The Energy Crisis In Pakistan Economics Essay

Electricity Crisis in Pakistan is one of the severe challenges the country is facing today. Electricity is essential part of our daily life and its outage has severely affected the economy and overall living of ours. Thousands have lost their jobs, businesses; our daily life has become miserable. Pakistan is currently facing upto 18 hours of electricity outage a day, is expected to face more if not dealt with in time.

The purpose of this study is to analyze the nature of this crisis and to propose some short-term as well as long-term solutions to this problem.

This study is exploratory in nature. We have done our best to conclude and sketch up some recommendations in the light of identified hurdles in the way of implementing the appropriate solution to our problem.

Our study finds some major wholes in our system if they are covered up we can not only overcome the deficiency of electricity in our systems but also we can be able to export it to our neighboring countries.

The basic flaws that our study identified are related to circular debt, and the inadequate capacity of our electricity production and distribution systems. Also we emphasized on some prospective alternatives to our electricity production that are cheaper and they provide more clean electric energy as compared to fossil fuel run energy plants.

INTRODUCTION

Background of the study:

Pakistan has been facing an unprecedented energy crisis since the last few years. The problem becomes more severe during summers. However, this winter was no different. During the peak crisis there was a power outage of 3-4 hours everyday. Those without generators and UPS faced tremendous problems. The prices of both continued to increase due to a sharp increase in their demand.

Almost two years ago the then WAPDA chairman who happens to be a caretaker minister admitted that WAPDA cannot meet the current demand for electricity. Its surprising that such a senior and experienced person took so long to find this out. On top of that the government which talked about Pakistan’s supposedly booming economy failed to understand the gravity of the situation. General Musharraf (R) after becoming Chief Executive used to talk about building dams especially Kalabagh Dam. This was one of the many promises he failed to keep. Even after that very few power plants have been set up to meet the demand for electricity.

During the second government of Benazir some independent power plants were set up. Had they not been setup then we would have had a much bigger crisis with life almost coming to a standstill. I come from the software industry which has been badly hit by the present power crisis. On an average the generator at my office is on for three hours. Our work is not much affected but overall the company’s operating expenses have increased.

The policy makers of Pakistan have so far failed to understand one thing. They do talk about making dams and setting up nuclear power plants but why do they not understand the importance and benefits of alternate energy sources such as solar, windmill energy etc. They are cheap and quick methods for producing electricity. Pakistan is a very blessed country because solar energy is available in most cities all year round similarly wind energy is readily available in the coastal areas. These energy sources if tapped can be of great help in reducing the current demand supply gap.

Pakistan is facing power shortage, natural crisis and oil crisis. In a report it is claimed that Pakistan has faced 1000 to 2000 MW shortage of power. And it will likely face 3000MW next year. Pakistan is facing 80 millions tons of oil shortage according to it’s need. And is lacking behind the needs of natural gas at about 27 million ton of energy in current year and this ratio will rise in upcoming years.

  Energy Crisis In Pakistan

An energy crisis is any great shortfall (or price rise) in the supply of energy resources to an economy. It usually refers to the shortage of oil and additionally to electricity or other natural resources.

The crisis often has effects on the rest of the economy, with many recessions being caused by an energy crisis in some form. In particular, the production costs of electricity rise, which raises manufacturing costs.

For the consumer, the price of gasoline (petrol) and diesel for cars and other vehicles rises, leading to reduced consumer confidence and spending, higher transportation costs and general price rising. Energy resources have depleted! Whatever resources are available are simply too expensive to buy or already acquired by countries which had planned and acted long time ago. Delayed efforts in the exploration sector have not been able to find sufficient amounts of energy resources. Nations of the world which have their own reserves are not supplying energy resources anymore; only the old contracts made decades ago are active. Airplanes, trains, cars, motorbikes, buses and trucks, all modes of transportation are coming to a stand still. Many industries have closed due to insufficient power supply. Price of oil has gone above the ceiling. At domestic level, alternate methods like solar, biogas and other methods are being tried for mere survival. 

The above is a likely scenario of Pakistan and around the globe after 25 years. A pessimistic view, but realistic enough to think about and plan for the future. But are we doing anything about it? Lets have a look at the current energy situation of Pakistan and the world. 

