Pakistan Policy Note—Building an Efficient Energy Sector 79558 Pakistan Policy Note 1 Rashid Aziz Building an 1 J une 2 0 1 3 Efficient Energy Sector Pakistan’s energy sector is facing a serious crisis. Key megawatts [MW]—a third of peak demand for challenges include large and growing shortages of electricity; and up to 1,500 millions of cubic feet energy, high energy costs, and inefficiencies that pre- per day [mmcfd]—around 25  percent of peak vent the sector from financing all its costs. It there- demand for gas), as well as financial constraints fore relies heavily on government support, through that prevent the sector from financing all its costs. subsidies and funding for almost its entire investment As a result, the sector relies heavily on govern- program. Specific actions to overcome the dire situa- ment support—through subsidies amounting to tion can be classified along three main lines. The first about 2 percent of GDP from the budget to cover are actions to overcome the investment deficit, which operating costs and funding for almost the entire requires least-cost investment plans based on low-cost investment program. This situation is unsustain- supply sources (notably hydropower), market compe- able, as energy shortages are constraining the tition, more efficient energy use, and incentives to growth of productive activities (resulting in a manage consumer demand. Second, steps to improve loss of GDP of 2 percent or more a year, accord- sector finances are needed. Key actions include modi- ing to preliminary estimates), employment, and fications to the current universal national tariff, cost- exports, while budgetary subsidies are diverting recovering tariffs, allocating additional gas for power resources from other high-priority activities. generation, and improving utilities’ operational and THE WORLD BANK GROUP SOUTH ASIA REGION commercial performance. Third, to improve sector gov- In recent years, the government (with donors) has ernance, managerial autonomy and accountability prepared strategies and plans to address these issues. needs to be introduced in power utilities. Performance For example, the Asian Development Bank pre- contracts or other tools for monitoring and improving pared a comprehensive assessment of the energy the performance of the public utilities—for example, sector in 2010 (under the Friends of Democratic outsourcing management, leasing, sale of shares Pakistan umbrella), analyzing the sector’s chal- along with management control, and privatization— lenges and recommending ways to address them should be considered, and the approach deemed most (ADB 2010). Similarly, in September 2010 the appropriate should be introduced. The problems and government prepared a power sector reform potential solutions to the recovery of the Pakistan plan that aimed at addressing governance and energy sector are all well known. What is needed now efficiency issues, regulatory challenges, invest- is leadership and a road map of sustained actions. ment requirements, and power sector finances. Implementation of these reform plans has, how- The energy sector is in serious crisis. Performance is ever, been incomplete at best. far from satisfactory, and major issues need to be resolved. Key challenges include substantial Pakistan’s per capita energy consumption is on par and growing shortages of energy (6,000–7,000 with other countries at a similar stage of development Pakistan Policy Note—Building an Efficient Energy Sector (Table 1), and energy access has expanded rapidly. plant in 2002 and 1,450  MW at Ghazi Baro- The number of electrified households rose tha hydropower plant in 2004). By comparison, from nearly half of households (7.8 million) in installed capacity increased from 3,711  MW 1996 to two-thirds (13.4 million) in 2006 and to 5,201 MW (40 percent) in Bangladesh over to three-quarters (19.0  million) in 2011.1 The the same period, and from 97,885  MW to greater access comes from a vigorous rural elec- 143,061 MW (46 percent) in India. After 2008, trification program—financed by government some 3,000 MW were added, taking capacity to resources—which the government continues about 22,500 MW by the end of 2011. Around 2 to pursue, largely for social reasons. But while 2,500 MW (10 percent or more of total installed network expansion brings social and equity capacity) is unavailable, however, as lack of benefits, it has also increased the energy short- maintenance and rehabilitation has reduced ages. Although about 3,000 MW of generation the capacity of public sector plants. This capac- capacity has been added since 2008, because of ity is further eroded in winter, when reduced inefficiencies and the network expansion this water flows mean that about 5,000  MW of addition has not reduced the overall shortfall— hydropower is unavailable. Total generation on the contrary, it has increased. The energy has therefore stagnated at 94–98 billion kWh intensity of Pakistan is relatively high due to since 2006/07, despite the additions; the newly inefficiencies in not only supply (for example, installed capacity could have generated around public sector generation plants depict heat 10 billion kWh, reducing the peak deficit by a rates of 12,000–14,000 British thermal units comparable amount. per kilowatt hour [btu per kWh], whereas effi- cient gas fired generation plants should achieve The deficit arose because investments fell heav- heat rates of 8,000 btu per kWh or below) and ily. They were needed to enhance supply transmission/distribution, but also in the use of and upgrade the networks to cater for the energy across different sectors. increased demand. From a peak of 26 percent of total investment and 51  percent of pub- Issues lic investment in the mid-1990s, the share of energy (including power) investments had A large and growing shortfall of energy supply declined to 4 percent and 26 percent, respec- with a shift to a poor high-cost fuel mix tively, by 2009/10. During this period, private investment (except for expenditures to com- Installed capacity stagnated over 2000–08, with plete plants that