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November 2, 2019

The complexities of energy planning


November 2, 2019

We have emerged from an energy crisis recently, but only to create new problems and issues or accentuating the existing ones. Lack of adequate planning and consensus, thereof, has been at the root of energy deficits and surpluses.

Energy generates economic growth and economic growth requires energy. It is a two-way relationship. Energy supplies are capital intensive and have a long gestation time. Long-term demand forecasting is required to bring about supplies. In Pakistan, energy forecasting and supplies development have a chequered history. Shortages and black-outs have occurred several times in the country’s history. Regional shortages are permanent, as we see that electricity supply coverage is 80 percent and gas supply merely 20 percent. Biomass is a general source of energy in rural areas.

Currently, we are facing electricity/energy surplus. After suffering a decade of energy deficit, probably overinvestment has been made which is partly responsible for the rising and uncontrolled circular debt. Lack of reliable forecasting and consensus on expected demand levels led to excessive investment. Both imported coal and LNG power projects were launched at the same time. Currently, an interesting and vicious problem exists; if RLNG power plants are run, coal power plants are underutilized and vice-versa. Take or Pay conditions in LNG and electricity have made the problem more severe. Investments should be demand based rather than supply based. Unfortunately, the latter has happened.

Ironically, demand forecasting and energy planning skills have been in short supply and reliance has been made largely on foreign consultants. Multiple consultants and studies have been launched, often simultaneously, creating confusion and giving rise to arbitrary decision making. However, most effort has been focused on electricity planning and demand analysis, being under government tutelage. In case of oil and gas, not much planning effort has been done. The electricity sector also received a lot of restructuring effort which was transformed from a monolith Wapda monopoly to a highly variegated and structured system. While the oil sector is adequately structured except for privatization, the gas sector faces multitude organizational and structural problems.

To be fair, it is not easy to make accurate and reliable energy demand forecasts. Developed countries, being rich, have excess supplies, which poor countries cannot afford. The late Mahboob-ul-Haque, an eminent and influential economist of Pakistan, once argued that one hour of non-supply may be better than one hour of peak supply. As mentioned earlier, energy demand and consumption is related to economic growth. However, reliable quantitative estimates of economic growth rates (GDP) have not been there, mostly due to political instability.

In the last economic vision report prepared and launched by the previous government projected long-term GDP growth rates varying between 7 and 10 percent. And growth rate now and its projections tell us a different story. All energy demand estimates based on earlier GDP projections would not hold at all. Resultantly, energy planners in this country have been doing scenario forecasting – often taking three assumptions: low, medium and high economic growth. There is obviously, no way of knowing, as to which scenario would transform into reality.

Although qualitatively, there is a firm relationship between economic growth and energy consumption, it has never been easy to determine an exact relationship that could be used to determine energy demand. The relationship is called energy-GDP elasticity by economists. There are all kinds of estimates of GDP elasticity in papers published in economic journals. Estimates for Pakistan vary from 1.5 to 0.6. The variations are due to data, methodology and other factors.

The confusion is not there only in Pakistan. In India, the corresponding estimates have also a similar kind of variations. However, one thing is sure that energy efficiency is improving almost everywhere due to technology changes and the GDP elasticity numbers are going down. For example in Europe, energy-GDP elasticity has gone down to 0.25 from earlier figures of 1.0 or little less.

The structure of the economy also influences the quantitative linkage between energy consumption and economic growth rates. Primary and raw material producing economies tend to have a higher demand of energy for producing one unit of GDP than secondary or tertiary economies producing finished goods or dealing heavily in services.

Intra-energy substitution also makes the job of an energy planner even more difficult. Electricity can be made in many ways. Oil and gas can substitute each other. Waste can be left as it is or can be utilized in many ways. Oil may produce less electricity than gas, for the same amount of energy content. Therefore, an Integrated Energy Plan may be a better choice than undertaking a subsectoral analysis of electricity, oil and gas demand separately. However, the usual practice is the latter, partial equilibrium analysis, making assumptions which may not always be tenable.

In Pakistan, an effort was made by the Planning Commission in the past but failed, although for reasons other than technical ones. It is not easy to integrate diverse groups and interests and make them work together harmoniously. There is yet another factor that affects energy demand in a significant way and that is price. Obviously, if the prices are high, demand would go down; if the price increases and vice versa. Thus, there is a negative relationship. It is even more difficult to forecast inflation and energy prices.

Technology change is another driver of variations in energy demand. For example, electrical vehicles (EV) have emerged as a formidable contender. If the claims of EV enthusiasts are accepted, in two decades, the demand of oil would go down challenging the viability of the oil business. The emergence of renewables like solar and wind, and further emergence of storage would be another blow to fossil fuel.

Practitioners often tend to adopt or are forced to adopt a simple growth rates approach – demand growing or expected to grow at a certain rate. Past trends may be repeated or may be adjusted upwards or downwards according to the evolving circumstances. Others, scholarly inclined, have started adopting time series methods like auto-regressive analysis and have succeeded in getting reliable and credible results.

It is, therefore, not easy to reject some demand forecast or argue strongly in favour of another. Economists are often found making incorrect or erroneous forecasts and later explaining why their forecasts went wrong. It may take some more time to develop more advanced skills in electrical planning, and external advice and input may be needed. In case of demand forecasting, there is a wide spread and strong capability in econometric modeling in our universities.

This resource has not been tapped yet fully. There have been limited industry-academia contacts. Academia is generally shy and used to relaxed schedules, while industry demands tight schedules. There is a lack of common lingua issue as well. Both have to learn the technology of each other to be able to be of use to each other.

Also, it is no more feasible or fashionable in indulging 20 years or longer forecasting and planning effort. It can serve at best as a loose perspective. A ten-year rolling plan with five years updating is being adopted more and more by the planning and investment community. It is in this context that we should evaluate the Indicative Generation Capacity Expansion Plan (IGCEP) submitted by the NTDC.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

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