Energy puzzle

The macroeconomic focus is clearly transitioning to growth. To make it sustainable, the energy sector puzzle needs to be resolved. There will be no eureka moment as there are many dimensions. All these are required to be dealt with simultaneously. Power ministry alone cannot achieve all the results. But the role of finance ministry is imperative since most of the energy issues are financial – it is a fiscal issue. Earlier, finance ministry was not taking ownership, but Shaukat Tarin must lead from the front. It seems that he is in full support of reforms and renegotiations.

The government wants to reduce the circular debt and at the same time desires to provide power at affordable rates. There are both numerator (cost) and denominator (consumption) problems. One cannot ignore numerator as lower tariffs would result in higher circular debt. The per capita electricity consumption is too low and is bound to grow with higher economic growth.

It is a complex equation. Multiple simultaneous steps along with stroke of luck can take us home. In Pakistan, grid is largely catering to domestic consumers. Without significantly increasing industrial consumption, capacity payment per unit cannot reduce. Industrial demand is highly correlated to GDP growth. Economic growth is a function of investment. Investors’ confidence is eroding due to growing circular debt.

The first step required for bringing industry to the grid is by assuring quality supply at affordable rates. The transmission and distribution system in pockets where there is high industrial demand needs to be upgraded. Then, the captive power users must be incentivized to move to the grid. Moreover, there is excess supply in captive segment too. It is not easy to move.

The government has taken some simple steps, and they are yielding results. The incremental consumption of B2 to B4 industrial consumers is billed at a discounted rate. Those who were relying on captive, every incremental unit on grid is becoming cheaper. That is making some industrial consumers to move to the grid.

Industries usually operate in clusters such as around Faisalabad and in areas of Karachi. In summers, the prime focus becomes domestic consumers. Industry needs energy around the year. Transmission and distribution networks in these pockets should be upgraded on a priority basis. Moreover, line losses and recoveries shall improve and for that to happen, moving Discos into private hands is imperative.

A new industry is coming online as well. One percent of GDP industrial expansion loans are sanctioned under Temporary Economic Refinance Facility (TERF). These will add to the energy demand. Overall, better economic growth will let the existing industries to consume more. The grid reliability assurance cannot be overemphasized.

Then the domestic consumption is skewed in summers and baseload is added to cater that. The consumption falls to a small fraction in winters. In North, natural gas is the fuel of choice for heating. These are to convert to electricity. The government should bring schemes of lower tariff for incremental electricity consumption by domestic users in winters.

The good thing is that the government is planning to do so. In this summer, there might be aggressive marketing on the benefits of using electric heating appliances. There should be subsidised financing for these. All these steps are needed to be supplemented by higher gas tariffs.

Boosting consumption will help solve the denominator problem. Growing cost cannot be ignored. If the tariffs increase, denominator would suffer. Thus, solutions are warranted without increasing tariffs.

The government deal with pre-94 and 94/2002 policy Independent Power Producers (IPPS) (barring a few) power plants finally seems to be done. The wind power plants under the 2006 policy did not sign the contract as their lenders demanded a similar treatment with the China Pakistan Economic Corridor (CPEC) projects. Then the massive investment commitment in transmission and distribution by western-influenced multilaterals requires some bending by Chinese too. That is perhaps making Chinese unhappy.

The government needs to strike a delicate balance. The real juice is in debt restructuring of front-loaded projects under the 2015 policy (including the CPEC). The government is doing with its own. There are talks of using “dry powder” in the CPEC to be used to pay off Chinese power sector lenders for the next three years. Someone must bell that cat. Other small steps such as retiring old power plants will help too.

The time is not with us. The circular debt is growing at an alarming pace. The elephant is shaping up into a gorilla. Shaukat Tarin and Tabish Gauhar are both doers. They should push the accelerator paddle on energy reforms.

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