The Economic and Regional Impact of CPEC Developments in Pakistan’s Energy Sector

Directed Research Project

Fall 2018

Professor Syed Muhammad Hasan

Abdul Hadi - 19020052

Amina Tanveer - 19020285
Sajid Faiz Malik - 19020006
Ismail Qamari - 19020381
Introduction
Energy shortfalls has been one of the recurring issues that has plagued Pakistan’s economy for
the last decade. The power shortfall reached a record high of over 9,000 megawatts (MW) in the
summer of 2018, rendering a vast majority of Pakistani households and industrial units with
persistent and prolonged outages. Estimates suggest that the shortfall might expand to over
10,000 MW by 2020 if policy measures aren’t enacted to augment energy production, stimulate
demand and curb losses. The current crises has resulted in an estimated loss to the economy of
approximately $5.8 billion or 2.6% of GDP, according to a recent report published by the World
Bank. The report also estimates the number of Pakistanis without access to electricity from the
national grid at 50 million, or about 36% of the population. Electricity demand in the country has
been growing at an annual rate of 10 percent, whereas the investment in the power sector has
reduced from 1.5 percent in the 1990’s to 0.7 percent, in the last 10 years.

It is evident that the shortfall plaguing the energy sector has significant repercussions for the
economy, with a comprehensive solution requiring the involvement of all important
stakeholders. The Pakistan-China Economic Corridor, the $62 billion project announced by
President Xi Jinping on his arrival in Pakistan as part of China’s grand Belt and Road Initiative
does provide some glimmer of opportunity for the country to escape its current energy shortfall
crisis. This multi-billion dollar project comprises of significant investments in transportation,
infrastructure and energy of which the latter accumulates a whopping 75-80%, which
approximates to about $33 billion. The energy projects under CPEC have been estimated to add
more than 17,000 MW of energy to the national grid and end Pakistan’s energy crisis by 2018.

The energy projects planned under CPEC consisting of a diverse portfolio in hydel, wind, solar
and coal as well as a national transmission line from Port Qasim to the rest of the country could
provide a short-term solution to Pakistan’s energy woes. Positive shocks to the the current
electricity production of 18,110 MW against the high demand of 23,670 MW every year starting
from the commercial operation date of the first CPEC energy project in 2016 uptil 2022 could be
expected to end the menace of load-shedding for the time being. These projects could not only
provide a way out for Pakistan but also have important regional and geo-economic implications
for Pakistan’s immediate region. This paper attempts to study these issues from a geocentric lens
and investigate the trends of future electricity demand and supply forecasting based on hitherto
trends.
CPEC Energy Projects Details

As part of the ‘Early Harvest’ scheme of CPEC, approximately 10,400 MW of energy has been
allocated to be added to the national grid by March 2018. Hitherto approximately 6 projects
have so far been completed and operational and the rest of the 18 projects are scheduled to be
completed by 2022.

The interesting aspect about these projects are that they are contracted to Independent Power
Producers (IPPs) instead of the governments of Pakistan and China. The Exim Bank of China
finances these investments using loans with low interest rates of around 5-6%. The government
of Pakistan is contractually obliged to purchase electricity from these firms at pre-negotiated
rates. The details of these projects are given below:

Project Name Primary Energy Estimated Cost Status Commercial

Input (USD Million) Operation Date

2 x 660 MW Coal (Imported) $ 1912.2 Financial 25th April 2018

Port Qasim closed
Coal Fired achieved on
Power Plant May 2015

Both units
operational and
connected to
national grid

2 x 660 MW Coal (Imported) $ 1912.2 Financial 28th October

Coal Fired Closed 2017
Power Plant achieved on
Sahiwal December 2015

Both units
operational and
connected to
national grid

50 MW Wind $ 112.65 Financial 5th April 2017

Dawood Wind Closed
Farm Thatta achieved on
March 27, 2015

Operational

1000 MW Solar $ 1302 Operational August 2016

Quaid-e-Azam
 Solar Park
Bahawalpur

100 MW Wind $ 250 Financial 16th June 2017

Jhimpir Wind Closed
Farm achieved on
March 30, 2015

Operational

50 MW Sachal Wind $ 134 Financial 11th April 2017

Wind Farm Closed on
December 18,
2015

Operational

CPEC Projects in Progress:

Project Name Primary Energy Estimated Cost Status Expected

Input (USD Million) Commercial
Operation Date

SSRL Thar Coal Coal (Local) $ 1912.12 + Financial 2019

Block-I 6.8 mtpa 1300 Closed
&SEC Mine achieved on
Mouth Power April 2017
Plant(2×660MW)
(Shinghai) 50% completed

