The Power Pic­ture

The power equa­tion in Pak­istan is a many-sided rid­dle that needs ju­di­cious han­dling.

Southasia - - CONTENTS - By Za­far Ma­sud

Pak­istan ha­has been fac­ing an acute power cri­sis and its mul­ti­plier ef­fects on the econ­omy for the last decade or so. The prob­lem has been ex­ten­sively de­bated and many op­tions to over­come it have been pre­sented by ex­perts at the pri­vate as well as gov­ern­ment level. While sug­gest­ing so­lu­tions, one needs to keep in view fac­tors such as af­ford­abil­ity (cost­ing and pric­ing) and avail­abil­ity of re­sources. There are no quick fixes but there surely are ways to solve the prob­lem rel­a­tively quickly.

The quantum of the is­sue is such – for ex­am­ple, the dde­mand-sup­ply deficit is 6000-7000 MWs and grow­ing – that the so­lu­tion should ad­dress this ad­e­quately.

Al­ter­na­tive fu­els, such as those ob­tained from wind, so­lar or waste ma­te­rial as well as run-of-the-river projects, can be the sup­ple­men­tary means to ad­dress­ing this large gap but ththey can't pos­si­bly be the main sources. Th­ese fu­els es­sen­tially of­fer long-term so­lu­tions (12 years and beyond) and will al­ways be limited in scale due to their ca­pac­ity uti­liza­tion and tech­nol­ogy.

The vi­a­bil­ity and cost-ef­fec­tive­ness of other al­ter­na­tive meth­ods can be dis­cussed at length but this ar­ti­cle will fo­cus on so­lar en­ergy.

There has been a con­sid­er­able de­bate about so­lar en­ergy be­ing the so­lu­tion to the power cri­sis but there are three main im­ped­i­ments to the use of so­lar en­ergy. Firstly, it can't be used on a large-scale ba­sis as only a limited sup­ply is pos­si­ble to the grid. Se­condly, the ca­pac­ity uti­liza­tion is very low – be­low 40 per­cent against the

over 80 per­cent in the case of en­ergy pro­duced from gas and coal. Thirdly, this is a very ex­pen­sive so­lu­tion in the medium to im­me­di­ate long term. For ex­am­ple, the tar­iff of so­lar en­ergy after 12 years is es­ti­mated at 17-18 cents which means that it can go beyond 22 cents in the ini­tial years.

The dy­nam­ics of other al­ter­na­tive fu­els can also be seen in a sim­i­lar con­text with slight vari­a­tions in num­bers. How­ever, so­lar en­ergy is in­deed a fan­tas­tic off-grid so­lu­tion for small-scale use such as for do­mes­tic gey­sers, tube-wells, street lights, schools, col­leges, etc. – ba­si­cally for all the places where elec­tric­ity uti­liza­tion is at peak dur­ing the day or is limited to a few hours since high­ca­pac­ity bat­ter­ies are not re­li­able. So­lar en­ergy may be a good so­lu­tion for the up­per and the up­per-mid­dle class house­holds as well, given that it re­quires high in­vest­ment costs ini­tially plus con­stant up­keep of wiring and ap­pli­ances.

That es­sen­tially leaves coal, nat­u­ral gas and wa­ter as the most vi­able op­tions for elec­tric­ity pro­duc­tion on a large scale. Pak­istan is blessed to have th­ese re­sources in abun­dance, which can very well be the main fu­els for now and for the fu­ture. Con­trary to the popular belief about coal and nat­u­ral gas, they are the most vi­able fu­els to ad­dress the power cri­sis in the quick­est pos­si­ble way at the most af­ford­able rates. The typ­i­cal lead time for set­ting up a coal-based power plant is 4-5 years, while a gas-based power project could be con­verted to coal in 9-12 months or even ear­lier on an al­ready func­tion­ing coal mine. In con­trast, the time re­quired to build a medium-sized dam is 7-10 years.

The con­ver­sion of the ex­ist­ing resid­ual fuel oil-based power plants to coal may be another quick so­lu­tion to the prob­lem as it re­quires a ges­ta­tion pe­riod of 15-18 months and can pro­duce 3000-3500 MWs elec­tric­ity.

Of the to­tal es­ti­mated ex­plored and un­ex­plored gas re­serves in Pak­istan – over 66 tril­lion cu­bic feet – the ex­plored re­serves are said to be 29 tril­lion cu­bic feet while our an­nual uti­liza­tion is 4 BCF. The un­ex­plored re­serves are es­ti­mated to be in the vicin­ity of 37 tril­lion cu­bic feet. This is pretty size­able while we also have huge op­por­tu­ni­ties off­shore. Then there is shale gas which is an ex­pen­sive source of ex­plo­ration and must be taken up at a later stage.

