Expensive Energy

Pakistan's economy is currently passing through many internal and external challenges and threats. The most prominent among them is energy. In the last decade there was shortage of gas and electricity in the country. As of today, there is over-capacity in power as well as exorbitant tariff rates which render energy unaffordable for all consumer categories.

Over the last 10 years, the domestic gas supply has stagnated at 4 bcf. There was a time, 26 foreign Oils companies were operating in Pakistan which have now dwindled to only 3. This is a sad reflection of the official apathy that has been extended to this sector. It may be that we were only focused on signing expensive RLNG contracts. It is high time to work on supply side issues of gas sector.

The energy tariffs in Pakistan are now one of the most expensive in the world. The very high upfront tariff and capital costs have resulted in the high price of electricity and loss of competitiveness of Pakistani Exports and Industry leading to a massive Balance of Payments crisis.

On the electricity front: There are two coal power plants, which are working in Pakistan on exorbitant tariff rates. Port Qasim and Sahiwal Coal Power Plants of 1320MW each are getting the tariff of USc 8.3601 & USc 9.16, respectively, as per Nepra determination and delivering 9.25 billion units of electricity per annum, separately. These plants are allowed to include the cost of the jetty and additional transportation cost in the upfront tariff which further enhanced the tariff
structure. Over-payments to these two projects are estimated to be $ 475 million per annum and over the life of the will be more than $ 14.25 billion.

On bidding for Jamshoro Coal Power Plant (1320MW) the tariff has been set at levelized 6.2 cents by Nepra. This is a reflection of the high costs associated with projects that are not subject to competitive bidding.

India's Mundra Ultra Power Coal Project (4000MW) is far cheaper than Pakistani plants on a tariff rate of Indian Rs 2.64/ Kwh. Bangladesh signed three contracts of coal-fired power generation at the same time, the average tariff for the power plant was set at 5.42 US cents/Kwh.

On the solar side, 4 power generation projects (100MW each) are operational in Pakistan with first 10-year tariff rates of 18 to 19 cents/kWh. Whereas solar tariff in India is between 7-8 cents. As solar tariffs cannot be directly compared across countries due to the difference in the solar radiation and the only logical comparison, in this case, is India, the tariff comparison for the same period of projects is given as:

Projects                              Capacity               Location                 Reference
                                            (MW)                                                    Tariff
Solar projects(100 each)       400                    Pakistan                  18.04
NSM Batch                            350                    India                         8.79
Uttar Pradesh Phase 2          215                    India                         8.04
Punjab                                   500                    India                         5.65
Rajasthan- 420 MW bundli    420                    India                         4.35

There are 17 wind power projects and they are operating on a high upfront tariff approved at Rs 15.322/Kwh levelized. Assumed capital cost of these projects is in the range of $ 1.5-1.8 million/ MW while worldwide average at the US $ 0.8 million, in India it is less than the US $ 0.7 million. Current worldwide Wind power tariffs are as low as 2.6 cents/Kwh, world average tariffs are around 6-7 cents/Kwh.

The household sector, as well as industrial sectors, are paying high tariffs as compared to regional tariffs which are making them locally and globally uncompetitive. Consumers in Pakistan are paying high prices with low per capita income and worldwide consumers are paying lower tariffs with far higher per capita income. This declining worldwide tariff implies that our industry and economy will further face a relatively higher cost of production even if our electricity rates remain the same as today.

The government needs to identify the factors behind the determination of high tariffs and revisit the tariff structure so the economy may get rational tariff structures leading to higher economic growth. The government could also consider the capacity payments to be sunk costs and not charge the consumers for the inflated costs.

On gas side, it was decided to import RLNG to cover the demand gap which is unaffordable and uneconomical. The rate of domestic produced gas for industry is Rs 600 per mmbtu and rate of imported RLNG is Rs 1700 per mmbtu. The cost of gas/RLNG includes an unrealistic level of Unaccounted for Gas (for gas/line losses) of over 10%. The partial solution to the problem can be found through the extensive exploration focused on the areas where there are known structures and are confirmed to have gas. One such area is Block-28 which has recently been acquired by Mari Gas Company. This is by far the most promising exploration acreage in Pakistan with expectation of reserves exceeding the Sui field in multiple structures. It is hoped that Mari Gas Company will rapidly deploy exploration in the area and waste no more time as this area had been in force majeure since 1991.