Analysis: From gas addiction to green innovation: Is there light at the end of the tunnel? (Part III)

To help transition to clean energy, developed countries (including the USA, EU, and UK) have pledged funding for developing nations in the form of grants, low interest loans and private investments. South Africa ($8.5bn), Indonesia ($20bn), and Vietnam ($15bn) are the first three beneficiary countries under a Just Energy Transition Partnership (JETP) program, while India and Mexico are next in line.

One potential use of a similar JETP initiative for Pakistan could be the early buyout of idle oil based IPPs and redeploying the capital to build cheaper wind and solar hybrid plants, and desalination plants along the coastal belt. With the right policy framework and minimal red tape, we could use this money to also finance private projects across a wide spectrum including mining of battery raw materials, nature-based carbon offsets, electric buses, electric rickshaws, and smart grids.

Demand-side management is an uninteresting, yet crucial, area that does not receive enough attention from policy makers. A MW saved is a MW generated. Our building codes and energy efficiency standards for consumer appliances sold on the market are not best in class and must be urgently revised to promote conservation and productivity. We employ slab rates and peak/non-peak tariffs as financial incentives but very little has been done to educate the consumer on how to reduce their electricity bills beyond just replacing incandescent bulbs with LEDs.

In the developed markets, various consumer distributed energy resources, such as rooftop solar PV and home batteries, are now being connected to the distribution grid in a bi-directional and AI-driven digitized relationship between multiple sellers and buyers of electricity. This not only reduces peak load but also the quantum of investment required to upgrade the transmission infrastructure as the energy sector “electrifies” further. The power sector is being decentralized the world over and should also be decentralized in Pakistan.

Long addicted to cheaply priced natural gas, Pakistan’s existing indigenous reserves are projected to fully deplete within the next decade or so. Gas is used in our country to cook food, heat homes, generate electricity, manufacture fertilizer, produce heat for process industries, and fuel CNG vehicles. Its allocation among provinces, and various categories of users, has always been a political and constitutional hot potato.

We have also not had a major new discovery for some time despite a series of policies rolled out to incentivize exploration and production of onshore, offshore, conventional, and tight, natural gas. Barring a stroke of luck, we are likely to enhance our dependance on imported liquified (and cross-border piped) natural gas in the coming years, unless we reduce its demand in the economy.

We would be able to better manage the gas demand and supply equation if domestic space heating and cooking gets electrified to a large extent in urban areas, or green hydrogen (produced by electrolyzing water using renewable energy) replaces it in urea and steel production. Likewise, it would help reduce gas demand if new wind and solar power plants alongside grid-connected batteries increasingly replace gas turbines, and the LPG footprint is expanded for commercial and residential heating and cooking.

Suffice it to say that each of these workstreams requires a coherent set of enabling policies and regulations to allow the private sector to make the economics work and play its due role. For instance, without effectively curbing the smuggling of LPG (also diesel) across the Iranian border on which an entire informal ecosystem depends, no related policy would ever work.

Like power, the gas market also needs to be deregulated and liberalized by removing all impediments to the direct exchange of molecules between sellers and commercial & industrial buyers. The government should just be a ‘matchmaker’ between foreign suppliers (whether from Azerbaijan or Russia) and our domestic fertilizer and export-oriented textile companies seeking state subsidies in the name of regionally competitive energy tariffs. It is true that from a pure economic standpoint, our value-add industries should have preferential access to indigenous natural gas vis-a-vis domestic heating and cooking.

However, our socio-political ground realities are such that households will always have priority over local gas production. It also makes little sense for the state to import expensive LNG and sell it to residential customers at highly subsidized rates. While this has been a major driver of the gas sector’s own circular debt problem hiding below the radar, PSO’s LNG-related receivables of Rs450bn highlights that serious disconnect.

The government must also let the private sector decide whether to set up more LNG import terminals (at their own cost and customer risk) by removing all obstacles to their accessing the common pipeline infrastructure or using cryogenic road tankers. Like the power DISCOs, our two state-controlled Sui gas distribution companies will likely lose some of their best commercial and industrial customers to cheaper and more reliable private suppliers -- unless they too are allowed to source (and sell) their own gas from wherever (and to whomsoever at whatever price) on a level playing field.

But no matter how we slice and dice it, the state will have to recognize the previous take-or-pay contracts signed with LNG suppliers and terminals as its sovereign liability that may, or may not, be fully recovered from consumers. Yet again, there are no free lunches or quick fixes on the table here but spurring overall economic activity with more affordable private energy should hopefully compensate for such ‘stranded’ costs in the long run.

To be continued

Writer is former SAPM on Power & Petroleum.