Critical factors of Energy Crises in Pakistan

Khan (2007) did a research on ‘Energy Demand in Pakistan’. The research question of this article is; what is the energy demand at disaggregate level? We employ Johansen (1988) and Johansen and Juselius (1990) multivariate cointegration method to examine the cointegration between various components of energy, real output per capita and price level. We will not offering a detailed explanation of Johansen’s methodology because it has well documented in the existing literature. If the null of no cointegation is rejected, then we estimate the dynamic energy demand model by using the following error-correction model Thus, this study examines the demand for energy at disaggregate level (gas, electricity and coal) for Pakistan over the period 1972-2007. Over main results suggest that electricity and coal consumption responds positively to changes in real income per capita and negatively to changes in domestic price level. The gas consumption responds negatively to real income and price changes in the short run, however, in the long-run real income exerts positive effect on gas consumption, while domestic price remains insignificant. Furthermore, in the short-run the average elasticities of price and real income for gas consumption (in absolute terms) are greater than that of electricity and coal consumption. The differences in elasticities of each component of energy have significant policy implications for income and revenue generation. To design appropriate energy pricing policy, up to date estimates of price and income elasticities of gas, electricity and coal demand that this study provides, will prove useful.

Shah and Bhatti (2010) performed their research on ‘Crises of Electricity in Pakistan and Future guideline for Policy makers’. The article has answer to the question of what is the shortfall in supply of electricity energy faced in Pakistan. The root causes of the shortfall in supply are mentioned. Share of different kind of power generating plants in Pakistan is presented in Figure 2. Historical peak demands of Pakistan from year 2002-2007 are presented in Table 2. A forecast of demand and generation for the years 2009-2020 is given in Table 3. A careful examination of the tables 2 and 3 clearly indicates that although Pakistan’s installed generating capacity will increase, the shortfall will continue to exist [Federal Bureau of Statistics 1998]. The government must take steps to overcome this situation. A forecast for next 10-12 years has been made using empirical data and preliminary calculations. A brief review is given about the potential of Pakistan to produce electricity and energy sources it has. Importance of utilizing coal resources of Pakistan also discussed in it. Also potential of water resource for construction of hydro-electric power station is described with mentioning the importance of run of river power station. Short and long term solutions to overcome this crisis are also given. Importance of renewable energy sources such as solar and wind power is discussed in this article. This article provides a brief review of energy crisis in Pakistan and the main area to be focused to minimize shortfall of electricity in Pakistan.

Fraser (2005) did a research on ‘Lessons from the Independent Private Power Experience in Pakistan’. He is senior financial analyst in the South Asia Energy and Infrastructure Unit of the World Bank. The discussion paper answers the question; describe the “orderly framework” developed by the World Bank Group for the IPP workout, and conclude with several lessons learned. The immediate step was to conclude voluntary standstill agreements valid for a period of 30 to 45 days so that a meaningful dialogue could commence on all relevant issues without the IPP companies and the lenders being under a threat of termination of the agreements and without government notices giving rise to further defaults and legal proceedings. The second step was to ensure a fair and just implementation of the IPP contracts. The third step was to set a negotiating strategy for different groups of IPPs. The 1292 MW, $1.6 billion Hub Power Project was hailed as a landmark in the field of infrastructure finance at the time of financial close in 1995. It set an important precedent for the viability of private finance for a major infrastructure project in a developing country. The complex suite of documentation developed together with experience gained by Pakistan officials and institutions during its six years of project development led to the adoption of a Private Power Policy in 1994. Under this policy, 19 independent private power projects (IPPs) reached financial close in record time for an additional 3400 MW. (Four projects, totalling 435 MW were subsequently terminated.) Pakistan earned high praise amongst international developers and financiers and was a model for private sector development in the power sector in the mid 1990s. It was described as “the best energy policy in the whole world” by the US Secretary of Energy following a trip to Karachi in September 1994. That same year, the Hub Power Project was named project finance “Deal of the Year” by Euromoney Institutional Investor. However, by 1998 the Government had issued notices of intent to terminate 11 IPPs, representing two thirds of private power capacity contracted, on alleged corruption and/or technical grounds. Perceptions by the project sponsors of excessive coercion, harassment and heavy-handed legal and other actions have initiated by the Government to renegotiate tariffs or cancel contracts contributed to Pakistan’s fall from grace in the eyes of the international private sector community. A turbulent three year work-out period followed where most contracts were ultimately re-negotiated which coincided with the period when Pakistan was brought to the brink of financial collapse. The World Bank Group played a pro-active role in facilitating the resolution of the IPP disputes, necessitated by its large financial role in the IPP program, and assisted in preventing the crisis from exploding further. The work-out strategy called for the Government to separate criminal allegations from commercial disputes with the former to be resolved through the legal system and the latter through amicable negotiation. Several important lessons can be drawn from the Pakistan experience. Setting a bulk tariff ceiling allowed Pakistan to alleviate its power shortage through private generation in record time; however, too much power was contracted with little regard for least cost expansion. The scale of private investment in generation should be aligned with the country’s state of development with respect to sector reforms and also social, economic, political and institutional governance. In addition, solicitation of IPPs should be on a competitive basis and staggered over a few years so that changes in international investors’ assessment of country and contract risks could lead to declining bid prices. Staggering IPP solicitation and scaling down large IPP capacity would also allow the utility to re-assess demand/supply conditions and adjust the contracted capacity and completion timing for subsequent IPPs accordingly. Since assumed future country conditions at appraisal can be substantially different from what actually emerges, it is important that a transparent bidding process is followed to be more politically sustainable. Finally, while the risk of renegotiation can be minimized by competitive bidding and transparent contracts, this risk cannot be wholly avoided. All parties have to recognize that renegotiation is reasonable provided it is done in a mutually acceptable manner.