720MW Karot Hydel 1688.26 Financial December 2021

Hydro-Power Closed
Project achieved on
22nd Feb 2017

70% completed

873MW Suki Hydel 870 Financial December 2022

Kinari closed
Hydropower achieved on
Project 31st December
2016
 65% completed

2x660MW Coal (Imported) 1600 Feasibility

Rahimyar stage
Khan Coal
Power Plant 15% completed

Engro Thar Coal (Local) 1500 Financial June 2019

Block II Closed
achieved on
2×330MW Coal April 2016
fired Power
Plant 60% completed

2 x 660MW Coal (Imported) 1320 50% completed December

Hubco Coal 2018, August
Power Plant 2019

300 MW Feasibility
Gwadar Power stage
Plant
60% completed

2x660MW 15% completed

Gaddani
Powerplant at
District
Lasbela,
Balochistan

1100MW Hydel 2364.05 Financial 2025

Kohala closed planned
Hydro-Power on December
Station 2018

15% completed

2x50MW Wind Wind 100 Financial 2019

Farm Phase II closed
of Pakistan achieved on
March 2017

70% completed
660MW Coal
HUBCO Coal 15% completed
Power Plant

300MW Salt Coal 15% completed

Range Mine
Mouth Power
Plant including
Mining

2x660MW Thar Coal 15% completed

Mine Mouth
Coal Fired
Power Plant by
Oracle

2x660MW Coal 15% completed

Muzaffargarh
Coal-fire
Power Plant

525MW Gas Gas 15% completed

Fired Power
Plant

Matiari (Port Grid 1500 15% completed 2019

Qasim) - Transmission
Faisalabad Line
Transmission
Line Project

Matirai (Port Grid 1658.34 15% completed March 2021

Qasim) - Transmission
Lahore Line
Transmission
Line Project
Literature Review

A number of papers have explored the relationship between the bridging and forecasting the gap
between electricity consumption and production in Pakistan. A variety of methodologies and
assumptions have been employed in these papers. We shall consider each paper according to the
section.

A number of studies have tried to predict the energy demand and production in Pakistan and the
rest of the world. Each methodology has its advantages and disadvantages and we shall see how
our methodology differs in respect to these models.

Iqbal, Nawaz and Anwar (2013) attempt to estimate the electricity demand function in Pakistan
using the smooth transition autoregressive (STAR) model over the period 1971-2012. They
estimate the elasticities of energy demand with respect to GDP growth to be greater than unity
(9% energy generation growth for every 6% economic growth per annum to sufficiently meet the
energy demand). They also investigate the relationship between optimal electricity prices and
consumption and conclude that the average prices of electricity are well below their optimal
level. Akin to this, Lee (2005), Khan and Qayyum (2009), Jamil and Ahmed (2010), Javid and
Qayyum (2013) majorly utilized the causality test and cointegration method to highlight the
association between electricity consumption and growth. Javid and Qayyum (2013) employed
the structural time series technique over the period 1972-2010 to estimate the energy demand
function in Pakistan which resulted in a stochastic in lieu of a linear relationship.

For the supply side, Chavez, Bernat and Coalla (1999) employed the Univariate Box-Jenkins
time series analyses (ARIMA models) to model and forecast energy production and consumption
in the Austrias. Alvarez, Troncoso, Riqueleme and Ruiz use a novel technique to forecast the
behaviour of time series by exploring the similarity of pattern sequences. This algorithm was
succesfully applied to electricity prices and supply time series of Spanish, Australian and New
York markets to provide robust results. Dmitrieva (2015) uses a special machine learning and
time series forecasting model to predict power supply of two hydropower plants. The Grey
Model was used by Rathnayaka (2014) to forecast efficient energy production and consumption
in Srilanka. The results using this model show that they better predict and forecast energy
production relative to MAPE (Mean absolute percentage error), MSD (Mean absolute deviation)
and MSE (Mean squared error). Li, Liu, Liao and Cheng (2015) apply a correlation analysis to
forecast long-term values of power production at small hydroelectric plants. They believe that
their forecasting methodology could be succesfully applied to forecast long-term power
production of SHP plants in the 13 districts of the Yunana power grid.
Data

The Pakistan Statistical Yearbook 2016 provides time series data for electricity consumption,
electricity production, and production capacity. This data is extracted from the annual Pakistan
Economic Survey published by the Ministry of Finance for the respective time periods.

Chapter 2 of the Pakistan Statistical Year Book 2016, Sections 2.2 and 2.3 provide
comprehensive figures for the installed capacity and generation of electricity as well as energy
consumption from 1971-2014. The electricity production portfolio for each year comprises of
installed capacities of hydel, thermal and nuclear in megawatts (MW) whereas the total
electricity generated is given in giga-watt hours (GWh). Akin to this, electricity consumption
breakdown in giga-watt hours by consumer (Households, commercial, industrial, agriculture,
street lights and other government departments) is also provided for each year.

