Pakistan Institute of Development Economics, Islamabad

Pakistan's Energy Security Challenge: Some Observations and Thoughts

Author(s): Khalid Rahman
Source: The Pakistan Development Review, Vol. 47, No. 4, Papers and Proceedings PARTS I and
II Twenty-fourth Annual General Meeting and Conference of the Pakistan Society of
Development Economists Islamabad, March 31-April 2, 2009 (Winter 2008), pp. 1011-1017
Published by: Pakistan Institute of Development Economics, Islamabad
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ThePakistan Review
Development
47: 4 Part
II (Winter
2008)pp.1011-1017

Pakistan's Energy Security Challenge:

Some Observations and Thoughts

Khalid Rahman

1. ENERGY SECURITY
1.1. Energysecurityhas becometheburningtopicof theday bothin countryspecific
and international terms.Many considerthatthe new alignmentsin geopoliticsare
stronglyinfluencedby the search for energysecuritywhich may be defined as
"dependableand affordable energynecessaryforan economy."It is even claimedthatin
termsof strategicimportance energysecurityis secondonlyto foodsecurity.Giventhe
of
shortage energy we are facingand thenationaldebateon its cost and affordability,
thereis no doubtconsensusthatwe have an EnergyCrisisin thecountry and ourEnergy
Securityis at risk.

1.2. The Issues

The nationaldebate on the energysectorhas turnedintoa blame game where
everyone is fingerpointing.It is interesting
how everyplayerhas a solutiondependent
on actionsbyothers.
The firststep to solving a problemis to recogniseand accept the problem,
somethingwe have been unwillingto do in the energysector for sometime.To
understand the problemand its genesis we need to understand: (i) the fuel /primary
energyside; (ii) availabilityof financialresources;(iii) importanceof demand side
management; and (iv) theneed to lookat energyin an integrated
fashion.

1.3. The Issue of Fuel/Primary

Energy
Pakistan'senergysectorhas beentoo dependent on itsdomesticgas as theprimary
sourceof energy.Unfortunately thepricingforthispreciousresourcewas notbased on
economic principlesof scarcityand optimalallocation,which resultedin it$ under
pricing,misuse and misallocation.This also createda barrierfor the entryof other
alternate
fuelssuchas coal and adverselyaffected
explorationandproduction activitiesin
thecountry. Pakistanwas nevera gas surpluscountry
as is obviousfromtheinstitution of
gas quotas and the need forimportof fueloil beyondthatproducedby the domestic
refineries.

Khalid
Rahman
isInternational
Consultant
onEnergy,
Lahore.

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1012 Klialid
Rahman

Therewas a lackof truerecognition thatwe wererunning outof domesticgas. No

real alternativewas putin place. Further whentheexpectedgas importschemesdid not
materialise we did nottakecorrective actions.But again,largelythedebateis focusedon
talksof ourlargehydropotentialand Tharcoal, whichare projectedas thesolution.The
nationneeds to understandwhy theyare not happening.The problemneeds to be
understood andidentifiedforpossiblesolution.
In theprimary energy/fuel sub sectorthecost forhydropower speciallyfromthe
multipurpose dams needs a revaluation. In particularwe need to factorin the cost of
thermal powerthathas to be builtto back up thehydropower as well as thetruecost of
financing.Unlesswe getoureconomiccostsrightwe willcontinueto have difficulty in
accepting the costof developingdomestic coal and alternate
energy .
The current powercrisisis inrealitya fuelsidecrisis.

1.4. Fuel and PrimaryEnergySecurity

Therefore we needto strengthen ouroptionsforfuel/primary energysupply.This
should include developmentof domestic resourceslike Thar coal and enhanced
explorationforfossilfuelswithinthecountry.At thesame timelike othernationswe
need to investabroadto securelong termsupplies/contracts forcoal and LNG (Light
NaturalGas). We havebeenfacingdifficulties in accessingLNG suppliesbecausewe did
notact in time.OGDC (Oil and Gas DevelopmentCompany)shouldgear itselfup for
seekingthedesiredreservesabroad.Also, as partof the Securitystrategywe need to
allocate our domesticresourceswherewe get the maximumeconomic benefit.We
alreadyhave in countrya reasonablefertiliser
manufacturing base. For futureexpansion
we couldinvestabroadin fertiliserplantsandreserveourowngas forthepowersector.
In thehydropower sectorwe needto givehigherimportance to developingtherun
oftheriverpotentialas wellas on smallerschemeson theirrigationsystems.

