By Muhammad Sheroze Khan Lodhi
Russia’s invasion of Ukraine in February 2022 has had a profound effect on global energy markets. Price volatility, supply shortages, security issues, and economic uncertainty have contributed to what the International Energy Agency (IEA) is calling “the first truly global energy crisis, with impacts that will be felt for years to come”.
As ever, poorer countries many still recovering from the effects of the global pandemic will bear the brunt of the negative consequences of the energy crisis. The myriad consequences of a global energy reboot mean that there may be some positive developments, too. However, with so much in a state of flux, it is difficult to predict with much certainty.
As the IEA notes, “Many of the contours of this new world are not yet fully defined, but there is no going back to the way things were”. Now even households in Pakistan are feeling the heat of energy poverty as power costs here have almost doubled since the war.
With inflation in double digits, there is a cry for massive electricity subsidies, which unfortunately the government can’t afford due to a poor revenue structure and massive circular debt. Naturally, the question of what went wrong to put us in this horrible situation and how to improve the power industry then comes up.
Here are some points that explain the power crisis and how we can manage the power debt problem in the future: In the past, reforms, or whatever we did in the name of reforms, did not produce the desired results.
For instance, the disintegration of the power wing of the Water and Power Development Authority (WAPDA) and its division into several independent power distribution companies (DISCOs) did not result in better performance.
In fact, the performance has only deteriorated over the years, with higher levels of corruption, inefficiency, mismanagement, bad governance, and incompetence adding to the menace of circular debt and bad recoveries.
Politicians have frequently exploited legislators’ plans to provide electricity to their various areas for political points during the post-Zia era. Because of the extreme line losses and low number of commercial or corporate users, an extension of the grid for rural electric supply typically doesn’t have a viable business case.
Even though grid extensions have been the most popular method for electrifying rural areas, off-grid systems are desperately needed because our transmission and distribution networks need to be completely redesigned. Nearly half of our generation must be taken off the grid since the Transmission & Distribution (T&D) system is stopped at 22,000MW while having a generation potential of over 40,000MW.
What the government can do is start offloading some power plants to provinces for local power generation and distribution, bypassing the grid completely. Sri Lanka, Nepal, and hilly areas in India have extensively used mini/micro hydropower systems to create mini-grids to extend electrification off-grid, where financing matters are often looked at by indigenous village energy committees (VECs) or rural electric cooperatives (RECs).
This off-grid model, whether funded by the local government or communities, implies that the business model shall be deregulated to a large extent, and most of the National Electric Power Regulatory Authority (NEPRA) and Central Power Purchasing Agency-Guaranteed (CPPA-G) tariffs may not be applicable. In provinces like Baluchistan with a sparse but distributed population, this decentralized distributed generation model is the way to go.
Similarly, the independent power producers (IPPs) introduced in the 1990s, on the advice of international lending agencies, have played havoc, contributing adversely to the financial health of the power sector and leading to ever-increasing power tariffs.
Not only is the common man unable to pay the exorbitant electricity bills, which include taxes and surcharges totaling above 30 percent, but it is also diminishing our exports, which are no longer competitive even within the region because of the higher input cost of electrical power.
Despite a massive increase in electricity prices in the current fiscal year, the circular debt is projected to increase by another Rs545 billion before settling around Rs392 billion. These Rs392 billion increases in circular debt would be adjusted against the reduction in the previous debt stock through subsidies aimed at keeping the total circular debt at Rs2,310 trillion by June next year.
On a conclusive note, the International Monetary Fund (IMF), other lending agencies’ loans, or even investors, cannot restructure the energy sector unless we set our house in order. No amount of loans and reforms is going to sort out the power mess unless the deep-rooted local problems of power theft, inefficiency, rampant corruption, and poor governance are addressed first.
Otherwise, the national debt will keep on increasing, with energy prices spiraling out of control. The actual problem is that we cannot have any meaningful reforms without a strong representative government in place.
That’s the only way Pakistan may escape the predicament it currently finds itself in. And for it to happen, a free and fair election must be held where the people can select their representatives.
The writer is an economic analyst.
Courtesy: Business Recorder.