Tuesday October 19, 2021

Controlling circular debt

The circular debt issue is getting more serious by the day and the worst has yet to come with the installation of new capacity while demand continues to stagnate. There are projections that it may be double the existing level in the medium term. It is hoped that the economic growth rate grows so as to increase electricity demand and capacity utilization. While this issue has many dimensions, we will focus on the demand management aspects.

There is a fundamental structural issue that will remain – the huge difference between summer and winter peak demand which leads to over investment in capacity and the generation cost increases beyond a reasonable level. At present, winter peak stands at 10-12,000 MW and summer peak at 25-30,000 MW; in near future it will be 20,000 MW vs 50,000 MW.

There are two peaks in a day in the summer or even in the winter – in the afternoon and in the evening. The evening peak is larger than the day peak. Capacity planning is done on this summer peak demand. And it is this peak that contributes to lack of capacity utilization and thus higher capacity charges and higher cost of supply. Thus summer peak has to be reduced. A positive aspect is that hydropower is produced only in summer which partly takes care of the summer peak but not all of it.

GHow to shave off the summer peak is a problem that has to be studied as to what is the marginal cost and revenue of peak hours. The late Dr Mehboobul Haq once argued that loadshedding may be cheaper. A major issue is that our markets and bazaars open till late in the evening/night. Only higher commercial tariffs after 1900 hrs can possibly change that.

We are a poor country and will remain so for quite a while. Our habits should conform to the limitations we have. Another possibility is that the hours of the second shift in industries could be changed to exclude evening peak hours. However, that would depend on practical possibilities and comparative tariff incentives that may be offered. Some industries may choose to avoid a second shift and organize a third shift in order to avail some incentives. This would also help shave the summer and winter peak.

Quite a number of factories have installed captive power plants, originally due to earlier power shortages. Most of the textile mills have done so and are operating gas power plants. The government has already drawn up a programme to allow captive power plants where there is cogeneration utilized in the process. There are some others which are utilizing waste heat to produce electricity. Except in such cases, there is no justification for providing gas to run captive power plants. It has been estimated that 2000 MW grid utilization would accrue. This would also reduce gas demand which suffers from supply side issues these days.

Industrial growth is vital to increase demand and capacity utilization. Industries pay full tariff – except the export sector, while the residential sector is given heavy subsidies due to poverty and low earnings. Half of the electricity consumers in the residential sector are not able to pay full tariff. Import policies have to curtail the current trend on imports. Currency devaluation should already have had some influence on curbing imports. Local content and introduction of new products is required. The steel industry has a scope for electricity consumption. Some of the furnaces can go electrical.

The government’s initiative for the construction industry can result in some increase in power demand. The PSM has been closed down without much chance of revival. Its individual downstream units can be revived. Erstwhile star industries have become sick industries and Railways factories are in the same shape. Our friend and benefactor, China, which built all of these can help revive these all. CPEC coal projects could have helped utilize these capacities. It was a great opportunity which has been partially lost.

On the agriculture side, most agricultural tubewells work on diesel which could be converted to electricity, although solar is a better solution. It can be electrified first and when the farmer gets resources he can go solar. This, however, does not apply to Balochistan where there is a bills payment problem and other issues.

In the transportation sector, electric vehicles can increase power demand as well. Allegedly, the current stakeholders in the automotive industry are opposing the introduction of EVs. Some intermediation is required. In any case, EV is the future.

Although T&D losses are supply side issues, they are relevant here. T&D losses and receivables are one of the most important cost elements that enhance cost of supply and thus contribute to circular debt. There hasn’t been much improvement in this respect for years. Ironically, the issue is not even discussed in the public discourse. Some solutions are available. Smart Meters on Distribution Transformers (DT) could do the job without much capex while a full smart meter programme may cost $5-7 billion which may not be affordable. The revived PEPCO may enable a collective approach and inter-company coordination on common issues such as smart meters.

It has been noted that there has been undue reliance on gas consumption due to cheaper gas, especially, space and water heating by gas. The elite could be encouraged to shift, at least partially, to electricity and solar water heating. Rising gas prices would take care of it ultimately, but we need faster action and switchover which could be achieved by policies and promotions. Some increase in capacity utilization and decrease in the summer and winter peak can be achieved through these measures.

Most of these issues are of a continuing and permanent nature. There should be some institutional arrangement to handle these issues. Both policy and operational levels should be involved. Some issues require quite complicated modeling for optimization. Carrot and stick approaches would be required. The problem can be reduced in its dimensions, if not eliminated altogether. Excess capacity at higher cost is the primary culprit, and its impact, it is hoped, would become more bearable with the uplifting of the economy which – ironically – depends significantly on energy cost and prices.

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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