1.5. The EnergyMix

Table 3

EnergyMixPlan Projections
Current Short Term Medium
Term Term
Long
2004 2010 2015 2020 2025 2030
Total
MTOE 50.8 79.39 120.18 177.35 255.37 361.31
Oil 15.20 30% 20.69 26% 32.51 27% 45.4725.7%57.9322.7%66.8418.5%
Natural
Gas 25.45 50% 38.99 49% 52.98 44% 77.85 44% 114.8445% 162.5845%
Coal 3.30 6.5% 7.16 9% 14.45 12% 24.77 14.0%38.28 15% 68.65 19%
Hydro 6.43 12.7% 11.03 13.9% 16.4013.6%21.44 12.1%30.50 12% 38.9310.8%
Renewable 0.00 0.0% 0.84 1.1% 1.60 1.3% 3.00 1.7% 5.58 2.2% 9.20 2.5%
Nuclear 0.42 0.8% 0.69 0.9% 2.23 1.9% 4.81 2.7% 8.24 3.2% 15.114.2%

The kbove table fromthe PlanningCommission's Medium Term Strategic

Framework(MTDF) gives a good analysisof the sources of Pakistan's energyand
also how this mix should change betweennow and 2030 to enhance its security
throughdiversity. It showsthatwe are overlydependenton imports.We shouldshift
our relianceincreasinglyto domesticsourcesthoughimportsin absolute termsmay
increase.

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 'sEnergy
Pakistan Challenge
Security 1013

2. FINANCIAL RESOURCES
2.1. The above EnergyMix projectionis centralto theEnergySecurityPlan whichis
partof theMTDF. However,thereseemsto be a disconnect betweentheprojectedplan
and thecountry'sresources.For thepowersectoralone,theseinvestment requirements
are estimatedat US$ 150 billionforthe additional143,310MW of installedcapacity.
Totaloil and gas relatedinvestments
up till2015 forin Pakistanare estimatedat US$ 16
billion.Furtherfinancingrequirementsformeetingits renewableenergydevelopment
targetsup to 2015 are to US$ 2.2 billion.All of theseare hugeexpectations
estimated be
whichmightnotbe veryrealistic.

2.2. The State also providesvast subsidiesto thesector.In 2007, the subsidyto the
powersectoraloneexceededUS$ 1.3 billion.

2.3. Enhancingthefinancialhealthof thesectoris centralto ensuring

EnergySecurity.
This is only possible if the governmentexhibitsthe political will to address the
underlyingproblems.
The necessarystepsinclude:

(i) Realistictariffs cost.

reflecting
(ii) Targeted subsidiescomparedwithindirect andcross subsides.
(iii) Securitising assets.
existing
(iv) Activepublicprivatepartnerships.
(v) Privatesectorto havea rolewhereithas a comparativeadvantage.
The current tendencyto rundowntheprivatesectorbased on distortedcomparison
of cost of deliverybetweenand publicand privatesector muststop.The comparison
musttakeintoaccountreliability of deliveryand truefinancingcostof thepublicsector
projects.This decisionmakingcouldbe facilitatedby looking theeconomiccostof un
at
servedenergy.
Failures,if any,in theprivateinvestments and public-private
partnershipsare a
resultof governanceand structural
weaknesses.Thesecan be addressed

3. DEMAND SIDE MANAGEMENT

3.1. The majoremphasisso farin thenationaldebate has been on the supplyside.
However,we need to address both supplyand demandside, whichincludes both
EnergyEfficiencyand Energy Conservation(EEEC). In overall economic terms,
EEEC normallyrepresentsa 'least-cost' developmentstrategy.Last few megawatts
of power, fromnew generatorsand transmissionlines, is more expensive thanthe
cost fromexistingplantsand lines, so reducingdemandthroughEEEC measuresis
more cost-effectivethanexpandingsupplies. Energyefficiencyand conservation
can not only reduce the large financialoutlaysrequiredfordevelopingadditional
energysupplies in the future,but can also help minimiseuneconomical 'excess'
standbycapacityrequiredto cater to peak loads, reduce subsidyrequirements,
and
defer transmissionsystem expansion needs, therebysaving public funds and
increasingreturnson energyinfrastructureinvestments.

