Taming the monster of higher electricity prices-II

Power sector problems in Pakistan are acute, chronic, and have accumulated over decades. They are also multi-dimensional and not restricted to any one aspect of the sector. They all, however, have culminated into feeding the monster, “the higher-than-normal electricity prices”. There is no easy way out of the present quagmire. A carefully-crafted reform program will be needed to plug the holes in the short-run and a treatment spread over medium- to long-run to heal it back to health.

An old English saying offers a short-term remedy: “If you find yourself in a hole, stop digging”. The first step to stabilize the patient will be to stop further aggravating of his disease. So, no more contracting of large-sized and high-upfront cost power projects, conventional or non-conventional, through long-term agreements. In the changed, and still changing, energy landscape, 3 to 5 years is a long-term now. Making any commitment beyond this period would carry high risks which must be avoided.

Use the standard economics principle of spreading the existing high fixed-costs of previously-contracted projects by expanding the existing revenue base and embracing new demand by offering incentives. Many existing consumers may not have deserted the grid or reduced their consumption for higher monthly bills alone. Excessive interruptions or poor service quality might have compelled them. These alternatives may still be inefficient and more expansive than the grid supply. So, find the reasons behind their frustration and win them back by addressing their grievances.

Conduct fresh surveys to create a database of each consumer’s connected loads, their pattern of use, his future plans to add or modify his loads, and in particular, his present or expected reliance on alternative options. Use this information to devise future tariffs by making a shift from the present volumetric (kWh) based rates to segregating the tariff into a fixed monthly capacity charge and variable energy charge. Given that 50% of the electricity consumption is from residential consumers, it will help recover the sunk costs from the consumers who use grid as backup and will avoid shifting these to remaining consumers.

Improve current system operation practices to squeeze additional capacity out of the existing generation and T&D facilities, and relieve any existing constraints. Lack of access to real-time data may not be enabling operators to use the existing T&D facilities to their limits. Such data access could permit them to improve their use, thus enabling them to enhance power transfer through these networks and dispatch generation, as much as possible, to its true economic potential.

“Net Metering” is a good scheme to promote renewable power in the country, but under the present situation in which demand on the grid is eroding, its aggressive promotion would exacerbate an already serious situation. Continue it, by all means, but revise the tariff and other TORs for “Net Metering” customers to recover fixed costs of the legacy grid facilities from them.

Understand demand and its patterns within the industries, especially their use of captive power facilities and other fuels for processes that can be converted to electricity. Start a campaign to win back the consumption that has switched to captive plants. Also, seek new demand that can be served within these industries from grid supply. Obviously, this will require some incentives, so be willing to offer such incentives if their long-term benefits exceed their short-term costs.

In the medium-term (next 3 years), avoid building any new central-station plants and T&D systems. Plan to serve any new electricity demand in the country, as much as possible, by squeezing additional capacity out of the existing systems through grid modernization efforts and distributed renewable power generation located as close as possible to the load centers.

System planning will also need to change. The traditional approach consists of aggregating forecast demand in the country and meeting it through a least-cost sequence of generation and T&D capacity additions. Bigger is no more better or cheaper, as small, distributed, and renewable power technologies now offer feasible options to serve demand at or near the source. So, shift the point of business-case evaluation, from generation terminals to the distribution substation.

NTDC’s latest draft Indicative Generation Capacity Expansion Plan (“IGCEP2047”) envisages 50,000 MW of new generation capacity to cater to peak demand of 44,000 MW and 6,500 MW of to-be-retired capacity by 2030, raising the total in its system to 76,000 MW, and indicating a “reserve margin” of roughly 70%. The cost of all this additional capacity can easily top USD 70 billion, and is fearsome for multiple reasons.

First, 60 to 65% of investment in the grid typically goes to generation, 10 to 15% to transmission, and 20 to 25% to distribution. Roughly, the cost of serving one megawatt of demand at or near its source helps avoid 1.5 to 2 megawatts of capacity upstream if we count all the costs from generation to consumer end. For a few megawatts of demand, it may not matter much, but if seen in the context of USD 70 billion needed to serve the demand by 2030, the avoided cost potential acquires a serious meaning which must not be left to traditional planning.

10 to 15% investment in transmission system may appear insignificant in the overall supply portfolio, but it is the most critical part, as a solid, robust, and resilient grid provides backbone to the whole system

Second, 10 to 15% investment in transmission system may appear insignificant in the overall supply portfolio, but it is the most critical part, as a solid, robust, and resilient grid provides backbone to the whole system. This is because it contributes significantly to optimizing generation requirements and then enabling their operation in the most efficient, reliable, and economic manner. Modernizing the grid by deploying intelligent and smart telecom technologies, with only a fraction of the overall cost, can help avoid a substantial portion of the investment required otherwise.

Third, 15 to 20% “reserve” capacity over peak demand is just normal but the IGCEP2047’s figure of 70% is way too high. The report attributes this to cover the intermittency and variability of the “30% by 2030” target for renewables. This should be an eye-opener for our policy makers, as it reveals the serious consequences of setting targets without proper studies. Renewable power generation is a highly cherished goal but developing it exclusively via the central grid may not be the best policy. It has to be pursued with careful study. Therefore, it should be left to systems planners to determine the most appropriate sequence and avenue for their uptake.

The remedies suggested for the short-run will only help stop the patient’s bleeding while those in the medium-run will acclimatize him for the main surgery that can best be performed only in the long-run (3 to 5 years and beyond). The whole power sector will require a thorough revamping and overhaul-its system, its regulation, its institutions, its business model, and its investment and pricing schemes. These can only be accomplished gradually, with patience, and over a long-run.

The hallmark of a viable future power sector in Pakistan will be a liberal legal, policy, and regulatory framework that can transform the currently dysfunctional power sector entities into an agile and nimble set of system operator and T&D service providers. These entities, must not have any interest in the sector, but only provide a facilitative platform to a host of diverse and disparate market actors to exchange their products and services through the grid in a competitive market that enables settling prices for these strictly in accordance with the value these provide to customers.

The settling of future electricity prices through an efficient and smart grid and in a competitive market will take the sting out of the monster and gradually neutralize it. More than anything, it will prevent it from growing into fearful Frankenstein.

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