Pakistan’s economy is performing at a very high note with GDP growing at an exceptional rate, touching 8.35% in 2004-05.In its history of 58 years, there has been only a few golden years where the economy grew above 7%. This year official expectations are that GDP growth rate will be around 6.5 – 7.0%. For the coming years, the government is targeting GDP growth rate above 6%. With economy growing at such a pace, the energy requirements are likely to increase with a similar rate. For 2004-05, Pakistan’s energy consumption touched 55.5 MTOE (Million Tons of Oil Equivalent). 

The energy consumption is expected to grow at double digit if the overall economy sustains the targeted GDP growth rate of 6% by the government. Pakistan’s energy requirements are expected to double in the next few years, and our energy requirements by 2015 is likely to cross 120MTOE. By 2030, the nation’s requirement will be 7 times the current requirement reaching 361MTOE. Pakistan’s energy requirements are fulfilled with more than 80% of energy resources through imports. 

On the other hand, international oil prices have not only broken all records but are touching new highs, with every news directly or indirectly affecting the black gold industry. Moreover, speculators all around the world expect oil prices to touch $100 per barrel in medium term. With concerns over Iran’s nuclear program, terrorist issues in Nigeria and high economic growth in China & India and their ever rising energy requirements, oil prices don’t see any another way but to shoot upwards. 

What is the government doing to ensure a sustainable supply of energy resources for economic growth? What strategic steps are being taken to acquire energy resources in future? Is private sector willing to invest in Pakistan’s oil industry? What are the incentives being offered to the foreign players to continue working in the exploration sector? What hurdles are stopping other big players around the world to enter Pakistan? What is the role of gas distribution companies so far? Are the citizens of Pakistan being robbed by energy giants with ever rising utility bills? What should be the real price of petroleum, kerosene and other oil products in Pakistan? When will the nation have “load shedding free” electric supply? Have we been able to make long term contracts with the countries to provide uninterrupted supply of energy resources? Will the government be able to provide enough sources to the citizens for a sustainable economic growth? Have we lost the race for acquiring maximum energy resources for future survival?

One of the major problems facing the new government, the energy crisis, is intense, costly and multi-dimensional. The infuriating electricity and gas disruptions and soaring fuel prices in turn pushing the cost of living have made life difficult for people. The even before it took office the new government was greeted with two jumps in fuel prices, accounting for a 15% rise in two weeks. Meanwhile, crude oil prices have been registering all-time-highs, shooting 40% in the past year. The undeniable reality is that that this global spike will somehow have to be accommodated in energy prices in Pakistan.

There is no quick solution to electricity shortage and the trend of surging prices is irreversible. There is very little the new government can do on this in the immediate term. At best, the problem can be prevented from aggravating until a sustainable solution is struck. Tough decisions will have to be made, and executed with commitment.

The starting point of any remedial efforts should be an acknowledgement of the fact that the crisis is a self-inflicted one. It cannot be denied that something has been wrong down the line that caused this crisis. The country has nearly gone energy bankrupt while a total disaster appears to be round the corner unless pragmatism is shown. It is also important that lessons be learnt from the past mistakes on part of relevant circles. The crisis is still addressable as long as there is due vision and devotion.

The golden age for energy in Pakistan has been 1960s and most of the 1970s, that is when Tarbela and Mangla dams were put into operation and other dams, including Kalabagh, were actively pursued. In subsequent years, action in the field of energy has been utterly recklessness. The prevalent crisis is a consequence of imprudent energy policies over the last three decades.

One of the major limitations that have hindered energy prosperity in the country is short-sightedness. There has not been a meaningful and coherent energy policy in place over this period. The approach has been “project-oriented,” rather than “goal-oriented.” Almost every regime has dealt with energy on an ad hoc basis. Long-term and sustainable planning of energy have been an alien concept. The reason is fairly simple; energy projects usually require huge investments and commitment, making them undesirable to any regime. The attitude of delaying new projects, as far as possible, has been the common practice and is in fact the recipe of the present crises. In doing so, when things start getting out of control, haphazard and quick-fix measures are sought. A typical example is the Independent Power Producers (IPPs) saga of the 1990s. In an attempt to avert an approaching energy crisis, as a result of negligible capacity addition during the 1980s and the early 1990s, the regime in 1993-94 decided to go for thermal generation through the IPPs. Undoubtedly, the IPPs provided a very healthy contribution at the supply end, enhancing power generation capacity by more than 5000MW. Nevertheless, this power addition cost the country a fortune – apart from the controversial tariff structure, the move was against the spirit of energy sustainability and security for the country. The fact that the IPPs were set up at the terms of the investors suggest that it was a move made in panic.