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J014 Khalid
Rahman

EnergyIntensityin Pakistan,1990-2006

12.6

19901991199219931994199519961997199819992000200120022003200420052006
Sources: Economic
Pakistan andPakistan
Survey Yearbook
Energy Government
ofPakistan, 1990-2006.
Islamabad:

3.2. If we look at theEnergyintensity notfallingrapidly

in Pakistan,it is presently
enough,especially when compared to other emerging economies, notablyChina and
India. . Our ratioof growthin energyto growthin GDP is stillhigherthanOne. Our
industryalso cannot keep asking for subsidieson energy. They need to improve
efficiencytoo reduceconsumption perunitof output.If we compareourenergyintensity
withothersitbecomesevidentthatwe cannotremaincompetitive unlesswe improveour
and For
productivity efficiency. example we use double the energyin steel makingas
comparedwiththedeveloped world.How can we compete!

Increase in EnergyProductivity
DevelopingAsia, 1980-2002
world
feBSBBHKSS39£S*S
OECDCountries
countries
Developing
Malaysia
Nepal
Pakistan
Indonesia
VietNam m2002
SingaporeJBMBSSSBBSSS^SSSSISSlmSE^^ *1980
China
Thailand
India
BBHHBSSSBSHS^^
Philippines If1
SriLanka

0.0 2.0 4.0 6.0 8.0 10.0 12

GDPperUnit
ofEnergy
U« (PPPUSVkOE)
Human
Source: United
Reports.
Development NationsDevelopment (UNDP),NewYork:2006.
Programme
(http://hdr.undp.org/statistics/data).

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 's Energy
Pakistan Security
Challenge 1015

<
r> £
P3 3
£ 2
mrfj £
d -c
vs
3 - S M 1
S "O "5b
& §
CQ

3.4. The above figurere emphasisestheneedto address Efficiency of EnergyUse. It

is apparentthatper Unitof GDP, energyutilisation by developingcountriesis highas
comparedto thedevelopedcountries.This is due to thefollowingreasons:

(1) Due to theEconomicMix: In developedcountriesa highershareof value

added and servicesectorin theeconomyresultsin a loweruse of energyper
unitof GDP. The developingworldhas a highershareof "dirty"industries
whichareenergyintensive.
(2) Inefficientproduction processesand highenergyconsumingequipmentand
losses as well as poordemandside management in thedevelopingworld.

Therefore,in orderto preserveoureconomicgrowthtrendsand improveits share

in the global market,Pakistanwill have to targetsignificant
reductionin its average
energyintensityby adoptingefficientenergyuse and reducingsystem-wide and end-use
waste.

3.5. EstimatedPotentialforSectorwise EEEC in Pakistan

• Industry 15-25percent
• Transport 15-20percent
• Agriculture 15-20percent
• Buildings 20-30 percent
• Average 15-25percent
Source:
ENERCON, National
EnergyConservation Islamabad.
Centre,

3.6. Areas of PotentialEEEC in EnergyDelivery

Thereneeds to be a reductionin Transmission and Distribution(T& D) losses,
whichare currently at 26 percent.If onlywe havea 10 percentreduction, thenitsimpact
is about 1500 MW savingWhichtranslates to a highernetavailabilityand lowercost.
Similarlya 5 percentreductionin UFG (unaccountedforGas) can resultin additional
availabilityof 150 MMSCFD (MillionStandardCubic Feet per Day) whichcould fuel
750 MW of additionalpowergeneration at low cost . Improving thermalefficiencyat the
current plantscould produce more powerat lowercots. Guddupowerstationrunson gas
withan efficiency of 29 to 30 percentwhereasmodernCCGT (CombinedCycle Gas
Turbine)plantshave efficiency of up to 55 percent.So a new700 MW plantcould pay
itselfbackon savingsin gas consumption alone.

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2016 Khalid
Rahman

Thereis a need forintroductionof Time of Day (TOD) metering to help in peak

shaving. Consumers need to get the rightsignal through realistic pricing.It will
encourageenergy conservationby forcing them to look at switching load to non peak
time,improve insulationand energy conservationin buildings and use of alternatives
suchas solarwaterheating.

