Thursday, February 24, 2011

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 Middle East.. Total Middle East Oil and gas resources add up to equivalent of 385 billion tons of Brown coal, out of which Iran and Saudi Arabia own 110 billion tons of coal equivalent each. Pakistan’s Thar coal is 185 billion tons. There is an urgent need to develop THAR coal, without which Pakistan’s energy problem can not be solved. Federal Government (GOP) and its institutions must support THAR coal development. Only coal is provincial subject, but electricity remains a federal subject even after 18th amendment.Similarly Hydo and Wind potential offer near term solutions.

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 India, this size of coal projects are being planned already. The feasibility of this proposal in Pakistan context can only be tested once it is actually tendered. The second option would be to float tenders for establishing a mining development company that undertakes to develop and finance the infrastructure and manages the Thar coal operations on behalf of the Sindh government, within the framework of the relevant rules and regulations. The company recoups its investments by granting mining leases and charging a fee on coal production by individual companies. Obviously such a company would be a multinational which may have a joint venture with local private sector and government of Sindh’s share in it. Such a company would offer many advantages. First of all to bring in finances, which appear to be well-nigh impossible for Sindh government to finance? Secondly, the operations would be more commercial like and would be on fast track.

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.


8.1)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 US target of achieving grid-parity in 2015, meaning that solar power becomes competitive with fossil power on the electric grid, would be achieved. The indicators are several; last month, the quoted capital cost rates in the U.S. markets came down to 3.5 USD per KW, it used to be more than twice this figure only some years back. Solar cells of high thermal efficiency (mono-crystalline Si- 17.5% efficiency) are costing less than 2.5 USD per KW, and thin- film lesser efficiency ones are being sold at 1.0 USD per kW or less. In China, several government contracts have been made at the rate of 1.5 USD per kW for domestic power, although Chinese rates, especially in the domestic market do not quite reflect true costs and prices. Still, it gives some trend.

However, even if grid parity in solar power is achieved as early as 2015, it would not mean overnight conversion in the US, Europe and Japan. It would take a long time to develop production and supplies infrastructure. Solar and other renewable market share in the developed world may not exceed 10-15 % by 2030, although new fossil plants construction rate may come down very significantly by that time (2030).

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 Pakistan, and hopefully would be offering reduced prices that may not necessarily translate into lower NEPRA tariff for reasons we have been discussing elsewhere. Prices in Pakistan do not come down so easy and automatically!!

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 Bangladesh, reportedly, a PV-LED combination has become very popular and successful in villages, where a 20 watts PV –LED power is lighting the lives in rural homes. The rent/tariff, it is said, has been kept as low as their kerosene budget for lighting. Not a bad deal, if that can be replicated here in this country.

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 Pakistan, especially in sensitive prices index. All daily consumption items have to be transported from long distances to retail outlets and daily workers travel to suburbs which are at the city limits requiring major transportation expense. Petroleum taxation and in general all indirect taxation has been guided more by practical reasons of collectability at source or purchase and rather than much economic rationale. A marginal petroleum tax may still be maintained to cover the user charge and financing needs of the transportation sector.

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.

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