Sunday March 26, 2023

Energy for the future

December 25, 2022

Pakistan has a perennial energy deficit, and that deficit keeps on growing. The growth in energy deficit is both a function of underinvestment in energy, incessant subsidies, and inability of the government to price energy at a level that reflects the marginal cost of a molecule of gas, or electron of electricity that is produced and dispatched.

The cost of natural gas at the household level is only a small fraction of the marginal cost of gas, resulting in inefficient utilization. Gas losses continue to mount, and a new hydra of gas circular debt is already in place, in addition to the regular circular debt.

As circular debts pile up, and the government refuses to take any meaningful decision, the consumer continues to bear the cost of inefficiencies of the state. Currently, we have a surplus of power generation capacity, but not enough foreign currency or the ability to afford expensive fuel. If pricing decisions continue to be arbitrary, the crisis is only going to worsen – eventually leading to complete paralysis. A partial version of this can be witnessed these days, as the central bank continues to conserve foreign currency while businesses shut down.

A drastic shift in mindset is required in terms of how energy is sourced, and how it is priced. If Pakistan is supposed to get on a sustainable growth trajectory, then energy security should be the order of the day. Currently, the country’s energy mix is heavily tilted towards imported fuel, whether that is imported LNG, coal, or petroleum products. There is a need to shift from imported sources to local, or to rationalize consumption.

Thar coal is an indigenous resource that can power the country for decades to come, if the resources are efficiently and effectively managed. Within a few months, it will be possible to produce more than 15 million tons of coal per annum, sufficient to generate more than 2500MW of electricity. We currently have almost 5000MW of power plants that can generate electricity via imported coal.

Through some technical modification, which will require certain investment, it is entirely possible to convert power plants running on imported coal to run on Thar coal. It is certainly a herculean initiative as it will require bringing everyone on the same page. It will also require investment in scaling up of existing mines, as well as establishment of a railway line to connect the mines with the power plants. The infrastructure investment to convert imported power plants to local coal, establish a railway line effectively creating a coal corridor, and scale up mining capacity will cumulatively cost about $2 billion.

However, once the infrastructure is in place, it is entirely possible to save more than $3 billion every year in foreign currency liquidity, ensuring we continue to produce affordable electricity using indigenous resources. This infrastructure intervention not only ensures energy security as reliance on imported fuel decreases, but also makes electricity more affordable. Recent numbers suggest that the fuel cost for generating electricity via Thar coal is in the range of Rs3 per kilowatt-hour.

As coal continues to provide base load, we also need to encourage mass adoption of solar on a household and commercial level. Currently, the process of getting a net metering connection is a painful one that is actively discouraged by the regulator. Development of decentralized solar capacity is essential for creation of a competitive market for electricity. Ironically, the state is willing to give guaranteed returns on establishment of solar power plants to cover a risk that households and businesses alike are willing to take and pay for it. It is time our thinking moves away from guaranteeing returns, and towards a more competitive market, not just in letter but also in spirit.

A mix of coal, nuclear, hydel, and solar will greatly reduce the country’s dependence on imported energy, and make energy more affordable. The energy mix just doesn’t end in electricity. We import more than $12 billion of petroleum products, largely used for automotive consumption.

It is critical that the state doubles down on developing public transport infrastructure, such that reliance on private vehicles is reduced. Countries across the world have done the same. It not just reduces the cost of commuting for the population, but also enhances energy security. As the population continues to grow, so will demand for petroleum products. We can either curtail this demand by interventions such as public transport infrastructure, or we can continue to defer the problem till it becomes too big.

Policymakers, and their cronies are oblivious of the problems of the generations to come. They are still living with a surplus mindset, whereas resource constraints are real. Someone somewhere needs to start thinking about future generations, and how the country will manage its resources. The population growth rate doesn’t seem to slow down, and neither will demand for staples, and energy. If any policymaker or public representative feels an iota of responsibility, they will plan for the future, and not just live for daily political theatrics.

The writer is an independent macroeconomist.