The avail­abil­ity of nat­u­ral gas re­serves can eas­ily ad­dress the cur­rent deficit. It can also con­trib­ute sub­stan­tially to­wards the fu­ture en­ergy needs through ra­tioning of the ex­ist­ing re­sources and bet­ter ex­plo­ration and pro­duc­tion ac­tiv­i­ties.

The ex­ist­ing ra­tioning of the sup­ply of nat­u­ral gas to CNG users and sub­si­dized in­dus­tries like fer­til­izer plants could it­self take care of the ex­ist­ing power deficit to a large ex­tent. A com­plete di­ver­sion is nei­ther pos­si­ble nor prac­ti­cal. How­ever, progress has been made in this di­rec­tion – and more is de­sired – by with­draw­ing sub­si­dies grad­u­ally and en­cour­ag­ing gas-based in­dus­tries to switch com­pletely to fu­els like LNG over the next three years.

Another area which needs ra­tioning is do­mes­tic con­sump­tion of nat­u­ral gas (the sec­ond largest user of nat­u­ral gas – above 18 per­cent). This seg­ment needs to be di­verted away from nat­u­ral gas, par­tic­u­larly for do­mes­tic heat­ing. The up­com­ing real es­tate projects should not be al­lo­cated gas or elec­tric­ity. They need to find their own power gen­er­a­tion so­lu­tions, ide­ally through so­lar or, wher­ever pos­si­ble, wind sources. So­lar-run do­mes­tic heat­ing ini­tia­tives should be made manda­tory with fis­cal ben­e­fits – in the form of tax and credit con­ces­sions – to en­cour­age the use of so­lar sources as fuel.

Ad­di­tional pro­duc­tion of do­mes­tic gas is also a way to re­duce the deficit and the cost of power gen­er­a­tion. The in­dica­tive sup­ply curve for do­mes­tic gas in Pak­istan shows that 85 per­cent of do­mes­tic gas costs Pak­istan less than $5 per mmbtu. On the other hand, the cost of RFO and LNG is about three times this level. The Weighted Av­er­age Cost of Gas (WACOG) for do­mes­tic gas is in the range of $3.2 per mmbtu which is why Pak­istan is able to have such a low re­tail price of gas. The WACOG level also in­di­cates that the price of do­mes­tic gas is quite low in Pak­istan de­spite the fact that not all of the coun­try’s gas po­ten­tial has been re­al­ized yet. There­fore, it is crit­i­cal that Pak­istan gives higher pri­or­ity to fur­ther do­mes­tic gas pro­duc­tion.

Ex­plo­ration and pro­duc­tion ac­tiv­i­ties have been lack­lus­ter in the last few years largely due to se­cu­rity con­cerns in the ter­ri­to­ries rich in oil and gas, as well as unattrac­tive well-head prices. The Pe­tro­leum Pol­icy 2012 of­fers prices which are con­sid­ered ad­e­quate by the E&P sec­tor and also al­low E&P com­pa­nies to ap­ply those prices to their ex­ist­ing fields. This can bring fresh in­vest­ment to the up­stream gas sec­tor and, if guided care­fully, more gas can be brought into the sys­tem in the com­ing months. Even if the do­mes­tic gas is priced at $6 per mmbtu as pro­posed un­der the 2012 Pol­icy, it will be much cheaper than any im­ported fuel which costs the coun­try $20 per mmbtu. This would mean that elec­tric­ity will be avail­able to the con­sumer at an es­ti­mated cost of Rs.8 per kwh which is more than half of the cur­rent tar­iff.

Hence, this be­comes the most vi­able so­lu­tion to the prob­lem, both in terms of af­ford­abil­ity and avail­abil­ity in the short­est pos­si­ble time. This may re­quire dis­tri­bu­tion in­fra­struc­ture for con­nect­ing power plants to the grid, which could be achieved within a few years.

How­ever, this so­lu­tion is to ad­dress the im­me­di­ate power short­ages for which the es­ti­mated time­line is 1to 3 years. For the medium term (4-6 years), coal, par­tic­u­larly lo­cally mined, is the best so­lu­tion. For the long term (7 year and beyond), hy­dropower projects should be ini­ti­ated. To achieve a proper fuel-mix, al­ter­na­tive fu­els to the ex­tent of, say, one-fourth of the to­tal mix are es­sen­tial from the long-term en­ergy se­cu­rity per­spec­tive. Th­ese pro­pos­als call for a con­sol­i­dated en­ergy min­istry by merg­ing the Min­istry of Wa­ter and Power with the Min­istry of Pe­tro­leum and Nat­u­ral Re­sources.

How­ever, th­ese pro­pos­als are just one side of the equa­tion to achieve the most af­ford­able and sus­tain­able en­ergy sup­ply. The so­lu­tion to the sec­ond side of the equa­tion – trans­mis­sion and dis­tri­bu­tion – is equally im­por­tant and will be dis­cussed in this space in due course. The writer is a found­ing part­ner of Burj Cap­i­tal, an en­ergy sec­tor pri­vate eq­uity and ad­vi­sory company.

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