were initiated during the only two additions (325  MW at Chashma nuclear 1990s) was essentially zero. Table Comparative energy use, 2011 1 Energy imports, Fossil fuel energy Electricity Electricity access Energy use per GDP per unit GDP net consumption production (share of capita of energy per capita (share of use) (share of total) (TWh) population) (KGOE) (PPP $ per KGOE) (current $) Selected countries in ascending order of GDP per capita Nepal 12 12 3 44 341 3.5 535 Bangladesh 17 71 42 41 209 7.9 675 Pakistan 24 62 94 62 487 5.4 1,017 Vietnam –11 70 95 98 681 4.7 1,224 India 25 73 960 66 566 6.0 1,375 Sri Lanka 44 44 11 77 478 10.7 2,400 Indonesia –84 66 170 65 867 5.0 2,952 China 9 88 4,208 99 1,807 4.2 4,433 Region South Asia 25 70 1,120 62 519 6.0 1,253 TWh is terawatt hour; KGOE is kilograms of oil equivalent; PPP is purchasing power parity. Source: World Development Indicators database. A number of factors led to the fall in investments. projects entailed higher power prices than Some of the reasons why investments declined required—and therefore a reversal of such are historical, but they are still relevant and programs was in order. More recent efforts continue to impact on investments: to mobilize private investments for power • While there is consensus on the need to generation have thus not attracted major develop hydropower resources, actual international investors. The government rec- investments are often impeded by concerns ognizes that the public sector alone cannot of the constituents over the distribution of finance the large investment requirements, water resources that would be made avail- and so may need to review the incentives for 3 able through large reservoirs. This issue is private sector participation to avert any fur- termed a “trust deficit� in the Bank’s water ther shortfalls in private investment in power. sector strategy report (Briscoe and Qamar • The surplus that emerged following the 2005). Essentially, the provinces are con- commissioning of IPPs in 1997–2001 led to cerned that they are not receiving their some complacency in government circles. due allocations under the Water Accord of They felt that investments to enhance capac- 1991 and have reservations about the effi- ity were not really a high priority. Given cacy of federal agencies (such as the Indus that power generation projects have long River System Authority) responsible for lead times and that power demand follows implementing the accord, the mechanisms income growth with a lag, the country is still set up for monitoring such allocations (for facing the impacts of this attitude—and the example, the telemetry systems installed by resulting decline in investments. the Water and Power Development Author- ity [WAPDA] over the last decade), and the The shortfall in supplies (during peak periods) wid- operations of the entities responsible for ened over 2008–11, from around 4,000  MW to managing water rights and allocations (for about 7,000, or about one-third of peak demand (Fig- example, WAPDA). ure 1). The shortfall is essentially managed by • The climate for private investment was hurt load shedding—rotating shutdowns of supply in the late 1990s. Pakistan went through a feeders. These disruptions are hurting indus- rather acrimonious debate with the sponsors trial, commercial, and other productive activi- of an independent power producers (IPP) ties, and their impact is estimated at around program involving threats of, and actual, 2 percent of GDP (Ministry of Finance 2012). cancellation of licenses of some IPPs; accu- sations of corruption in the IPP program; The historical pattern of development—which has and a widespread perception that those yielded a suboptimal energy mix and heightened the Figure Demand has risen faster than capacity, 2008 –11 1 Hydro Thermal (WAPDA) Thermal (KESC) Nuclear Peak demand Actual production 25,000 20,000 15,000 Megawatts 10,000 5,000 0 2008 2009 2010 2011 Source: World Bank staff estimates. Pakistan Policy Note—Building an Efficient Energy Sector economy’s vulnerability to world market oil prices— moving to thermal generation, Pakistan is not has increased generation costs by three to four times. benefiting from the cheapest supply sources— Generation costs account for around two-thirds hydro and coal (see Figure 2). Some of these of power supply costs. The generation mix has consequences are self-inflicted, as investment shifted from two-thirds hydro and one-third decisions have been held up due to disagree- thermal in the 1980s to only 30 percent hydro ments between provinces on water-resource and 70 percent thermal today. Also, there has use and mining rights. Even within oil and gas, been a shift from domestic low-priced gas to reduced gas availability ensures that power 4 imported, higher priced, dirtier furnace oil generation is not based on the cheapest fuel (Figures 2–4). The cost of generation of exist- sources—in fact, it is based on fuels (fuel oil, ing hydro plants is PRs  1.6 per kWh and for diesel) that are the most expensive and vola- new hydro plants it is estimated to be between tile in price movements. Nor is the allocation PRs  2.50–2.60 per kWh; by comparison, gen- of lower cost gas for power generation based eration cost of gas based combined cycle plants on least-cost criteria: while public sector plants is PRs 4.50 per kWh, nuclear PRs 4.20 per kWh, installed 15–20 years ago receive gas, some pri- coal PRs 8.10 per kWh, fuel oil PRs 16.75 per vate plants—which were installed in the last kWh, and diesel around PRs 21.00 per kWh. By five years and incorporate more modern and Figure Generation costs 2 Fuel Operations and maintenance Capital 20 U.S. cents per kilowatt hour 15 10 5 0 CCGT-LNG/ Diesel New supercritical New Hydel Nuclear Wind imported gas engine–fuel oil coal– red boiler stream–fuel oil RoR Note: Estimated cost of power generation alternatives for residual fuel oil is $710 per ton and for imported coal is $120 per ton at delivered prices. Source: Tetra-tech and Hagler Bailly Pakistan 2012. Figure Power generation fuel mix, 1990 –2011 3 Hydro Gas Oil