The last few years provide a perfect example of failure to make a timely response to the growing energy needs. A threefold increase in energy demand over the last two decades has been responded to with an ill-proportioned increment at the supply end. Consequently, with the advent of 2008 the gap between demand and supply grew to 4,500MW indicating a 40% deficit of electricity. The prevalent energy crisis has not appeared overnight – the omens were evident for a number of years but the authorities failed to react in time. Senior WAPDA officials claim that in 2002 the government was officially warned about the approaching electricity crisis and was asked to take immediate measures to enhance generation capacity. The timely warning failed to receive any appreciation. The attitude of the relevant authorities has thus indirectly contributed to the growth of the dire crisis. Another example worth quoting here is that of the 969MW Neelam-Jehlum hydroelectric project. It was to be constructed in 2003 at a cost of $1.5 billion. It got abandoned until the present power crises intensified towards the end of 2007. The revised estimate is around $2.25 billion. The delay is costing the country a fortune – an extra $750 million in terms of project cost, apart from enormous monetary dents inflicted by the five-year delay. It is also noteworthy that WAPDA has traditionally pursued the major projects of national interest but failed to get the due positive response from the policy- and decision- makers. Interestingly, WAPDA plays the role of a scapegoat, because the common man blames WAPDA for his sufferings.

It is also important to plant relevant and qualified people at the key policy and decision making positions. Quite often, these positions are offered to utterly irrelevant, ill-qualified and incompetent people. The track record suggests that energy offices are amongst the most coveted ones in any regime, simply because they are considered to be the most lucrative ones. There are examples when undergraduate and utterly irrelevant people have been appointed to run energy offices. There are also cases when the crucial positions have been used as incentives during political bargaining. The unhealthy attitude towards sensitive energy positions is enough to explain how the field of energy has been traditionally toyed with.

Another aspect of the bankrupt policies is politicisation of projects of national interest. The paramount example is that of Kalabagh Dam. It has been politicised to such an extent that its orchestration now appears to be next to impossible. Evidences suggest that the issue has been used to serve the vested interest of regimes and certain political and ethnical forces. With the emerging post-lection sense of national reconciliation on the political arena, it is expected that such projects would be looked into with cool heads. It is time to move on. The technical issues, if there be any, have to be addressed on the drawing board, rather in processions. It has to be realised that the delay in project has not only made the country suffer but also people that come from all provinces.

In order to tackle the existing crisis and ensure a prosperous energy future, the backbone of the future energy policies would have to be reliance on domestic resources (hydropower, coal and solar and wind energy) and energy conservation. Decisions on energy projects should revolve around national interest rather than naïve political and personal gains. Energy offices should be run by qualified, committed and deserving people equipped with due mandate. Relevant ministries and departments should also be overhauled.

Inflation and energy crisis targeted Pakistan:

Pakistan is facing a number of constraints in the path of social economic and political development. One of them is the ever-increasing inflationary pressure on the general public. This inflationary pressure created a social instability and misconception among the messes towards the Government. General public considers the government responsible for this inflation. Government gave the blunt gift of inflation, unemployment, terrorism and energy crisis to the public. The government offended the masses. Some economists argue that such type of increase in prices was never seen before the regime of Musharaf. The prices of essential domestic commodities have touched the psychological boundaries. The fixed income employees and creditors are affected by this inflation. 

During five years the prices of red chilli increased by 62.7%, flour 66.2% vegetable oil 120% sugar 30.9% rice 69.9% and other essential domestic commodities like vegetables, chicken etc also showed increasing trend of prices. According to official reports the inflation rate is 7.2% and according to non-official reports like UN 8.6% World Bank 8.9% and Asian Development Bank 9.1%. This inflationary pressure has psychologically affected the employees and employers. Some renounced economists argue that the reason of this increasing inflation rate is the standard year 2001 according to which inflation rate is measured. In 2001 the foreign aid was given to Pakistan therefore low standards were made to measure the inflation rate. Although the increasing trend in the prices of fuel and other things in the international market is another factor but the standard year is also a factor.

Not only these factors caused hyperinflation but also energy crisis played a vital role in this hyper change in the prices of daily use domestic and capital commodities. 