The stochastic trends for the portfolio mix of energy sources are provided in the Figure 1 below:

The trends demonstrate how the proportion of thermal energy started to rise from the early 1980s
and eventually surpassed hydroelectricity in the late 1980s. As of 2014, the share of thermal
stands around 62%, hydel 32% and nuclear a mere 7%. The share of thermal has seen a
consistent rise over the years and has remained fairly constant over the 60-70% range over the
last 15 years. On the contrary, the share of hydel has consistently fell and has remained constant
at around 30% for the last 15 years. The share of nuclear energy has remained fairly low but has
started to increase marginally over the last 5 years.
We also analyze stochastic trends for electricity consumption, which are provided in Figure 2
below.

Demand side analysis illustrates how the share of households in the consumption portfolio is the
greatest as of 2014. It is then followed by commercial units, industrial units and finally
agricultural requirements for electric power. Household requirements seem to be consistently
increasing with time, reaching almost half of the entire consumption mix by 2014. Commercial
ratios however seem to be declining with time but have stayed fairly constant around 30% for the
last 15 years. Industrial requirements also depict a similar decreasing trend but they have also
stayed constant around 10% for the last 15 years. Lastly, agricultural needs seem to have stayed
fairly constant around 8% for all time periods.

The current energy production portfolio greatly diverges from international standards. The
increasing trend for thermal and the decreasing trend for hydel does pose some serious problems
for policy makers. Issues of environmental pollution due to the rise of coal and oil based plants
are detrimental to government objectives of producing clean, sustainable and renewable energy.
One of the criticisms of CPEC energy projects could be attributed to the external costs that coal
based electric power generation bring. Although coal is a cheap source of energy, it is also one of
the most significant polluters in terms of carbon dioxide emissions. In one hour, a 1200 MW coal
power plant could be expected to produce 1200 kg of carbon dioxide, 9 kg of nitrous oxide and 5
kg of Sulphur dioxide.
The impact of utilizing coal for thermal energy purposes could be seen in the aforementioned
figure. Data used from the World Bank illustrates how carbon dioxide emissions in terms of
metric tonnes per capita has been on a persistent rise for Pakistan over the last few decades.
CPEC energy projects concentrated on coal energy production such as the Port Qasim Coal
Power Plant, Sahiwal Coal Power Plant and the Thar Coal Field could further add to this
environmental menace. The pollutants generated by such coal plants could lead to acid rain
which disturbs the mercury level on ground. Coal emissions also significantly mitigate the
amount of arsenic and lead contents in the groundwater which reduces water available for
irrigation and drinking purposes. This may lead to long-run repercussions of reduced agricultural
yields and respiratory problems.

Methodology and Results

Data on electricity demand and supply from the Pakistan Statistical Year Book was used to
forecast the future values for electricity production and consumption for the years 2014-2025.
Production capacity has increased exponentially in order to cater to the demands of the
increasing population. In our analysis, we found that the natural logarithm of total production
capacity measured in megawatts showed evidence of following a stable AR(1) process with a
drift. The results from an AR(1) regression are as follows:
The t-statistic for the Dickey Fuller test was -3.112, which is less than the critical DF value of
-2.421, hence allowing us to reject the null hypothesis of a unit root in favour of stationarity.
Hence the following equation can be used to forecast future capacity:

The effects of CPEC energy projects can be incorporated into this forecast by adding a shock to
total capacity at the time period when the project is ready for operation:

Using the above equations, the forecast for the expected future total capacity, with and without
the introduction of CPEC projects, were calculated. Positive capacity shocks were introduced
each year starting from 2015 with respect to the commercial and expected commercial operation
dates for each of the 23 listed CPEC energy projects. Fig 1.1 shows a graphical depiction of the
results.
Moving on, it made intuitive sense that total electricity generation would have a strong
relationship with total capacity, and would hence be cointegrated. To check if a cointegration
relationship existed we performed a static model regression for total production on total capacity.
The coefficient estimate will then be used to conduct the Engel Granger augmented Dickey
Fuller test for cointegration. The following results were obtained:
Using the estimated coefficient, a new series, z, was generated to test for cointegration. This new
series was then tested for a unit root, with regression results showing sufficient evidence to reject
the null hypothesis of z having a unit root in favor of z being a stable stationary process.