Coal Nuclear Imports 100 75 Billions of kilowatt hours 50 25 0 1990–91 1995–96 2000–01 2005–06 2010–11 Source: Pakistan Energy Yearbook various years. Figure With stagnating supply, gas diverted from power, 1990 –2011 4 Domestic Commercial Industry Cement Fertilizer (feedstock) Fertilizer (fuel) Power Transport (compressed natural gas) Unaccounted for gas 4 3 Billion cubic feet per day 2 5 1 0 1990–91 1995–96 2000–01 2005–06 2010–11 Source: Oil and Gas Regulatory Authority. efficient technologies—do not. Hence, there production) to 300  mmcfd in 2011, or more is an overall inefficiency. The transition to than 10  percent of available gas (global best thermal generation (and within thermal, from practice is 1 percent). Also, gas has been gradu- gas to fuel oil) has thus increased generation ally diverted from power. Indeed, power gener- costs by three to four times; also, power genera- ation receives about 400 mmcfd less gas today tion costs move in tandem with fluctuations in than in 2006. Thus, only 26 percent of power international oil prices. generated in 2011 came from gas, down from 41 percent in 2006. While natural gas can significantly reduce gen- eration costs in Pakistan, in recent years the avail- The high costs are also driven by high transmission able gas has been reallocated to other activities and and distribution losses: 25 percent in 1996, 24 per- ­ sectors— at the expense of power generation. Paki- cent in 2006, and still 24  percent in 2011. But stan attracted investment in gas exploration in the distribution companies (DISCOs) show the 1990s, raising proven reserves more than wide variation in losses: from 10  percent for 50  percent—to 32  trillion cubic feet (Tcf)— Islamabad Electric Supply Company to 35 per- over 1996–2006. Gas production doubled to cent for Peshawar Electric Supply Company 3,800 mmcfd and sales to about 3,347 mmcfd. (PESCO) in 2011. Another issue is that the Much of this additional gas was allocated for DISCOs do not collect all the bills issued—of power ­generation—rising from 511 mmcfd dur- the PRs  705  billion billed in 2010/11, some ing 1995–96 to 1,343 mmcfd during 2005–06. PRs 83 billion (12 percent), or nearly $1 billion, But this success was not sustained: reserves was not collected. Again, there is wide varia- have since fallen (27 Tcf in 2011), production tion—four or five of DISCOs have achieved and sales have stagnated at about 4,000 mmcfd collection rates of 95–98 percent, while others and 3,400 mmcfd, and the allocation for power have rates of just 60 percent. generation has fallen to 924  mmcfd. By the end of June 2011, gas demand had increased to Boosting energy efficiency could be one of the most cost- 6,000 mmcfd. Despite stagnant supply, another effective ways to narrow the power deficit in Pakistan 1.8 million consumers were added over 2006– and to address both peak load and energy shortages. 11, bringing the total to 6.2 million. Current “low-hanging� options with available technologies range from improvements in light- In parallel, and partly due to the large expansion ing and air-conditioning in buildings to street of the networks, the performance of the gas utili- lighting and water pumping in municipalities— ties has deteriorated. Unaccounted for gas rose and waste heat recovery in industries. Although from 188 mmcfd in 2006 (about 7 percent of the importance of energy efficiency has been Pakistan Policy Note—Building an Efficient Energy Sector Better distribution companies have reduced losses to good-practice levels among Table developing countries, 1999, 2006, and 2011 2 (percent) Distribution company 1999 2006 2011 Islamabad Electric Supply Company 13.3 9.7 Gujranwala Electric Power Company 16.5 10.2 12.0 Lahore Electric Supply Company 20.2 13.1 13.3 Faisalabad Electric Supply Company 12.7 11.6 11.2 Multan Electric Power Company 24.1 20.5 18.3 6 Turkish Electricity Distribution Company, Istanbul 16.2a 11.0b North Delhi 27.1 12.5 Eastern Power Distribution Company of Andhra Pradesh 12.0 7.0 Dakshin Gujarat Vij Company 24.3 12.1 Edenor, Buenos Aires 10.2 11.1 12.6 PLN, Jakarta (Java only) 17.5a 8.8 Source: NEPRA (Pakistan); TEDAS (Turkey); Edenor (Argentina); PFC (India); PLN (Indonesia). a. Data are for 2005. b. Data are for 2008. recognized in Pakistan, and Enercon was estab- determined by the National Electric Power lished in the early 1990s, there has been rela- Regulatory Authority (NEPRA) can be taken as tively limited implementation of actions on this a proxy for full cost recovery. The tariffs noti- front (such as large-scale deployment of energy fied by the government represent the reduced efficient lamps). As a result, the vast potential cost to consumers. The difference represents a for energy savings across the buildings, indus- steep financial shortfall relative to the cost of try, transport, and agriculture sectors, esti- supply (Figure 5). At its peak (up to about July mated to be in the range of 20 to 30 percent, 2010) the shortfall was nearly 35 percent of sup- remains largely untapped. ply costs; for the 2011/12 determinations, it was still around 25 percent of total supply costs. A Strained finances major part of the current shortfall comes from the fact that tariffs were not adjusted between Power tariffs (despite recent rises) are still far short November 2003 and February 2008, while of supply costs. The aggregation of tariffs supply costs rose sharply—oil prices (around Figure Progressive tariff adjustments, February 2008 –June 2012 5 NEPRA-determined estimated average tariff Government of Pakistan–noti ed estimated average tariff 13 Average tariff, PRs per kilowatt hour 11 9 7 5 3 February January January January January June 2008 2009 2010 2011 2012 2012 Source: World Bank staff estimates. 