There are three main resources used to fulfil the energy requirements Electricity, Fuel and Gas. Despite having the treasure of natural energy resources, Pakistan’s energy production plants are not fulfilling the country’s requirements effectively. The present energy crisis is affecting the economy entirely. Industrial and daily life has paralysed by this energy crisis. WAPDA is just fulfilling the country’s energy need near to 46% the remaining is fulfilled by the alternative expensive resources. The energy crisis created cost pull inflation in the country, as electricity is the key material for any production plant. There is a general observation of 5-10 hours of load shedding, but some times it hits the level of 18 hours. Even the industrial capital of Pakistan (Karachi) is suffering from the same situation.

Why in the era of energy reservation Pakistan is not utilizing its energy resources? Pakistan is just relaying on the electricity production by Dams. But Pakistan has not enough dams or water to generate electricity. Although WAPADA is enjoying the monopoly but government has to pay 2 rupee/unit as incentive. Our neighbouring country India has built a number of Dams to overcome the energy crisis but Pakistan government has paid no heed on this issue. Many projects are delayed due to provincialism the glaring example is of Kala Bagh Dam. The costly machinery amounted US $9 million is now functionless due to (rust) delay in the construction of Kala Bagh Dam, Some scientists predicted that in next 10year world has to face the water shortage also.

If the government fails to construct dams for the generation of electricity due to Provincialism government should have to adopt alternative options to accomplish the energy needs of the country. As Iran has large treasure of natural energy resources like natural gas and fuel, despite this Iran is engaged in the attainment of nuclear power generation plant. Pakistan, despite being an atomic power does not think about the nuclear electric generation plant. International community is imposing sanctions on Iran due to uranium enrichment but Iran pays no heed to them. Then why is the Pakistani government reluctant to use its nuclear plants to tackle energy crisis?

Secondly, Pakistan’s western area especially Thar is enriched by natural coal, which is the fifth largest treasure of the world. Pakistan has signed a contract with China to generate 300 Mega watts by coal deposits in 2003, but due to some reasons it has not been completed till now.

Industrialists due to high prices of electricity use alternative resources (petrol) in electric generators to fulfil their energy needs but, the fuel (petrol) prices in international market cross the psychological limits of US $110/beryl recently. The high prices of fuel and electricity created a long-term cost pull inflation (increase in the prices of raw material of one commodity cause high prices of other commodities). 

There are a lot of expectations with the new government as Nawaz Sharif pledged that if he came in rule he will fix the prices of domestic commodities like vegetables oil, floor, sugar and rice for two years. Now the new government should take basic steps to eradicate inflation. I think energy crisis is the real cause of this inflationary pressure. We are hopeful that new government will take some positive steps to fulfil its promises and public expectations. 

The looming energy crisis in Pakistan:

Energy costs, from where they stand now, could rise by more than 50 percent in the next few years. The cost of power on this scale would be difficult to manage by most emerging economies All oil-consuming countries, particularly the third world have suffered due to the consistently rising demand-driven cost of energy 

From 2004 onwards, the price of oil started soaring in the international market, and for the first time in October 2004, oil prices crossed the benchmark of US$ 50 per barrel. It continued to fluctuate but kept moving up each year and in 2007 briefly crossed US$ 100 per barrel. For the past few days it has been hovering at US$ 103 plus per barrel. The oil industry has been plagued by two main deficiencies which is a drop in exploration activity following the economic slowdown of the mid-1990s. Coupled with that, the global refining capacity did not keep pace with the rise in demand by developing countries, especially in China, India and the Far East beginning 2000. Yet, both OPEC and the vertically integrated oil industry have displayed no interest in increasing the output, which needs additional investment in exploration and at last 4 to 5 years to build additional refining capacity.

All oil-consuming countries, particularly the third world countries have suffered due to the consistently rising demand-driven cost of energy. Pakistan is one of the countries worst hit by the rise in price of energy. The domestic energy generation sources are restricted to hydropower, limited production of oil and gas, and negligible use of coal as the input for power generation. Even the conversion of cement industry to use coal did not help much as the required quantity was being imported from Indonesia and some other countries. This brings us to the shortage being faced in supply of electricity for domestic and industrial purposes (In figures I and II below the position of domestic demand and supply for electrical energy is highlighted).

