Introduction
According to the Ministry of Finance, the energy crisis is the largest single drain on Pakistan’s economy, shaving off up to 2 percentage points from annual gross domestic product growth in the country. The current energy crisis began to manifest itself in earnest by late 2007. Although the causes of the crisis are structural, the immediate trigger was the 2007 global commodity price boom, when oil prices almost tripled over an 18-month period. The unprecedented fuel inflation was a key factor in the 36% increase in Pakistan’s import bill in fiscal year 2008 and the consequences of an energy generation policy that relies heavily on oil-fired thermal generation became all too clear.
As energy crisis is the largest single drain on Pakistan’s economy, this crisis stems from a fuel mix transformation initiated two decades ago, when power generation came to rely more on imported furnace oil than hydro-power. The resultant increased power generation costs, coupled with the high proportion of line losses, have led to the need to increase tariffs, while causing losses to power generation, transmission and distribution companies. This in turn has given rise to the phenomenon of circular debt in the energy sector, whereby slippages in the payment of bills (particularly on the part of public institutions) trigger a chain of delayed payments for imported furnace oil, natural gas or other inputs to the thermal generation system, which in turn hamper the operation of the power plants and result in less than optimum capacity usage. In addition, the energy crisis is a significant drain on the government’s resources, with energy subsidies taking up a substantial part of the federal budget. Under an International Monetary Fund agreement of September 2013 the government is committed to clearing the circular debt, adjusting tariffs to improve resource allocation and encourage conservation, and implementing fuel policies aimed at ensuring natural gas supplies to power plants.
Origins of the crisis While 2007 is considered the starting point of the ongoing energy crisis, the issue has its roots in policy decisions taken two decades ago. In 1994, when only 40% of the population had access to electricity, Pakistan was facing power shortages of about 2,000 MW during peak load times (Pakistan, 1994). The government of the day assessed that the average annual increase in power demand would be about 8% in the short to medium term, and generation capacity of the order of 960-1,300 MW would have to be added to the system annually from the mid-1990s onward to meet the demands of a growing economy. The scale of investment required was deemed to be well beyond what the public sector could muster. By 2013, however, the proportion of power generation from hydro and nuclear sources was about 36%, while the proportion of generation from furnace oil-fired sources was almost equal at 35%. Gas-fired plants accounted for 29% of power generation, while coal-fired plants accounted for a minuscule 0.1% of generation. Thus, in less than two decades the fuel mix for power generation underwent a significant transformation.... continue....
Conclusion
Pakistan’s energy sector has become a major drain on the economy and is impeding growth, both because of power shortages (which have affected small manufacturing enterprises and services in particular) and because of the budgetary impacts of energy subsidies, which divert much-needed resources from more productive sectors. The energy sector has become a focus of public policy in recent years and has garnered the attention of international financial institutions, including the IMF. Pressure for reform of the sector as a whole, and the power generation, transmission and distribution regime in particular, has grown substantially. The government is obliged to carry out tariff adjustments, remove subsidies and ensure a level playing field for all private sector entities active in power generation, in addition to other policy and governance reforms. The process has got off to a rocky start, with the judiciary calling into question the power sector regulator’s authority and competence. How the government handles this delicate situation in the face of skepticism from state organs and hostility from consumers remains to be seen.
Post a Comment