75  percent of supply costs) peaked at $150 a meet them and thus require additional support.2 barrel in June 2008. While the government has (Other DISCOs, however, achieve good levels of aggressively adjusted tariffs since 2009—and technical and financial performance.) changes in supply costs are promptly incorpo- rated in consumer tariffs—the overhang from This lack of cost recovery is a huge burden on the 2003/04–2007/08 has not been overcome. federal budget, aggravating macroeconomic imbal- ances. The government provides subsidies from The difficult financial picture is further complicated the budget for various (Table 3). The largest by uniform national tariff fixed at the cost of the component of budgetary subsidies is the TDS. 7 most efficient DISCO, even though supply costs vary Since 2002/03, the government has kept power widely by province and DISCO. The government tariffs below the cost of supply3 and committed makes tariffs uniform by notifying the lowest to pay the difference as a TDS. Yet the volume determined tariff for each class of consumer to of such subsidies is unsustainable. The shortfall all DISCOs. The sum total of notifying a uni- in DISCO revenues—which the government form national tariff equivalent to the costs of finances as TDS—has amounted to PRs 250– the most efficient utility implies that all other 400  billion (roughly $3.0–4.5  billion) annu- utilities automatically receive a subsidy through ally in recent years. The lower level is achieved the tariff differential subsidy (TDS). In 2012, in years when the government does not take this amounted to PRs 465 billion (about 2 per- actions to offset previous years’ accumulated cent of GDP). deficits and payment shortfalls. In years when such overdues are also tackled, the level of TDS Another contributing factor is low collections. Even if has approached the higher end of the range. tariffs are insufficient for cost recovery, DISCOs should collect all the revenues they bill. However, The TDS has also been very unpredictable. Each substantial accumulated arrears or receivables year, the budgeted level is exceeded by a fac- have developed within some DISCOs (discussed tor of three or four. This places a high bur- above). Due to inadequate tariff adjustments and den on the federal budget—which cannot be insufficient cost recovery, most DISCOs continue ­ sustained—and adds great uncertainty to the to suffer financial losses and are compelled to budgeting process. defer investments for system enhancement, efficiency improvements, and the like. A tariff Finally is the issue of “circular debt.� With revenue structure that does not promote energy conser- and resource shortfalls, the DISCOs build up vation has also become a major barrier to push- arrears in payments to the National Trans- ing demand-side energy efficiency in Pakistan. mission and Dispatch Company (NTDC). Finally, NEPRA establishes performance tar- The arrears force NTDC to delay payments gets for each DISCO, but some DISCOs do not to its power producers, which then build up Table Federal government subsidies, 2008/09–2012/13 3 (PRs million) 2008/09 2009/10 2010/11 2011/12 2012/13 Budget Revised Budget Revised Budget Actual Budget Revised Budget Power sector 88,412 111,640 66,703 179,526 87,317 334,927 147,288 464,256 185,287 Ex-WAPDA DISCOs 74,612 92,840 62,903 147,005 84,000 288,927 122,700 419,018 134,970 Of which Tariff differential 65,000 82,000 10,000 77,000 30,000 238,827 50,000 412,018 120,000 KESC 13,800 18,800 3,800 32,521 3,317 46,000 24,588 45,238 50,317 Of which Tariff differential 12,000 17,000 2,000 31,700 2,000 46,000 24,000 45,000 50,000 WAPDA is Water and Power Development Authority; DISCO is distribution company; KESC is Karachi Electric Supply Company. Source: Budget documents (various years); World Bank estimates. Pakistan Policy Note—Building an Efficient Energy Sector arrears to their fuel suppliers, refineries, and of the inefficient and unsustainable energy so on. This is often referred to as circular system that can only be addressed once the debt, though the arrears buildup is one-direc- underlying causes have been resolved— tional—from consumers to DISCOs and trans- otherwise­it would just reemerge. mission companies, generators, and ultimately to fuel suppliers. The Ministry of Water and Weak governance Power defines circular debt as the bills unpaid by NTDC/Pakistan Electric Power Company Overall sector governance remains weak with diluted 8 (PEPCO) to other energy suppliers. Based on responsibilities across ministries. The government, this definition, the ministry estimated circular as owner of the power and gas utilities, exer- sector debt, as of June 30, 2012, at PRs 461 bil- cises almost no control over the managements lion.4 However, this is only “current� circular of public utilities. This is due partly to the lim- debt, as it does not include debt swaps or other ited capacities of the sector ministries, but it financing that the government resorts to for also highlights the lack of a reform champion clearing arrears. For example, PRs 142 billion or leader, who is fully empowered to implement of term finance certificates were issued during the reforms. Past efforts at sector reform had 2011/12; similarly, PRs 302 billion of previously limited impacts or were abandoned in between. accumulated DISCO debts was consolidated Even when PEPCO was empowered to fully into government debt. Total liabilities of the implement the reforms, the desired result was sector as of June 30, 2012, could thus be around not achieved because it got bogged down in PRs 600 billion. The Planning Commission esti- running the companies, rather than restruc- mated the circular debt (as of September 2011) turing them (develop management capacities, at PRs 270 billion for PEPCO and PRs 27 bil- systems, and human resources) and prepar- lion for KESC, for a total of PRs 297 billion. It ing them to operate as autonomous, commer- also reported that circular debt is increasing by cial entities. To address these governance and PRs 30.5 billion a month because of shortcom- high-level leadership challenges, the Friends ings in NEPRA’s method to determine actual of Democratic Pakistan report recommends cost of service, underbudgeting of subsidy pay- merging the sector ministries and regulators ments, and failure to collect revenues.5 and consolidating the authority and responsi- bility for completing the reforms in one office The