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Saleem (2003) did a research article on ‘Technical Efficiency in Electricity Generation Sector of Pakistan’, where he aims to answer the question; what is the impact of Private and Public Ownership in Pakistan? This paper aims to test the null hypothesis of the existence of technical efficiency in publicly owned firms. This is achieved by using the annual reports of the companies and collecting data during field visit to electricity sector of Pakistan. This paper conducts a comparative technical efficiency analysis of 21electricity generation plants (12 private and 9 public) using panel data of 6 years (1998-2003), and two stat-of-the art methodologies: Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA). The results show a mixed technical and scale efficiency scores for the public and private generation plants. There are some public and private firms, which have high technical efficiency scores. However the results also suggest that the public ownership has a negative impact on the technical efficiency of the firms. Due to less apparent differences in production structure between, public and private plants, it is suggested that benchmarking of public firms using private plants as a comparators, is feasible and desirable. On a more empirical basis, our study bridges an important gap in research on the technical efficiency of private and public electricity generation sector. The analysis also shows that there is not a big difference in the production structure of public and private plants, therefore, after adjusting the inefficiency factors like load factor, system losses, maximum demand and per capita consumption of electricity sector could effectively be benchmarked against each other.

Basharat (2010) wrote an article basically based on the question that ‘Where has all the power gone?’ He is the member of centre council institution of electrical & electronics engineers Pakistan. It was extremely surprising to read Naeem Tahir’s article on the Power Sector as appearing in the op-ed pages of Daily Times of August 7, 2010. The gentleman’s foray with comparatively less insight into the subject has resulted in a skewed analysis. Consider. As against what has been written, we see that it was the immense load shedding in late 2007 that led to the demise of the earlier political set-up and that the power deficits were carrying on since 2004-05, albeit spread away from the bigger of the urban areas. The writer is again wrong when he casually mentions Pakistan’s demand of April 20, 2010 as 14,500 MW, whereas in actuality it was 17,000 MW on that day, while it reached the 20,000 MW mark during late June and early July this year. Indeed, it was 14,500 MW for the PEPCO area (excluding KESC) and the low production of that day was on account of extreme low hydel generation of only 2300 MW against the projected 4,000 MW or so. However, because of lower temperatures and inundation of large areas, the demand for the last few days has remained a little less than 18,000 MW.

