Pakistan's energy sector has seen some tough times due to national debt and increased demand, but Engro Powergen CEO Syed Mohammad Ali is confident its future is bright 

The installed generation capacity of Pakistan increased by about 3,500MW during the period 2009-12, resulting in a total installed capacity of 23,500MW in 2012. During the same period the demand supply gap went over the 7,000MW mark. This shows that there is investment in the sector, but demand continues to outstrip supply. Therefore, in order to meet the forecasted demand of 36,000MW by 2020 an additional supply of 12,500MW is required in the system over the next few years.

The policy framework in Pakistan is geared to attract investment in the power sector. The current Power Policy 2002 (as amended in 2006) provides for lucrative dollar based equity IRR and a sovereign guarantee to projects on the condition that the power purchaser is a federal entity and that the tariff is approved by NEPRA.

The derailing of the power sector was mainly due to the formation of the circular debt. This surfaced in 2008, mainly due to the delayed notification of various tariff increases from 2003 to 2007 which resulted in delayed billing of the differential amount.

In 2012, the circular debt figure rose to a near $5bn mark. The situation became so dire that the Government of Pakistan (GoP) defaulted on its sovereign guarantee for the first time in the history of the country, defaulting on payments of approximately $450m to nine IPPs’ that generate 1,700MW of electricity.

Since 2008, the cost of power generation increased three-fold. The average generation cost/tariff currently stands at PKR 13.68/kWh, making the need for subsidy to also increase threefold. The lowest cost of generation is PKR 0.16 /kWh for hydro and the highest cost of generation comes from HSD and RFO being PKR 21 /kWh and PKR 16 /kWh respectively. Hydro generation stands at 32 percent, whereas HSD and RFO is 36 percent of the total generating capacity of the country.

This situation mainly came about due to the dependence on conventional thermal fuels with accelerating prices for power generation. This was further aggravated by subsidising gas, a depleting fuel in Pakistan.

The weightage of heavy fuels in the power mix, pulled down investment in the sector as the receivables continued to mount, and the subsidy provided by the GoP was unable to keep pace with the rising price of expensive fuels.

The turnaround year
The new government has also directed an un-popular but necessary tariff hike in two phases. A 40 to 45 percent hike for industrial and commercial users in August last year and a 20 to 50 percent increase for the residential bracket in October 2013 in order to implement IMF’s plan for phasing out the subsidies.

A move toward cheaper fuel sources has been seen in the development of the first Thar coal mine in Pakistan. Engro plays a vital role with the government of Sindh in developing Thar coal. A ground breaking ceremony of the project took place in February this year where the Sindh Engro Coal Mining Company (SECMC) will set-up a 3.5 Mt/a (600MW) capacity mine in 3.5 years after financial closure that can quickly be expanded to 6.5 Mt/a (1,200MW), and then up to 19.5Mt/a (3,600MW) in the future.

Engro also has the capacity and expertise to facilitate the conversion of existing furnace oil based power plants to Thar coal, and it will be analysing the prospect. It is simultaneously developing the needed infrastructure for the LNG import to provide for the much needed energy on a fast track basis.

The move away from conventional fuels was also reflected in the vision statement of the National Power Policy in 2013, where it was stated that “Pakistan will develop the most efficient and consumer centric power generation, transmission, and distribution system that meets the needs of its population and boosts its economy in a sustainable and affordable manner”.

The long-term steps required for the development of the power sector require new investments in alternate energy projects. Thermal currently constitutes 62 percent of the generating mix and a 68 percent installed capacity.

Engro also has the capacity and expertise to facilitate the conversion of existing furnace oil based power plants, and will be analysing the developments. By developing the required infrastructure on a fast-track basis, more energy efficient opportunities will become available.

Paving a nuclear path
With the federal government, in November 2013 it was announced that there would be development in nuclear power with the KANUPP-2, and KANUPP-3 power plants. They are expected to add 2,200MW to the national grid. The first 1,100MW is due to be commissioned by 2019. Last year also saw the announcement of Gadani coal power project of 6,600MW in Baluchistan with the first 1,320MW expected to be commissioned by 2017.

[Nuclear plants] are expected to add 2,200MW to the national grid

For long-term sustainability and to abate the consequences of peak oil, hydel and renewables (mainly solar) need to be explored rather than solely developed like nuclear and non-renewable energy. For solar energy, small and off-grid solar parks can be commissioned in areas with high Global Horizontal Irradiance (GHI).

The higher the GHI the more you are able to utilise the energy from the sun. In Pakistan, Quetta has the highest GHI. On grid solutions can also be developed for the industrial hub. Engro has been the first to venture into the solar space, by initiating a 360kW grid connected to a solar generating unit in March last year.

Even though 360kW is a small project, this is the largest solar power generation facility in Pakistan. This unit is expected to generate power for the Daharki colony with the capability to provide power to the grid on a net metering basis.

The project is currently in its test phase and has encouraged us to take the next step and expand this experience on a commercial scale. In the solar field the government of Punjab, along with Punjab Power Development Board (PPDB), has initiated a Quaid-e-Azam solar park for the development of 1000MW of solar power in the Bahawalpur region of Punjab, which was also initiated in 2013.

Another crucial factor for the development of the power sector is to improve the efficiency of state-owned units. In the meantime fuel supply should be diverted to the efficient IPPs rather than state owned power units, which tend to be inefficient due to old technology.

The federal government also needs to revisit the transmission strategy and the distribution network to reduce the gap between the government notified tariff and the NEPRA notified tariff, which not only provides for higher fuel prices as part of the subsidy given by the government, but also the inefficiencies of the transmission and distribution network.

Of the nine distribution companies (DISCOs), PESCO and HESCO are known to have high losses with numerous sub divisions routinely showing losses in excess of 70 percent. For efficiency in the network National Transmission and Distribution Company (NTDC) and the DISCOs need to be privatised (see Fig. 2).

We have a success story from the privatisation of the Karachi Electric Supply Company (KESC) that has improved on its recovery by incentivising neighbourhoods that have no theft and recovery issues, and with no load shedding. Pakistan has all the right policy incentives, a known 25-year power tariff with pass through fuel costs and taxation, and the risk of exchange rate variation is covered by providing for dollar indexation, and the sector also has government guarantees and protection.

In a policy framework like this, Pakistan is set to flourish in the power sector, with continued progress and implementation of stakeholder recommendations.