large and growing subsidy requirement, along (a senior energy advisor). with circular debt, has two important impacts. First, it crowds out borrowing by the power Equally, the government has not announced its and other energy sector entities for invest- vision and strategy for the energy sector. As a result, ment in new capacity and blights the fur- investment decisions are not driven by rigor- ther development of existing projects. If the ous analyses (such as least-cost planning). Over amount of subsidies paid from the budget time, the capacity of the Planning Commission during 2007/08–2011/12 (PRs  1.2–1.4  tril- and the utilities to conduct such analyses has lion) had been invested in power generation, eroded. The process for approval of public sec- it could have financed 4,000–6,000  MW of tor projects has also been undermined. new hydro or thermal capacity. This should be compared with the 3,470 MW added over Operational and technical performance can be 2008/09–2010/11 and the need for as much improved across a wide spectrum, in technical areas as 8,000 MW today. Second, circular debt cre- (losses, voltage and other indicators of service qual- ates severe liquidity shortages in the sector as ity), commercial areas (collections), and other areas. a whole, such that suppliers refuse to provide While some utilities in the power sector have fuel, generating plants stay idle, maintenance achieved operational and technical perfor- programs lag or are not implemented at all, mance standards that compare favorably with and spare parts are unavailable when equip- utilities elsewhere, most fall far short of these ment breaks down (NEPRA 2011). But it must standards. The key reasons the utilities are not be stressed that the circular debt is a symptom complying with mandated or internationally accepted levels and standards of performance to introduce or apply these concepts. As a include: result, private sponsors are not required to • The sector’s unbundling—which was compete on the price of power that they designed to improve performance gradu- offer, and the government continues to take ally by, for example, enhancing private sec- on contingent liabilities—as guarantees tor participation, increasing commercial for the offtake or fuel-supply obligations of pressure, and promoting greater account- their public sector counterparts. ability—has not been completed. At times, pressures from within the utilities have fore- Other options for improving operational and techni- 9 stalled the process;6 at other times, action cal performance include decentralization of respon- plans or programs prepared with inputs and sibilities (for the DISCOs) to the provinces—and the consensus of all stakeholders have not privatization of the utilities. The former would been implemented.7 require significant strengthening of the pro- • There is limited progress in operating the vincial governments’ capacity to manage the sector on commercial principles and in utilities. While privatizing the utilities remains assigning responsibility (along with account- a primary objective of the government, it ability) to boards of directors and manage- needs to be recognized that in the current ments of the utilities. The government is ­ situation—the severely constrained financial involved heavily in the utilities’ day-to-day situation of the power utilities—it would be operations, with two effects: boards of direc- difficult to attract private sector interest in tors and managements have no incentive owning and managing those utilities without to perform their functions efficiently or to some form of discount on the asset values and the best of their ability, and the government share prices. Since some privatization transac- cannot hold them accountable for improv- tions have, in the past, been overturned due to ing the utilities’ performance. such discounts, a consensus on the approach • In 2009/10, the government signed perfor- for privatization needs to be developed before mance contracts—initiating a process for such transactions can be taken to market. holding the utilities accountable for per- formance—with all the DISCOs. But the Policy Recommendations contracts were not extended to subsequent years, and an important opportunity for High-level leadership and management of the reform strengthening governance and accountabil- program is required. While addressing the chal- ity was missed. lenges and constraints facing power and over- • Managing the power sector along commer- all energy development requires actions across cial lines was introduced unevenly, creating several fronts, strengthening governance and efficiency gaps, as illustrated by the use of leadership should be an overarching objective. IPPs. The solicitation of IPPs in the 1990s The government needs to establish a high-level was based on a fixed price, and the govern- and fully empowered structure (which could ment guaranteed the offtake of power by be a single ministry or a dedicated task force NTDC or WAPDA and fuel supply by Paki- reporting to the Council of Common Inter- stan State Oil or gas companies to the IPPs. ests or the Cabinet) to manage the transition. This approach was appropriate at the time, The responsible ministry or task force would as procedures to select IPPs based on com- need to be empowered to act on behalf of sec- petition on the price of power had yet to be tor institutions, take the required administra- developed. Also, direct contracting between tive actions, address conf licting objectives, IPPs and power consumers (as merchant priorities, and points of view, and provide plants or for part of their output) was not regular updates to the Council of Common standard industry practice. However, both Interests or the Cabinet. The ministry or task these concepts are now well established and force would also need resources to conduct are used for most IPP solicitations. Paki- critical analyses and reviews and be guided stan’s IPP policies have not, though, evolved by the vision or goal that the government Pakistan Policy Note—Building an Efficient Energy Sector e ­ stablishes—for example, for the sector for the gas, liquefied natural gas, and pipeline imports) and next 15–20 years. renewables—as inputs for power generation. The success of earlier policies in promoting explo- Reduce supply shortfalls ration and development of gas highlights the need to further improve incentives. While the The decline in investments has to be reversed and government has enhanced the producer price investments need to be prioritized through long-term for natural gas under the 2012 Petroleum Pol- and least-cost analysis. Enhancing supply and icy and announced premiums for shale and 10 overcoming the current shortages requires tight gas development, it should also recognize significant investments over the medium and that the gas pricing policy places a cap on the long term. The focus of these investments has reference (fuel oil or crude) price, which is to be on low-cost sources of supply—particu- well below current world market prices. These larly hydro, coal, and gas. Energy and power imperatives for enhancing domestic gas sup- investments, because of their long gestation plies (and the policy measure to be used for and large financing requirements, need to be encouraging further exploration—that is, fur- carefully designed and implemented, requir- ther adjustments in the parity price) need to ing integrated energy planning as a forecast- be weighed against the implications of such ing tool, with the capacity to prepare and pricing policies. Specifically, an increase in update forecasts or plans.8 Such forecasts for the party price would reduce the comparative the power sector were traditionally prepared advantage of gas-based generation projects— by NTDC, with the Planning Commission’s and may ultimately defeat the purpose of low- Energy Wing providing the macroeconomic ering power generation costs. and multisector framework.9 Over time, the capacity of NTDC and the Energy Wing to do Regional energy trade offers opportunities for reduc- this has eroded. The Asian Development Bank ing the supply deficit. Pakistan can supplement has provided an Integrated Energy Model to domestic energy (power as well as gas) supplies the Planning Commission for preparing com- through imports. There is a strong comple- prehensive forecasts, impact analyses, and the mentarity between the hydropower generation like, though input requirements for the model capacities of Central Asian countries, which are high. Whatever the mechanism, there is peaks in summer, and seasonal demand pat- a need to develop and sustain capacity in the terns in Pakistan. Imports from Central Asia utilities (including NTDC) and the govern- can contribute toward meeting the peak sum- ment for preparing comprehensive, integrated mer demand in Pakistan; it could also be a energy development plans and for updating source for low-cost power for the country. Simi- them regularly. larly, power imports from India—because of the close proximity of high consumption areas More effective use of existing generation capacity in Pakistan (such as Lahore and Faisalabad) to must also be ensured. Much of the installed capac- India—could alleviate the shortages in those ity in Pakistan is not available or only partially areas. Efforts need to be made to expedite such available—primarily due to a lack of mainte- projects. nance, but also because most of the public sec- tor plants were installed 20 or more years ago Improving energy efficiency is a “least-cost� option and now need to be replaced or rehabilitated. for curtailing the deficit, investment requirements Rehabilitation and upgrading of such plants, would be reduced correspondingly. This requires including their conversion to coal, should be increased efforts by Enercon, to pursue strat- accorded a high priority—particularly for egies to scale up demand side energy effi- meeting the growth in demand over the next ciency measures across various sectors, in two to three years. coordination with WAPDA, DISCOs, pri- vate sector entities, service providers, local Continuing efforts are required to develop domestic financial institutions, and other stakehold- resources—coal, gas (conventional, shale and tight ers. There are significant opportunities for tapping into energy savings across the build- policy issues to maintain uniform national ings (public and private/residential), indus- tariffs. try, transport, and agricultural sectors, which • Various mechanisms could be used to could be achieved through a combination reconcile the differentiated cost of sup- of policy-based and market-driven interven- ply with this policy. They include enact- tions and associated financial incentive tools ing surcharge and subsidy schemes, using and capacity-­building measures. They include the bulk sale and power purchase price robust energy-­ efficiency building codes, mini- to equate consumer level tariffs, allowing mum energy performance standards for appli- some DISCOs to charge the actual cost 11 ances, energy service companies (ESCOs), of supply (which implies very small varia- energy audit capacity building, and dedicated tions in tariffs), and directly subsidizing energy efficiency credit lines and funds. Global the remaining DISCOs for supply costs in experience can be used and adapted to apply excess of this level. practical, effective, and proven delivery mod- • Also, the government claims it noti- els in Pakistan, which could go far in improv- fies tariffs at the level of the lowest cost ing energy efficiency and thus mitigating the DISCO. This principle is, however, not energy shortages and crises, especially in the always followed. The Planning Commis- short term. sion has estimated that if the government adjusted all tariffs to those of the lowest Improve sector finances cost DISCO, the DISCOs could achieve PRs 98 billion in additional revenues, and A framework is urgently needed to reduce the across- the TDS requirement (PRs  592  billion) the-board subsidies and the sector’s financial deficit. could be reduced by about 15 percent. Key actions to improve sector finances include • The tariff notification process