Mr. Tahir thereafter presented the list of power stations that were once (installed in the country since 1959 till 1992) and then simply sum totals the installed capacities, which incidentally have no relevance with the present capability of these very plants. The various technicalities related to power house operations and availability thereof during various times of the year was also ignored. Actually, it has to be understood that immediately on installation, power generation equipment reduces in capacities, which thereafter is only maintained through stringent maintenance and rehabilitation processes. In case, somehow, the needed level of maintenance is not able to be conducted, then the capacities de-rate like anything. Actually, during the last 15 years in general and the decade in particular up to 2008, the Power Sector was denied the required funds leading to overall stunted generation capabilities.

Bhutta (2010) wrote an article on ‘Wind Power Projects and Role of Government’. He is an energy specialist. The article revolves around the research question; what are the initiatives are taken by the government of Pakistan considering wind projects? Energy is the engine of economic growth. Wheels of economic growth have started to move at a faster pace during the last 4-5 years and Pakistan’s economy had grown at an average rate of about 7% during the last three years. The demand of energy is also expected to grow almost at the same ratio and is expected to increase from about 60 Million Tonnes of Oil Equivalent (MTOE) to about 360 MTOE by 2030. To meet energy needs of Pakistan’s and to maintain the energy security the Government of Pakistan has formulated a medium to long-term energy strategy as a part of Vision 2030, that aims to ensure availability of sufficient energy on sustainable basis at affordable prices to achieve planned economic growth rates. The principle to be adopted is that the wind IPP will be made immune to factors which are beyond its control (i.e., variability of wind speeds), but fully responsible for factors within its control (i.e., the availability of the plant). The energy mix of Pakistan is not diversified. Only three energy sources, i.e. gas, oil and hydropower, account for 92 percent of the total primary energy supplies. There are under-exploited indigenous energy resources in Pakistan that includes renewable energy especially wind power. Currently, activities are being made to increase development of wind resources. Pakistan’s electricity demand is rising rapidly. With the up-turn of the economy, the demand of electricity is expected to increase by about eight fold by 2030. In order to manage the situation and improve the primary energy mix, the indigenous resources wind and hydro has given due weightage in the Energy Security Action Plan (2005-2030) Strategic directions of energy sector development include supply based on optimum energy mix, maximum utilization of indigenous resources with emphasis on development of wind power. It is envisaged in the Vision 2030 to increase renewable energy share to 9,700 MW by 2030. The Indigenous resources including reserves of wind power could not be exploited in past. The constraints on development of wind power include overall shortage of investment funds, high initial cost, lack of local technology, trained human resources and non-availability of wind mills. Therefore, the Government of Pakistan has announced its first ever Renewable Energy Power Policy – 2006 by the newly created Alternative Energy Development Board (AEDB). Thereafter, AEDB has issued 93 Letter of Interest (LOI) for 4605 MW from the total identified wind power potential of 41,000 MW to the private investors. The private investors are in a process of conducting feasibility studies and land acquisition. National Electric Power Regulatory Authority (NEPRA) has announced a levelized upfront tariff of 9.5 cents/kWh for wind power generation for 20 years. This paper gives a brief account of current status of wind power projects and role of various government departments and policy in the development of renewable energy sector of Pakistan. It also includes the procedures involved and formalities to be fulfilled for approval and funding for public sector energy projects.

Khan and Qayyum (2009) did a research on ‘Electricity demand in Pakistan’. The research question that has been made base for this literature is; analyse the demand for electricity in Pakistan? The energy demand literature suggests that income and price elasticities have been used to understand demand patterns and to undertake other activities such as forecasting, demand management and policy analysis (Bose and Shukla, 1999). Reliable income and price elasticities are more relevant in designing public policies on restructuring because price is the major component of reform (Narayan and Smyth, 2005). .This paper examines the patterns of electricity demand in Pakistan over the period 1970-2006 using autoregressive distributed lag technique to cointegration. Long run and short-run price and income elasticities are examined for the national level and for the three major consumer’s categories- households, industry and agriculture. The overall results suggest that income and price elasticities possess expected signs at aggregate and disaggregate levels in the long run aswell as in the short run. The error correction terms possess expected negative signs and are highly significant with reasonable magnitudes. Furthermore, the estimated long run and short-run electricity demand functions remains stable over the sample period. The results thus convey important information to the agents operating in the electricity market regarding the pricing policies and helps in planning the future strategy of electricity demand management. The findings of the present study carry important policy implications for Pakistan. The estimates of electricity demand equations can be used for the policy purposes, since these are stable and do not suffer from any structural break. Given that our results suggest that increase in the number of electricity users and changes in pricing policy can increase revenue both in the long run and in the short run, the argument for policy relevance gains more strength. To design electricity pricing policy, up-to-date estimates of price and income elasticities of electricity demand that this study provides will prove useful. The policy makers and private investors could benefit from this study because it provides useful information regarding the market for electricity consumption.

