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Electricity crisis and circular debt

APRIL 13, 2012 AMJAD AGHA

The electricity crisis being faced in the country is devastating for the economic survival as well as for the well-being of the population. Not to speak of new ventures, existing factories and businesses are being shut down due to nonavailability of electricity, which is rendering thousands of people out of job. The national debt is galloping and unrest in the population is mounting, as there is no solution in sight. Signals for the looming crisis were visible for the last several years, but unfortunately no positive steps have so far been taken to rectify the situation. The main cause of the electricity crisis is the extremely high cost of generation primarily due to the faulty fuel mix being used to produce electricity. At present the total generation installed capacity is 21,000 MW. The peak demand is 15,000 MW, but the production is only 9,000-10,000 MW, resulting in 10-12 hours of loadshedding. The root cause of the faulty fuel mix is the use of furnace oil as the main fuel to produce thermal electricity. The months of January to May have very low hydropower available since reservoirs are empty and snow melt will not start till June. The Tarbela reservoir receives about 95 percent of its water through snowmelt. Natural gas is in short supply and is available only to produce 29% MW of electricity. As over 50% of current generation is dependent on furnace oil, it is not viable for the government to purchase and provide oil at such a high price, therefore many plants are either shut or are producing much below their capacity. The price history of furnace oil is illustrated in the following diagram. The price of furnace oil was about Rs 2000 per ton in the nineties. It started increasing in 1999 and went upto Rs 10,000 per ton in 2001. It rose sharply in 2006 to Rs 20,000 per ton, and in 2008 it touched Rs 30,000 per ton. There was a short duration drop in 2009, but then onwards, it kept on rising very sharply.

In 2010, it went up to Rs 40,000 per ton and at present its price is almost Rs 70,000 per ton. The price of furnace oil has thus risen 30 times since 1990 and seven times since 2005. There were plenty of warnings, and if appropriate action had been taken in the years 2006-2008 by arranging alternative fuel, the present crisis could have been avoided. The alternative fuel is 'coal' that could have been initially imported and subsequently obtained by developing huge deposits of Thar coal. We have been hearing about Thar coal for the last 8 years, but zero coal is obtained from this source up-till now. Many proposals had come from foreign investors, but nobody has been allowed to touch this coal. It is a great national tragedy. The cost of producing electricity from furnace oil is about Rs 16 per kwh. This is only the fuel cost, total cost to the consumer for such electricity is about Rs 22-25/kwh, which includes fixed cost and transmission/distribution losses. The supply of furnace oil to the IPPs and rental plants is the responsibility of the government, since fuel cost under the agreement signed is a pass-through item. The government is unable to pay the fuel cost to the generating companies, with the result that plants are shut or are running at a very low capacity. The generating companies are thus unable to pay to the oil companies and a high circular debt is created. At present, the circular debt is around Rs 400 billion. Unless this debt is cleared, there will be no immediate improvement in electricity supply. Everybody now seems to accept that alternative fuel to furnace oil is a must but nothing has so far been done. Even if today the import of coal is started, it will take about three years. Before the coal can be obtained and some power plants are modified to use different boilers etc, then again only those plants can be converted to coal which are near the coast. To transport large quantities of imported coal upcountry will be a huge task. The other alternate fuel again for a short period could be natural gas. It is known that additional gas can be extracted from certain fields by applying high pressure. The availability of additional gas will take some time plus the quantity of gas may not be sufficient to totally replace furnace oil. Similarly the open pit mining arrangement for Thar coal will take a minimum of three years.

This means that the earliest that change can take place is about three years provided the work on the alternatives is immediately started. If industrial production and economic activity is to be restored, the government has no choice but to meet the circular debt as a subsidy for the next three years. With the tariff increase already announced, the circular debt will come down, but it will not be possible to burden the consumers any more. If the US really wants to help, they should take care of this debt for the next 2-3 years. Our top priority for the power sector should be to concentrate on opening the Thar coal mines as soon as possible. Experiments for gasification of coal may continue, but open pit mining is the tried and known solution. In the meantime, the existing furnace oil plants be converted as much as possible to use coal, initially imported and then Thar coal. Additional gas should be extracted from the existing fields to help replace furnace oil. All new thermal plants be based on coal, these plants be located near the Thar deposits, so that transportation of coal is avoided. There is some news of importing 5000 MW from India. It appears to be hypothetical. How, and at what cost and when it will be possible is yet unknown. We should concentrate on the development of our own resources. Such offers if serious could be examined, but should not deter us from following our own course. The country has huge potential to produce hydropower, while there are gas fields waiting to be developed, vast coal deposits exist. Imported natural gas can also be a better and more economical fuel than the furnace oil. However, for immediate solution, there seems no option except to fund the circular debt for the next three years. The present available generation capacity is sufficient to meet the peak demand, provided the fuel required is provided to the operating units. Simultaneously serious steps must be taken (i) to develop coal mines and gas fields immediately, which is essential to replace the high cost of oil; and (ii) get rid of the circular debt and eliminate loadshedding so that industry, commerce and living conditions be brought to normal levels. Obviously some other expenses will have to be cut during the next three years to accommodate this essential subsidy for restoring the economy. We must be determined to use indigenous resources, which are in abundance. Concentrate on Thar coal, supplemented by natural gas fields existing and new and hydropower. A number of medium sized hydropower projects are ready to be launched on the Jehlum River,

Kunhar River and Swat River, as well as in Dir, and Chitral. These should be taken up even if the mega multipurpose projects like Bhasha, Kalabagh are not yet started. Doing nothing is no option. (The writer is the President of Associated Consulting Engineers, former managing director of NESPAK, and former chief executive of Pakistan Hydro consultants for the Ghazi Barotha Hydropower project)

http://www.brecorder.com/articles-a-letters/187/1177269/