Energy plan and pricing

Posted on June 13, 2011. Filed under: Uncategorized |

ALONG with the next year budget in early June, the government will announce an energy sector roadmap to gradually revive its role as a driver of economic growth.
A lot would need to be done to remove roadblocks through institutional and political debate as solutions in hand are mostly sketchy. But the government strategy paper at the least identifies real problems in an integrated form. The sector overhaul cannot take place without improvements in resource availability and rationalisation of energy prices. “The capacity situation (in power sector) will worsen in the next 2-3 years as very few projects are in the pipeline.
Load shedding will continue,” it says.
The data put on the table at least give an idea what the government intends to do in the first 3-6 months of the next financial year. About Rs398 billion wastage or unrecoverable revenues are missing from the overall stream only in the power sector. Of this, about Rs160 billion are stated as the cost of mismanagement. Distribution losses are put at another Rs162 billion. Other losses are in fuel supplies and various disputes.
In fact, energy shortages are now well documented; that has pulled down economic growth by two percentage points during the current fiscal year. That means the rate of growth would have been close to 4.5 per cent of GDP, instead of now revised estimate of 2.4 per cent of GDP. Clearly, the energy sector has chocked economic growth.
Importantly, there has never been a disagreement over the energy sector reforms but the overall roadmap and the mode of its implementation have always been questionable.
The results of previous reforms have in fact diluted the public trust any reform process.
The most successful reform tool in the last two decades or so has been privatisation but its outcome has disappointed the general public. Energy, cement, banking, ghee, sugar and similar examples are case in point.
The post privatisation process of improving market conditions monitored by regulators has been frustrating. If anything these regulators have virtually blunted the political tool available to general public to secure its interests. This has been very clearly conceded in the future roadmap. The two regulators — Ogra and Nepra — have “not been performing their functions of oversight or research as mandated by law. A major revamp of the regulator is required with large scale induction of professional expertise,” it says. About Nepra, it adds, it was taking “ages to determine generation tariff for the private sector by far exceeding the time limits set by itself for the process”.
The roadmap has quantified the cost of losses. For example, just by replacing private sector tube-wells with energy efficiency motors would provide a saving of 1,100mw at a cost of $330 million (Rs28 billion) which is less than the annual cross subsidy in tariff. Replacement of substandard fans and motor pumps could save anther 500mw at a cost of $100 million.
Estimates suggest that air-conditioners were consuming 5,500mw of electricity in peak hours and hence tariff needs to be substantially increased for higher-end consumers, probably to make its use unaffordable to an already skewed middle class.
Another 1,000mw savings have been estimated through compact fluorescent lamps while 500mw could be saved from street lighting by putting them on solar energy.
It says the power generation by public sector companies at 25-30 per cent efficiency was deplorable when compared with their private sector counterparts at 45 per cent, although newer technologies could yield 60 per cent output. “Annual loss (in this head alone) is estimated at over Rs40 billion by continued dispatching over inefficient plants”. The government paper puts distribution losses at 27 per cent, saying each percentage loss adds Rs6 billion. “Potential saving in the system is Rs90 billion per annum”.
Also, domestic gas appliances consume over 1000mmcfd (million cubic feet of gas per day) in winter at 22 per cent efficiency against a world standard of 70 per cent. “About 500mmcfd saving is possible at an estimated cost of $300 million”.
The consumer end power tariff will be increased by eight per cent over the next three months and thereafter Nepra will be authorised to determine and notify prices directly. Apart from fuel impact, base tariffs are estimated to increase by about 20 per cent throughout the next financial year.
The government believes that lower end tariff especially in the residential categories up to 100 units per month still remain a problem as they are approximately 40 per cent lower than the determined tariff. “There is a need to rationalise the pricing and slabs and cross subsidies”.The lower end domestic consumer pricing is well below the cost of production by 75 per cent and consume 30 per cent of electricity.
Another special category would be created for uninterruptible supply contracts for industrial consumers who are prepared to pay at least double of the existing charges for no load shedding at all.
It says the pricing for gas is grossly inefficient both at the production and consumer end.The low gas price at the producer level is one of the main reasons for disincentive for exploration. The existing domestic price is at $3.2 per mmbtu (million British thermal unit), a part of which comes back to the government in the form of taxes and duties, against $10 per mmbtu or so of imported liquefied natural gas (LNG) or piped gas from Iran that would be paid abroad.
“The economic argument for raising price for domestically produced gas is overwhelming and an urgent requirement”.
The consumer pricing for gas is about a third of alternative fuels, putting extreme pressures on the demand for gas on political grounds. The provinces have invoked constitutional clauses to wastefully use it for political gains as a direct consequence. “The low consumer price of gas is tantamount to wasting the valuable resour ces.” The low gas price is an indirect subsidy to the well-off as it primarily goes to 20 per cent of the people who have gas connections. CNG on the other hand is a subsidy to the two per cent who own cars. Gas price to industry, captive power is also unfair, according to official summary, which says “not all industry has captive power and hence selected industries and hotels such as Marriot, Sheraton in Karachi are given subsidy for no rhyme or reason”.
Gas pricing to fertiliser is a another issue, where the country can import fertiliser and subsidise the same to farmers saving at least a Rs100 billion per annum, according to the paper. It argues that efficiency in the use of natural resources can only be inculcated if the pricing is corrected, having multiple beneficial impacts on economy. It says the gas pricing could generate more than Rs400 billion, by raising Rs100 billion from the gas users, other than fertilisers, by increasing the prices to only 60 per cent of alternative fuels, earning another Rs100 billion from fertiliser if the product was imported, and then by reducing pressure on supply and improving efficiencies. Gas losses at 10 per cent were higher than international standards, which could be halved to save $2 billion per annum if valued at import value of fuel oil.
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