According to the PPIB website, during 2008 Pakistan would be short of electricity supply to the tune of 1,457 mwh. Given this supply shortfall, and few choices for plugging this gap with indigenous energy resources; the planned and projected growth in GDP appears highly unlikely. If Pakistan chooses to rely on fossil fuel to generate electricity it would be a constant burden on the country’s foreign exchange reserves, and due to continuously increasing price of oil, our exportable surplus would become progressively more uncompetitive and goods for local consumption would become costlier. This may result in closure/ bankruptcy of some industries and the country could face some economic weaknesses. It is therefore imperative that Pakistan finds workable remedies to the looming energy crises and remedies are found with practical solutions to facing up to the problems arising out of growing population and the growing energy needs to support reasonable GDP growth.

For the last 10 years Pakistan has been importing crude oil and refined petroleum products to generate electricity, besides meeting the increasing demands of its expanding transport sector.

The alternate energy sources and tueir crisis :

Nuclear energy:

KANUPP was established with the help of the Canadian Government in the 1960’s and nearing end of its lifecycle. The “Chashrna Nuclear Power Plant” has been designed and built in collaboration with People’s Republic of China, and is being operated and maintained by Pakistani scientists and engineers, delivering full power of 300 mw to the national grid. With the Karachi Nuclear Power Plant also operational since 1971, Pakistan is the only country in the Muslim World operating nuclear power plants. Nuclear power is safe, economical and environment-friendly.

Natural gas exploration:

Pakistan still has huge untapped gas reserves. If we allocate more resources to their exploration there is a possibility that in the near future part of the energy resource gap may be met from new reserves.The current gas prices and the limits they place on increasing the profitability of this sector would not attract any reasonable amount of investment, whether local or foreign, since the cost of exploration has gone up substantially and current well head prices do not justify further investment at the current rate of return. The other factor discouraging exploration of new gas reserves, which would continue to haunt us, is the law and order situation in most of the areas where gas finds can be a possibility.

Natural gas import:

The IPI (Iran-Pakistan-India) gas pipeline project is also a long story (global political situation is not being discussed for obvious reasons) but the current plan to lay the 54 inch pipeline through the coastal area has a major flaw. Even if Pakistan starts building the pipeline on priority basis, it may take 5 years to complete the project (i.e. by 2013), and it may plug the energy gap only thereafter.

Solar energy:

At present, except for low-ampere domestic use, solar energy is a distant possibility, although in a country like Pakistan where clouds are a rarity for most part of the year it could be a workable option. There is a simple way of harnessing this energy for the industry, which is dependent on steam generation through oil or gas-fired boilers. Water can be pre-heated by converging sun rays on tanks made of metals/alloys that can easily absorb the heat. This pre-heating can reduce the cost of producing steam and reduce the energy resource gap to an extent, though negligible.

Coal:

Pakistan has enormous coal reserves (probably the third largest in the world) that remain untapped and even the industries that have converted from gas to coal as their energy source have to import coal mostly from Indonesia, which is again a drain on Pakistan’s scarce foreign exchange reserves.

Wind energy:

The government is following a policy to encourage investment in wind energy. Two corridors have been identified in Sindh, and land has been allocated to various wind energy projects. The issues confronting the wind power sector are as under:

(a) Scarcity of equipment: wind power equipment is in short supply, the world over. Propelled by GDP growth needs, demand for energy has been growing globally, and as cost of energy derived from fossil fuels has increased two-fold during the last three years, the demand of wind power equipment has also grown manifold.

(b) Due to growth in demand and increase in the cost of metals, especially steel and its products, the price of equipment required for wind power has also increased manifold.

(e) Although the cost of equipment and know how is high, the advantages of wind power are quantifiable, and after a number of years, electricity generated by this technology would become the cheapest compared to alternate sources of energy at that point of time.

To install this initially expensive but eventually very economical technology, in the first instance Pakistan may start importing and installing the equipment to generate electricity but in the long run it must encourage domestic production of the equipment. If Pakistan can replicate the sophisticated machinery and equipment for uranium enrichment and also can produce or cause to be produced very high RPM centrifuges, machinery, electric circuits, vacuum valves and allied equipment then, probably, then it also has the capacity to produce equipment for wind power. In this regard, Pakistan can also enter into technology transfer agreements with foreign manufacturers.

The considerations that place wind energy on top of the list is mainly due to the fact that generating energy using this technology requires no fuel, and the energy production process does not pollute the environment.