Money Matters

Pakistan’s power sector crisis: strategic reforms and the case for local coal

By Muhammad Wali Farooqi
Mon, 06, 24

“The power sector can sink Pakistan’s economy if not run properly” -- these were the remarks made by Miftah Ismail in a private ceremony back in June 2022 when he served as the federal minister of finance.

Pakistan’s power sector crisis: strategic reforms and the case for local coal

“The power sector can sink Pakistan’s economy if not run properly” -- these were the remarks made by Miftah Ismail in a private ceremony back in June 2022 when he served as the federal minister of finance.

These words perfectly capture the essence of the severe challenges faced by the country’s power sector. As of November 2023, the power sector’s circular debt alone stood at Rs2.703 trillion. The leaking bucket of the power sector is dragging the entire national economy and its fiscal sustainability down, while consumers are burdened by a continuous rise in electricity tariffs.

A closer analysis of these challenges points to several tough but doable solutions -- provided there is resolute political will and a robust governance framework in place. Pakistan’s current power generation capacity, including NDTC and KE, stands at 42,764MW according to the Indicative Generation Capacity Expansion Plan 2024-34 (IGCEP 23-24). Alarmingly, at least 48 per cent of energy production relies on imported fuels, placing a significant strain on the national treasury and driving up electricity prices. A report from Pakistan’s largest securities and brokerage firm notes that from February 2023 to February 2024, the cost of imported fuels for power generation alone totaled at least $2.66 billion.

Recognizing the unsustainable dependency on imported fuels, the National University of Sciences and Technology (NUST)’s premier think-tank, the US-Pakistan Center for Advanced Studies in Energy (USPCAS-E), has conducted a thorough study and advocated for harnessing coal resources in Thar, one of the largest coal reservoirs in the world, for power production. The NUST study underscores that utilizing Thar coal could decrease generation costs to as low as Rs14.19/kWh or even less, providing a more stable and affordable power supply while saving substantial amounts in foreign exchange.

A prime example of such potential savings is the proposed conversion of Jamshoro Power Company Limited (JPCL) to utilize 100 per cent local coal from Thar mentioned in the USPCAS-E whitepaper. This conversion is projected to provide total savings of nearly $2.4 billion over the plant’s operational lifetime of 15 years considering the current costs and consumption rates. JPCL, thus, represents a lower hanging fruit that we could capitalize on immediately to demonstrate the benefits of such strategic shifts.

Thankfully, with support from the Special Investment Facilitation Council (SIFC), the utilization of local coal is seemingly a priority for the current government regime as during a meeting chaired by Prime Minister Shehbaz Sharif in April 2024, discussed the broader benefits of converting all imported fuel-based power plants, noting that such actions could save $800 million per annum and reduce electricity tariffs by Rs3 per unit. Hypothetically, if the average plant operating on imported coal has a lifespan of 15 years, this strategy could save up to $12 billion in 15 years. However, it is important that the step towards this right direction is taken rather soon to save the nation from the ongoing energy crisis.

While reducing costs for power generation using local resources is crucial, addressing the operational and recovery losses faced by government-owned power distribution companies is equally critical. According to the State of Industry Report 2023, these Ex-Wapda Distribution Companies (XWDISCOs) have incurred Rs342.944 billion in losses due to T&D losses from FY2018-19 to FY2022-23, and commercial losses amounting to Rs557 billion between FY2019-20 and FY2022-23.

Given the poor performance of these government-owned distribution companies, the SIFC and Government are considering measures for their privatization but unfortunately, the plan seems to be going slower than it needs to be.

The path forward for Pakistan’s power sector is fraught with challenges, yet recent government initiatives -- bolstered by support from the SIFC -- hint at possible transformative changes. Prioritizing the use of local coal from Thar can evidently reduce reliance on expensive imported fuels and provide Pakistan much-needed energy security. Although the efforts to restructure and potentially privatize the inefficient state-owned distribution companies are moving slower than desired, these measures acknowledge the urgent need for deep-seated reforms. Swift and effective implementation of these plans will be crucial.

The anticipated financial savings, potentially reaching billions of dollars, not only promise economic benefits but also pave the way towards a more sustainable and autonomous energy future for Pakistan. Embracing these reforms decisively is essential for curbing the current energy crisis and stabilizing the national economy.

The writer is an energy economist with a focus on optimizing global energy systems. Currently serving as a research officer at the Institute of Policy Studies in Islamabad, he is committed to addressing climate change challenges through pragmatic solutions and is an advocate for circular economy principles, minimizing waste and promoting sustainability.