Wednesday, October 27, 2010

LPG sector; has open market regime worked

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

Tuesday, October 26, 2010

Re-organisation Of electrical sector; the closure of PEPCO

Reorganization of Electrical sector: closure of PEPCO issue ?

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

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

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

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

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

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

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

Monday, October 25, 2010

Electricity for All-rural electrification ?

Electricity for All ,Rural Electrification ?



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

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



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

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

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

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

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

Thursday, October 21, 2010

Should Coal be imported,inspite of Thar Coal ?

Should Coal be Imported , inspite of Thar Coal ?

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

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

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

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

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

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

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

Converting Oil-fired Power Plants to Coal

Converting Oil-fired Power Plants to Coal

By Akhtar Ali

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

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

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

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

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

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

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

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

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

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