must also moving to cost-covering tariffs—for example, be revamped. First, the NEPR A Act, or in three years, along with targeted subsidies for NEPRA’s Tariff Rules, should be amended life-line consumers; eliminating the TDS and to require that NEPRA complete its determi- addressing, in parallel, the issues arising from nations within six weeks after petitions are the policy of uniform national tariffs; revamp- filed; currently it takes six to nine months. ing the tariff notification process, to make it The time taken by Ministry of Water and (essentially) automatic; and improving the DIS- Power to notify tariffs adds further delays. COs’ collection performance. The cumulative impact (such as penalties • While the government has increased tariffs and financial costs that the DISCOs have to substantially since 2007/08, these actions incur, which NEPRA does not recognize or are seen as ad hoc measures to reduce the accept) is estimated to be around PRs 81 bil- sector’s deficit at any one point of time. A lion for 2012/13. firm commitment to implement cost-cover- • Finally, requiring the DISCOs to improve ing tariffs over the medium term—along performance—notably, collection of the with programs to shield the poor from fur- amounts that they bill to c ­onsumers— ther tariff increases—is therefore strongly will reduce the subsidy requirement, recommended. and improve the DISCOs’ cash flow. For • In the absence of an announced timetable 2012/13, the DISCOs will lose PRs 85 billion to eliminate the TDS, the utilities face no in revenues solely because they do not com- compulsions to reduce costs or increase col- ply with NEPRA’s target for collections. lections, as the perception (and most often, the reality) is that the government will cover Other actions that should be considered the deficit. Announcing a firm timetable for include: eliminating the TDS is therefore a high pri- • As an interim step, publish the TDS amounts ority; it will also mean savings of PRs 300– (both budgeted and actual) separately for 400 billion a year in the federal budget. The each DISCO to identify the DISCOs and geo- government will, in parallel, need to address graphic areas benefiting from this subsidy. Pakistan Policy Note—Building an Efficient Energy Sector • Strictly use the most efficient plants first, ministries and agencies to implement reforms. and allocate natural gas to them (as power It also requires decisions on such issues as: generation costs account for the bulk of • Merging the Ministry of Water and Power power supply costs). and Ministry of Petroleum and Natural • Improve the utilities’ operational perfor- Resources into a single Ministry of Energy; mance and manage consumer demand more merging NEPRA and OGRA into a single efficiently. This requires reducing theft and Energy Sector Regulator. technical losses and improving metering. A • Strengthening regulatory framework— 1 percent reduction in losses would generate updated rules and regulations, capacity 12 PRs  9–10  billion in additional revenues or building of regulators, and so on. reduce costs by a similar amount. Other measures to improve sector governance Improving efficiency in supply and at the consumer include: and end-user level would also reduce power supply • Introducing legislation, along w ith deficits and improve reliability of the system, though enhanced investigation and prosecution, to these approaches may face financial, institutional, combat energy theft. and market barriers that need to be addressed through • For all public sector companies, develop- appropriately designed policies and programs. Key ing performance standards, which could be components of an energy efficiency improve- enforced through annual performance con- ment roadmap should include comprehen- tracts or through more rigorous and timely sive legislation to promote energy efficiency, monitoring of utility performance; ensur- strengthened institutional set up and coordi- ing compliance with such standards; and nation, loss-reduction programs for DISCOs introducing reward and penalty schemes for and public generation companies, demand- boards of directors and management that side management through DISCOs, building comply with (or fail to comply with) such codes and equipment efficiency standards, and contracts. The responsibility for monitor- promotion of energy savings performance con- ing these performance contracts could be tracting by ESCOs. Such a strategy for scaling assigned to the boards of directors of the up energy efficiency should be accompanied companies or (to further enhance transpar- by a comprehensive and targeted consumer ency) to NEPRA. In the latter case, NEPRA’s awareness program and capacity building of performance monitoring capacity would a range of stakeholders from energy auditors, need to be enhanced. to ESCOs and to financial institutions, which • Granting the public sector entities that will help mainstream energy efficiency as an can operate independently the required integral component and business line within autonomy and accountability to operate the sector framework and operations. Stronger along commercial lines. The government energy efficiency policy signals will also attract maintains strict administrative and opera- the private sector, including appliance and tional control over all companies. Some equipment manufacturers, building contrac- companies, such as Islamabad Electric Sup- tors, industries, ESCOs, and local commercial ply Company, Faisalabad Electric Supply banks. Company, Gujranwala Electric Power Com- pany, and Lahore Electric Supply Company, Strengthen sector governance can manage their affairs—including power purchase costs, investments, debt service, The government must announce its vision for the sec- and operating costs—within the resource tor and designate a high-level champion or leader to envelope provided by the determined tar- manage the reforms. This announcement has to iffs. The government should cease inter- be complemented by amendments (wherever vening in the day-to-day management of required) in the current rules of