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