Power Sector Distortions a major hurdle for Pakistan’s development: World Bank

January 10, 2019 (MLN): The World Bank, in its report titled 'In the Dark’, has termed electricity shortage as one of South Asia’s most significant barriers to achieve its development. The report also identifies distortions in the electricity supply chain that cause power outages and estimates their economic costs in Bangladesh, India, and Pakistan.

Ever since its inception in 1947, Pakistan’s power generation capacity has journeyed a long way from 60 megawatts (MW) to 25 gigawatts in fiscal year 2017, whereas share of the population with access to electricity grew from less than 60 percent in 1991 to an officially estimated 98 percent in 2014.

However, the gap between projected demand and actual supply has been widening at an alarming rate since 2006, to the point that it is now the most unreliable in the world, disrupting business operations and people’s lives.

In an effort to close the gap between electricity demand and supply, the government has been seeking new sources of fuel. It started importing liquefied natural gas (LNG) in 2015 and has begun mining the Thar lignite deposit. Coal has historically played a negligible role in electricity production in Pakistan, accounting for less than 1 percent in 2014. But some government estimates suggest that potential future investments in coal-fired generation could increase that share to 30 percent.

Electricity shortages in Pakistan stem from several institutional and regulatory causes. Reducing these shortages will require comprehensive sector reform aimed at addressing inefficiencies in the allocation and distribution of natural gas, increasing fuel efficiency in electricity generation, reducing losses in the transmission and distribution of electricity, and correcting pricing problems in the electricity market.

The World Bank recently supported the government of Pakistan in some of these reform efforts through two Power Sector Reform Development Policy Credits. Deepening energy sector reforms would also provide opportunities to limit future reliance on coal.

Even though oil products and natural gas continue to be the largest sources of commercial energy supply in Pakistan, the intensified use of it has led to a widening gap between supply and demand.

Gas shortage for electricity generation has increased reliance on expensive imported oil. The growing reliance on oil-based generation has increased both the country’s trade bills and the cost of electricity. Domestic oil production meets only 17 percent of the country’s oil needs for electricity generation; the rest must be imported.

Adding to the problem of a low gas supply, Pakistan loses more than an eighth of gas during delivery. Both Sui Southern Gas Company Limited (SSGC) and Sui Northern Gas Pipelines Limited have performed poorly in managing distribution networks, leading to high levels of unaccounted for gas (UFG).

Many factors have contributed to the high level of gas losses in Pakistan, but the main causes can be traced to the ways in which SSGC and SNGPL are regulated. No regulatory mechanism links their financial returns to their operational efficiency.

Despite the government’s ambitious plans to privatize distribution and generation companies, the Ministry of Energy controls and manages all 10 distribution companies in Pakistan. Only in Karachi is distribution privately provided, by K-Electric, a privately owned, vertically integrated utility that controls generation, transmission, and distribution.

Pakistan also has the worst power outages in the region as measured by both duration and frequency. The 2013 World Bank Enterprise Survey found that 81 percent of firms in Pakistan reported being affected by outages, typically lasting 17 hours each.

Power outages have forced hundreds of factories to downsize or shut down in the past few years, resulting in a drastic contraction of exports. Textile manufacturers, which account for more than half of Pakistan’s export shipments, say that the frequent outages and long hours of load shedding make it difficult to meet order deadlines. Small and medium-size factories suffer the most because they have fewer options for coping with power outages.

The impact of lack of reliable access to electricity on households and firms imposes the largest cost on the economy, estimated at $12.87 billion (4.75 percent of GDP) a year in fiscal 2015. It includes the potential income lost by the roughly 5 million people who still live off the grid and the millions of households and business that are affected by power outages.

The second-largest sources of distortion include the inefficient allocation and delivery of gas and underinvestment in transmission. Each is estimated to cost about $1.1 billion (0.41 percent of GDP) a year. The power sector does not get highest priority in gas allocation. Diverting gas from fertilizer to power generation would increase electricity supply, reduce oil imports, and lower domestic fertilizer prices. Lowering UFG during transmission and distribution would further reduce domestic gas shortages.

The third-largest distortion is inefficient electricity generation, which is estimated to cost Pakistan about $0.96 billion (0.35 percent of GDP) a year. Other large economic costs stem from inefficient electricity distribution, estimated at $860 million (0.32 percent of GDP) a year, and gas and electricity underpricing, each estimated at around $360 million (0.13 percent of GDP) a year. Reducing inefficiencies in generation and distribution would increase net electricity supply whereas removing energy subsidies would eliminate circular debt and send proper price signals for energy conservation.

The report suggests that Power sector reforms should be a top priority for South Asia and can yield huge economic gains toward a more sustainable future. Such reforms can be instrumental in making the best use of existing facilities, avoiding waste, and increasing cleaner electricity supply.

It is important to rationalize the price of energy so as to incentivize investment and conservation. The increased revenue from energy sales could be spent promoting more sustainable long-term growth. Meanwhile, utilities would have the resources to invest in the long-term reliability of the grid and provide higher quality service to all, the report added.

However, in the absence of other reforms, too narrow a focus on liberalizing energy prices may be inadequate and, given the current inefficiencies in the sector, would lead to excessively high electricity costs, putting added stress on the poor and most vulnerable.

Rather, increasing efficiency should be the main priority, together with a gradual increase in energy prices and targeted assistance to mitigate the impact on consumers.

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Posted on: 2019-01-10T12:18:00+05:00