3.7. The case of CFLs (Compact FluorescentLamps)

As partofdemandsidemanagement manycountries havestartedactivelysupporting
the use of CFLs and some have announcedlegal frameworks for phasingout the
incandescent lamp. A study1 showsthatif a CFL of 14 W be givento each domestic
consumer ofless than100 KwH (12 millionoftheminthecountry) itwouldsave 546 MW
of peak load. This wouldmakeavailablethispeak timeenergyto activitieswithhigher
economicvalue.Further it wouldrepresent a savingof $ 710 millionin new generation
cost
capital and $ 0.76 millionin savingin GovernmentofPakistansubsidybasedon 2000
hoursof running over thelifeof theCFL . In additionthelowerelectricity bill forthe
consumer that
provideshimextracash forotheressentialneeds.It is understood Pakistan,
likeothercountries is activelydevelopinga programtoenhanceuse ofCFLs .

4. ENERGY MANAGEMENT- AN INTEGRATED LOOK

Pakistan'senergyplanningand management are fragmented. we have
Historically
looked at fuel/petroleum, water
electricity, etc in silos ratherthan an
taking integrated
look at energy.The GoP agenciesresponsiblefortheenergysectorare also organised
along theseline. As a resultwe have notalways looked at the least economiccost of
deliveryofthewholeenergychain.
Piecemeallook at energypricesand policieshaveresultedin economicdistortions.
This has been further aggravatedby thedesireto use the sectoras a majorsourceof
revenue. A typicalexampleis thepiecemealstrategy on CNG promotion andpricingand
thetaxationstructure on petrolversusdiesel whichhas negatively impactedthe.refining
sectoras it createsproductdemandimbalancevis a vis capacity.It has also affected the
balanceofpayments bypushingup imports ofdieselandbelowcostexportsofnaphtha and
encouraged smuggling ofpetrolcausingan overalleconomicloss.The totalimpactofcosts
on theeconomy, taxrevenuesandsubsidiesneedtobe evaluatedinan integrated manner.
Productpricingwhichdoes notreflecttrueeconomiccost has to a certainextent
affecteddevelopmentof our indigenousresourcessuch as coal as well as enhanced
Extraction andProduction in thecountry.
(E & P) activity
Again,as a resultof piecemeallook at thecostof delivery,powerplantsbased on
imported oil havebeenand arebeinglocatedupcountry ratherthanat thecoastas a result
of whichoil is cartedup countryoverloadingtransport infrastructureand resultingin
increased truecostofenergydelivery.
The economiccosts/benefits of thewholechainneedto be fullyunderstood before
It
allocationof resourcesand subsidies. is important thatan Economic analysismust
precedefinancial decisions.HopefullytheIntegrated EnergyModelbeingdevelopedbythe
Planning Commission willprovetobe a usefultoolinaddressing someoftheseissues.

implementing
Energy inPakistan.
Efficiency TheAsian Bank,2007.
Development

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 Pakistan
's Energy
Security
Challenge TO17

5. GOING FORWARD: SUGGESTIONS

(i) We need to do integratedenergyplanningand do trueeconomicpricingof
different of
options energy resourcesand supplies;(ii) it mustbe recognisedthat best
theoreticaloptionsmay not be the truerealisticoptions.Plans should be based on
economicand financialrealities.Projectshortlistingshouldbe of "do able" projectsthat
takesintoaccounttheeconomicand financialrealitiesand the"bankability" issues; (iii)
theplannersand strategistsneedto linktheirEnergyStrategy withtheoveralleconomic
and financialstrategy;(iv) EEEC needs to be giventheimportance it deservesrather
thanlip serviceonly.Supplyside alone willneverbe able to meettheenergydemandof
Pakistan;(v) O&M of existingassetsneedsto be a highpriority.It makesno senseto add
new capacitywhile we keep loosingcapacityof existingassets; (vi) investin primary
energyassetsbothdomestically and abroad;(vii) projectsofrunof theriverhydropower
plants and smallhydropower plantson theirrigationsystemdeservemoreattention; and
(vii) improvethefinancialhealthofthesector.

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