Solar Energy Research Centre (SERC) did a study on ‘Introducing solar power in Pakistan’. The study answers the question of; what is the importance of solar energy in countries like Pakistan? In the developing world, the availability and cost of power can play a vital role in economic development and people’s well-being. As countries become wealthier and their populations grow, demand for energy increases. Traditional sources of energy are often too expensive to satisfy this demand. There are also concerns about the limited reserves of fossil fuels and their environmental costs. Solar energy, in particular, is an excellent alternative to fossil fuels, particularly for such developing countries as Pakistan that receive high levels of solar radiation. More and more countries, therefore, are introducing economically and environmentally sound energy policies and are turning to solar energy for a wide range of uses, including cooking and water heating. However, people are unlikely to adopt a completely new technology until they know something about it and have seen how it works. They need to have access to clearly presented information that explains the technical and economic benefits of replacing long-established traditional methods with new, innovative ways of doing things. This means that the new technology must be readily available. When this project began, the Solar Energy Research Centre (SERC) in Pakistan had already developed designs for solar geysers and cookers suited to the country’s socio-economic conditions. However, the Centre did not have facilities to manufacture these devices at affordable prices and of high enough quality. With US$2,500 in funding, SERC was able to establish an up-to-date facility for the mass production of solar geysers and cookers and provide all the necessary technical support, service implementation and management for such a facility.

Looney (2007) did research on ‘Sustaining economic expansion in Pakistan in an era of energy shortfalls: growth options to 2035’. The 1960s, 1980s and early 2000s have been periods of rapid expansion in most of the standard macroeconomic growth indices. In turn these have affected, albeit to a lesser extent, the many measures of individual energy supply and demand. Drawing on the empirically-based complex links between energy and the economy, several alternative scenarios of growth and energy needs are developed in an attempt to answer several key questions. In particular, what are some of the key interrelationships between sources of energy demand and supply? What are the economic growth consequences of alternative energy availabilities and, in turn, how do these growth patterns affect the subsequent energy supply and demand patterns? What energy strategies are suggested by the interconnection between the country growth requirements and energy needs? Are these significantly modified under rising or falling energy prices? Pakistan’s recent economic acceleration together with rapid rates of population growth is having a significant impact on the country’s energy supply/demand balances. Energy supplies in turn affect the pace and pattern of the country’s economic expansion. Based on the analysis, several guidelines are drawn for the country’s future energy policy.

Weynand (2007) did a research on ‘Energy Sector Assessment for USAID/Pakistan’. The Mission’s Economic Growth team requested that EGAT’s (economic growth, agriculture & trade) Office of Infrastructure & Engineering send out an energy expert in March 2007 to assess Pakistan’s energy sector with an eye to answering three questions:

How is energy contributing or constraining Pakistan’s economic growth?

What assistance needs to be provided to Pakistan’s energy sector to foster economic growth?

What role should USAID play?

He and his team Maintaining and expanding energy services within Pakistan is crucial to the economic growth of the country. During the course of this assessment two critical needs have been identified: (1) providing more energy supplies through expansion AND conservation; and (2) increasing access to modern energy services to un-served regions and population groups. The two major challenges that must be overcome to satisfy these needs are: (a) aligning economic incentives through policies, regulations, subsidies, tariffs, prices, collections, and taxes to improve fiscal discipline and transparency, attract investment, and encourage energy conservation and efficiency improvements; and (b) creating sufficient capacity to empower stakeholders such as the Government of Pakistan, the private sector, NGOs, and energy consumers to both implement and respond to the incentives framework.