business, to these companies as a first step and hold enable the high-level champion to make all the boards of directors and managements the required decisions on behalf of the sector accountable for ensuring efficient electricity supply. Gradually, such delegation should seek customers independently and enabling be extended to other companies, when they them to transport that gas through the gas demonstrate the ability to manage their transmission companies via an open-access affairs independently. framework. The government needs to introduce market condi- Final Words tions for power, where commercial principles and trade among generators, distributors, and initially The above three pillars for reforming the energy large customers would cater to all service require- framework are mutually reinforcing. Adding low- 13 ments. Introducing market forces in the power cost generation and improving governance are sector should also be considered, which would essential elements of financial sustainability. absolve the government from responsibility for And without financial sustainability it would be managing utilities, reduce government liabili- difficult to achieve good governance or attract ties and subsidies, and allow the private sector the investment needed for adding low-cost to take over commercial activities (which it is generation. best suited to perform). Introducing competi- tion in the solicitation of new IPPs could be Notes the first step. For this purpose, the policy and A. Ahmad, K. Saeed, M. Saqib, and L. Wang security package documents would need to be (Energy Unit, South Asia Sustainable Devel- updated to allow for competition on the price opment Department) also contributed to this of power and energy, enable the level guar- note. antees and contingent liabilities required to 1. However, according to household income analyze specific investments, and amend the and expenditure surveys (see Ministry of selection c ­riteria—to allow selection based Finance 2011), 91  percent of households on lowest energy cost, minimum contingent report electricity as their source of lighting. liabilities and commitments, and the like. The 2. Without government support to offset these government will need expert advice and assis- performance failures, the DISCOs’ revenue tance, for amending the security package and and resource shortfall would become a selection process along these lines. charge on their equity. Applying this for- mula over time, a number of DISCOs erode The government has announced a new exploration all their equity. The support provided by policy for natural gas, for which there may be room the government can therefore be consid- to improve the incentive structure. The policy aims ered as recapitalizing those companies. to enhance local gas production by attracting 3. NEPRA-determined tariffs are taken to investments for exploration and includes an represent the cost of supply. increase in the wellhead producer price. This 4. Data provided to the Asian Development up-front incentive is reportedly attracting inter- Bank and World Bank team by the Minis- est from local and international companies. try of Water and Power in its communica- The government may be reluctant to offer the tion on September 29, 2012. full parity price, as that may generate windfall 5. Planning Commission presentation on cir- profits for exploration companies. However, cular debt, September 7, 2011. mechanisms can be designed for the potential 6. The most notable of such pressures is the exploration companies to share some of the incomplete transfer of human resources upside potential with the government. With- from WAPDA to the companies. A cadre of out more domestic gas, Pakistan will need to senior officials insists that because WAPDA import the required fuels, and thus the oppor- employed them on a “common seniority� tunity cost of forgoing gas development is high. pool, they are entitled to serve in any of the companies that were created out of In parallel, the government should consider introduc- WAPDA. While this means their expertise ing market mechanisms in the gas sector. They could can be available to all companies, it dis- involve encouraging exploration companies to torts the managerial incentives that would Pakistan Policy Note—Building an Efficient Energy Sector arise once these officials opt for a specific Monograph Series. Pakistan Institute of company—and demonstrate their alle- Development Economics, Islamabad. giance to that company alone. Briscoe, John, and Usman Qamar. 2005. Paki- 7. Examples of such lack of implementa- stan’s Water Economy: Running Dry. World tion include the recommendations of the Bank Report 44375. Oxford, UK: Oxford Energy Sector Task Force and the Sep- University Press. tember 2010 Action Plan prepared by the Ministry of Finance. 2011. Pakistan Social and government. Living Standards Measurement Survey 2011. 14 8. For a recent exposition of the need for Islamabad: Government of Pakistan. such planning, see Alahdad (2012). ———. 2012. Pakistan Economic Survey 2011–12. 9. The last comprehensive National Power Islamabad: Government of Pakistan. Plan was prepared, with assistance from Ministry of Petroleum and Natural Resources. the Canadian International Development Various years. Pakistan Energy Yearbook. Islam- Agency, in 1994; an update (based on a abad: Hydrocarbon Development Institute limited set of inputs and assumptions) was of Pakistan. recently prepared by NTDC. NEPRA (National Electric Power Regulatory Authority). 2011. “State of the Industry References Report 2010/2011.� Islamabad. ADB (Asian Development Bank). 2010. “Inte- Tetra-tech and Hagler Bailly Pakistan. 2012. grated Energy Sector Recovery Report and “Pre-feasibility Study for Power Import Plan.� Friends of Democratic Pakistan, by Pakistan from India.� World Bank, Energy Sector Task Force, Manila. Islamabad. Alahdad, Ziad. 2012. “Pakistan’s Energy Sector, From Crisis to Crisis—Breaking the Chain.� © 2013 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the South Asia Region. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC.