollinate the ideas ,and facilitate a coordinated energy regulation.In most countries ,this practice has been adopted including the USA(FERC), Singapore and elsewhere.
10)Reorganisation and liberalisation of the GAS sector
The current domination of the sector by two distribution companies (SNGPL & SSGC)must go and the sector and the two companies fragmented on the lines of electricity sector , namely replaced by one or two Transmission companies and several distribution companies like LESCO, GEPCO, FESCO etc.
2)Open transmission access regime to third-party suppliers and gas producers along with consumer choice for large customers be instituted.
3)Gas market and a parallel unregulated gas sector , in addition to the existing regulated one,be instituted to promote investment ,production and greater supplie in the sector.This should also cover and include the so called TIGHT or UNCONVENTIONAL gas exploration and production.
4)Draft Rules for TIGHT GAS , in the absence of the proposed de-regulation ,seem to be adequate and forward looking. Consideration may be given to pegging the TIGHT GAS PRICE to 75% of the oil price subject to 100 USD per barrel of upper slab,as has been the case of imported gas from Iran.
11)Demand Management
Recent energy summit has prescribed short term demand measure. Longer term rules are required to be put in place. Two most important ones are suggested in the following:
1)Restriction of air-conditioning load during peak hours for consumers having demand exceeding 100-200 KW , and obliging them either to install gas based air-conditioning of absorption chillers or buy-in chilled water from distributed cooling systems.A sufficient notice of two years be given to such users.Malaysia has introduced this provision for quite some time now.Distributed cooling through chilled water distribution has become quite well known in several middle Eastern and South East Asian countries.
2)Distributed and district cooling projects be promoted and mandated in co-generation and tri-generation mode which has a potential of a thermal efficiency of 75% as opposed to present average of 40% in good cases.
12)Revamping Existing Generation capacity.
1)Against an installed capacity of some 22000 MW, existing peak generation does not go beyond 14000 MW.Although circular debt and consequent financial problems of energy companies has had a role in lack of adequate electricity generation,it is widely recognised that some 3-5000 MW of existing capacity needs a varying degree and level of revamping/BMR.Prior and immediate attention may be given to those projects including privatisation of such units along with their gas allocations.GOP/MoWP are reportedly seized of this matter , along with USAID support in this respect.
2)Single cycle gas turbines(mostly out-dated) should be put much later in the economic dispatch order ,than is the current should not have a capacity factor/utilisation of more than 20-30%.
3)NEPRA monitoring code of generation capacity should be implemented with strictness and monthly wesite publishing be made mandatory.Electricity generation data by generation facility must be published daily by CPPA/NTDC.
13)Reduction of T&D losses including theft in Electricity and Gas sector.
1)Ironically T&D losses in electricity sector in Punjab are minimal (12%), while elsewhere these exceed 25-30%.In industriallised countries T&D losses to the exclusion of non-existing theft are a mere 5 %.However in the same very Punjab, gaT&D losses ,which mostly are shear theft,are phenominally high ,much higher than in Southern sector (SSGC network) .This indicates that company culture and history ,its organsation,work-force and management has a lot to do with theft than the possible sociological factors. Regulatory authorities ought to delve deeper into this phenomenon.
2) USAID assistance ala DRUM project India must be procured where such programmes are showing good results. India, to consolation of many among us
14)Renewable Energy
14.1)Solar Energy
It appears that the earlier
However, even if grid parity in solar power is achieved as early as 2015, it would not mean overnight conversion in the
14.2)Towards a Solar Policy
Solar future may be far off for us, if we do not equip ourselves with the right technology at the right time. Easier said than done, but it can be done. This should not, however, mean recruiting non-productive scientists bureaucracy in our R&D institutions and elsewhere, marveling at show case projects. Throwing money at it , does not bring in technology, neither doing nothing and waiting to be supplied packaged technology ,in the rich oil producing Arab countries’ style ,suits us. Private sector would have to be integrated, which is a separate discussion and would be taken up at some other time. It would remain a difficult question as to when to enter into this and how. Although a few things can be done immediately, like introducing solar energy in schools and universities curricula, and augmented by R&D activities in PhD programs should receive immediate priority. That a trained work-force brings down technology induction costs and speeds up the process, would not be lost to anyone.
14.3)The Lessons from Wind?
We may miss the boat for early solar power , if we do not plan for it.. Look at the Wind Power. Despite a forward looking policy, we have only a few MW of wind power installation, although a few projects are at an advance stage of processing, which may mean 100-150 MW of wind power in a few years time. Due to heavy demand of Wind Turbines in the Western markets, no wind power equipment vendor was ready to supply wind turbines to our projects. Long lead times were quoted and not honored. In this atmosphere, obviously prices quoted are high also. Of late things seem to be changing; enthusiasm has shifted to solar energy, and considerable resistance developed against wind power due to noise, birds’ safety and aesthetic issues. Consequently vendors are talking to project sponsors in
14.4)When should we jump in ?
When should we jump in? We are already in it in limited ways , largely on the basis of foreign funded projects , which are also serving as demonstration models for manufacturers as well , and hence the rationale for foreign aid , apart from its philanthropy and ? . Solar PV costs are coming down very fast. Sometimes, in the next five years, solar power may be competitive in off-grid markets, of small and far off villages. For specialized applications such as power supply to communications tower, monitoring stations, pipelines instrumentations, health and education facilities in far off villages , it is already competitive and in demand. In
14.5)Institutional issues
Even if the real days of Solar Power may be ahead in time, there is to be some home work and an enabling policy in place, to guide investors, businessmen, R&D institutions, vendors etc. For example in what areas and villages government is to priorities solar power. What kind of institutional arrangements are required and may be permitted and supported. In this case company model may not work as well as it does for grid power. Cooperative bodies may have to be promotes and the role and functions of such co-operatives may have to be defined. Electricity Co-operatives have worked successfully in The US in the initial days, and have survived till this day. Electricity Coops are going to be in fashion again through out the world and more so in the developing countries. May be for development purposes a few one-MW solar power plants may be permitted every year, which may require auctioning such opportunities. Local content may have to be mandated.
14.6)In Concrete Terms
Following steps are recommended.
1) a limited number of small commercial-demonstration projects may be approved and installed as IPPs, such as in the following;
1.1) one or two solar PV projects of 5 MW each.
1.2) 10 -20 MW Solar Thermal(Parabolic trough) as ISCC with an existing Steam Turbine or Gas Turbine Combined Cycle Plants in Kot Addu/Muzaffar Garh.
1.3) One or two Solar dish 1 MW projects.
These projects may be auctioned to get lowest offers as solicited projects. The preferential feed-in-tariff would not pose a heavy burden on consumer tariff.
2) In the area of Wind Power,there is already a demonstration project in the form of Zorlu.Several projects are at an advanced stage.Now that we seem to have missed the boat on early wind power, we can afford to wait till a reasonably priced Wind Power regime based on some indeginisation can be brought in.Work on this must be initiated sooner than later.
14)Full disclosure and transparency
14.1)Electrical sector
1. Freedom of information act 2003 must be implemented in letter and spirit in the regulated sector of electricity and industry. A visit to websites of Indian utility and government energy agencies may be useful in learning as to how this aspect can be improved in energy sector in Pakistan.
2. implementation of the following two NEPRA notifications must be expected;
Instead of annual reporting, monthly publishing on the websites of individual entities/companies may be instrumental in resolving many problems. A case in point is the NEPRA determination on KESC’s fuel adjustment charge(FAC) where in two and of four member have distanced themselves from siding with and signing NEPRA determination and have written “notes of dissent”. There is a petition is Sindh High court in this respect as well. Had requisite data , mandated in the two of NEPRA gazette notifications( on generation and distribution performance) been implemented and requisite data made available on monthly basis, the scope of confrontation and confusion could have been lessened if not eliminated altogether.
NEPRA has done well by publishing details of “fuel (adjustment) charges(FAC)”, for the first time in May 2010. Earlier it used to simply announced a figure in a few lines statement. We would encourage NEPRA to continue with this practice and even broaden the scope of such detailed publications in this respect.NEPRA should also publish data or/and require agencies such as PEPCO/CPPA to publish data on “Annual Fixed Cost payments”. Although “reference data” is already published by NEPRA in its determinations, there is a significant discretion and detail in this respect. Scope of such disclosure need to be broadened and extended to include IPPs.
14.2)Oiland Gas sector
Oil and gas sector is worth more than twenty billion US dollar in terms of sales and output. Except for Gas T&D tariff and mere posting of petroleum retail prices and gas wellhead prices, there isn’t much to show by OGRA. The sector is almost totally regulated, theoretically, except LPG where there is confusion as to the regulatory domain. Admittedly OGRA works within the framework of the role assigned to it by Ministry of Petroleum (MPNR) and the GOP. It cannot arrogate powers to itself, although it can build pressure towards higher domain and role for itself. The due process is lacking in the following areas: Surely there are and must be rules in the following areas which in itself is not enough. The actual application and adjudication of those rules is to be the subject of due public process, where price is not determined by the market forces. International transparency moves and initiatives these days even go beyond public tariff and pricing determinations. They are demanding Publish what you pay(PWYP)policies and regime, for it has been found that the actual payments vis-à-vis publically determine tariff may be deviating for legitimate and not so legitimate reasons. Following areas should come under some process of public input and scrutiny through the regulatory process of OGRA and the latter should not restrict to posting of results but invoke the whole regulatory input and process into these.
1) Well-head prices of oil and gas.
2) Ex-refinery prices of petroleum products such as gasoline and diesel, including crude oil imports
3) Oil pipeline tariff
4) PSO imports of petroleum products (50% of the total demand is met through imports valued at around 8 billion dollars)
5) Furnace oil pricing despite claims of being in the open sector; and most importantly
6) High Speed Diesel (HSD) pricing.
On the other hand, what little powers have been granted to OGRA, successive leadership of that organization have not chosen to make use of those. For example who stops OGRA in holding public hearing for discussions on the other constituents of petroleum prices, if the ex-refinery (wholesale or producer price) is made an untouchable tree for it?
15)Energy Development Fund
Pakistan is suffering from an Energy crisis , causing social ,political and economic difficulties.The region is a victim of terrorism furthering and pronouncing the aforementioned problems.Lack of timely investments in the immediate past in the sector has been diagnosed as one of the key issue.It is more than a simple government failure. There are structural problems.Current Electrical Power installed capacity is aroun 23000MW.The demand is expected to double itself every ten years,which meansan additional capacity requrement of 75000 MW in the forhtcoming two decades.Besides eneration capacity, this would entail investments in Transmission, and Distribution.Also investments in primary energy production and transportation utilities
..This may require an investment of 200 billion USD.This can be both a problem as well as an opportunty.This is
one area where Pakistan would need support from friendly countries in terms of foreign equity and project loan investments.A commercially
viable capacity building project is being proposed to facilitate domestic and foreign investment in the energy sector.An Energy Development Fund is proposed,which would not be a ecipe of free lunch .The basic idea,as explained in the forthcoming,is that the proposed fund acts as an
intermediating and facilitatiing instrument and institution.
15.1)Energy technology indigenisation
Indegenisation often suffers from chicken egg syndrome ; indegenisation does not occur because lack of an adequate market, while market does not develop due to lack of indigenous resources. A lot of energy and power equipment is labor intensive, bulky and transport cost sensitive, pavng way for local cost efficiency. Except for turbine-generator, the rest of power plant (about50% of the total) can be locally manufactured with lower costs and higher efficiencies. There is abundant evidence from India and China, where coal power plant and wind power plant are produced at 50% of the price level presenting in OECD countries.Western companies do not even compete when Chinese/Indian suppliers are expected to bid. In automotive sector, vendor industry has been developed largely under tariff protection, which cannot be done in the case of energy sector, where near zero tariff regime exists due to the need of keeping energy prices competitive, if not low enough. in the case of power( equipment) industry, Energy Fund may go a long way towards development of local indeginous industry creating jobs, self-reliance, saving foreign
exchange and reducing costs. Apart from cost reasons, local availability is expected to facilitate speedy project completion and lesser cost escalation risks.
15.2)Risk intermediation
There are a wide variation of risks including country political risk, project location etc. The proposed Fund may offer various mechanisms to mitigate risk or offer to share or fully take up
risk premium as a subordinate lan, output grant etc.
15.3)Green Projects
The Fund may also market credit lines, concessionary or otherwise, dedicated to green projects such as alternate energy, energy conservation, energy efficiency, related BMR, CDM etc.
15.4)Commercial Credit lines and Equity Finance
EDF can also source market, manage or intermediate ordinary debt and equity instruments.
15.5)Project Development
To shorten lead times , project identification studies , preliminary and feasibility studies
and other investigations may be financed on grant or concessionary loans basis.
16)Towards Zero Energy taxation
Petroleum taxation is a major cause of inflation in
What is zero-energy taxation regime? Simply put this means integrating the energy sector and its taxation; pooling the taxes and subsidies to balance and cancel each other. This would allow withdrawal of electrical subsidies and reduction in petroleum taxation resulting in falling petroleum prices with the rise in Electrical tariff. This may be acceptable and affordable to all parties; lower prices to consumer, no budgetary loss. Above all, it would be sellable to lenders and donors which pose a major constraint in independent economic policy making.
17)Co-operation with India
Trade with India is permitted in many products. Pakistan would tremendously benefit from trade in Power Technology sector. Indian coal and wind power is probably cheapest in the world and it is next door. Tremendous savings of time and cos t can be made through overland transfer and shipment of often very heavy and bulky power equipment.India has installed 11000 MW of Wind Power .The wind turbine price in India is almost half of what it is in Europe and elswhere.Pakistan-specific powwer plants can be built by Indian companies within Indian borders under a power purchase agreement with Pakistan companies under PPIB rules and tariff .Very interesting and economical propositions can be built . A consensus needs to be created in Pakistan among the stake-holders in this respect .This consensus seeking initiative should be launched by the political leadership. There is a bipartisan support to the improvement of trade relationship with India.Former government of President Musharraf also sought raaproachment with India.
Although one would like and prefer to have China in this role.But China is over-comitted on many projects including the hydel ones , and the latter is expanding into Africa.And India is next door.Several companies like HMC,HEC and KSEW may be revitalised under such arrangements. Otherwise many private sector companies may also benefit from such trade and Joint venture beseides cheaper inputs to the power sector.
Subscribe to:
Posts (Atom)