The t statistic for the DF test is -2.806 which is less than the critical value of -2.421at the 1%
significance level. Thus we can reject the null hypothesis in favour of z being a weak stationary
process, which allows us to consider total generation and total capacity as cointegrated time
series, which follow the equation:

The capacity forecasts which were obtained earlier were later used again to forecast electricity
generation with and without CPEC. The results can be viewed in fig 1.2.
The
Regional Impact

The introduction of a multi-billion dollar project with massive investments in energy not only
has consequences for Pakistan but could also impact the relationships and economic ties with its
immediate neighbours. For a more holistic approach to our analysis, we shall consider the effects
of the CPEC energy projects for each country.

Security cooperation has long taken precedence over economic relations between Pakistan and
China. Since 2015, a shift towards strengthening economic ties has been witnessed with the
inauguration of China Pakistan Economic Corridor (CPEC), a set of projects under Beijing’s Belt
and Road Initiative. It is a planned 3,218 kilometers set-up of infrastructure ranging from roads,
pipelines, railways and dry ports from Gwadar to Kashgar in the Xinjiang province of China,
intended to enhance the lives of 3 billion people in the region. The mega project is twofold;
transportation and energy. The project is estimated to cost around 75 billion dollars, and
approximately 40 percent of it set to expend on energy generation and infrastructure
development. (“How Will CPEC Boost Pakistan Economy”)

When it comes to investing in such mega projects in Pakistan, China is not being a benevolent
philanthropist but merely following its own strategic policies emerging out of certain
motivations. China has surfaced as not just a regional but global superpower with global interests
and the need to assert global dominance. With such a policy comes economic expansion. It is
estimated that 80 percent of its oil is currently transported from the “Strait of Malacca to
Shanghai” which takes up to 2-3 months. (“How Will CPEC Boost Pakistan Economy”) The
CPEC project will allow China to secure access to not only the Central Asian energy sources but
the Arabian Gulf, serving as a detour to its current path and reducing its span of exchange to
Africa and Middle East. Moreover, beyond its commercial target, Gwadar can be utlized as a
‘safe harbour’ for the Chinese navy. (Golley and Ingle 56) In return, Pakistan will enjoy the
much needed infrastructure development. The chief investors of CPEC, the “China Development
Bank” (CDB) and the “Exim Bank of China”, are in line with Beijing’s geo-economic interests.
The government aims to create optimum economic conditions by establishing multiple special
economic zones (SEZs) for Chinese firms to invest in Pakistan. CPEC will open up both
countries to immense opportunities. If everything goes according to the schedule, with 21
agreements on energy including coal, oil and solar energy, 14 will be functioning and providing
energy up to 10,400 megawatts by 2018. China Daily, a renowned Chinese newspaper, reports
that these projects will be able to provide 16,400 megawatts of energy in total. (“How Will
CPEC Boost Pakistan Economy”)

In the regional political aspect, perhaps the biggest opposition to CPEC comes from the two
stakeholder’s mutual adversary and immediate neighbor, India. It regards the ambitious project
as a violation of its “sovereignty and territorial integrity,” as it passes through the
Gilgit-Baltistan region in Pakistan-occupied Kashmir. (Kaura 42) One of CPEC’s objectives is to
facilitate the functioning of Gwadar port in southern Pakistan. India could suffer in the wake of
this as “four-fifth of its energy supplies cross the Indian Ocean” and establishment of Gwadar
port would equip China to project its power capacities into the Arabian Sea and onto the Indian
Ocean. As Pakistan continues to deny transit routes to India, it furthers the hindrance India has to
the riches of Central Asia especially natural gas as the extension to Afghanistan via land is
blocked. It is notably problematic since India has formulated a plan to increase its natural gas
consumption from “7 to 15 percent by 2022” and transform its dependency on coal and oil to
gas. (Kugelman) Given the circumstances, the New Delhi establishment is now partnering up
and entering various energy security arrangements to curtail its losses of the Central Asian
resources. It has entered energy deals with “Bangladesh, Myanmar, Nepal, and Sri Lanka. It is
also exploring a pipeline project with Moscow and gas deals with Indonesia”. (Kugelman) To
Pakistan’s dismay, the United States has enhanced its strategic coordination with India in its
more active engagement in Afghanistan. In a Congressional hearing before the Senate Armed
Services Committee, Defence Secretary James Mattis endorsed India by commenting on CPEC,
“In a globalised world, there are many belts and many roads, and no one nation should put itself
into a position of dictating. That said, the One Belt One Road also goes through disputed
territory, and I think, that in itself shows the vulnerability of trying to establish that sort of a
dictate.” (Kaura 42)

Iran could benefit in the wake of these projects. It has been interested in the establishment of a
“natural gas pipeline” but the project has been prevented from completion, given the financial
constraints on Pakistan’s part. Recently, China has agreed to finance it under the rubric of CPEC.
This would allow Pakistan to generate more energy and reduce its dependency on the oil and gas
imports from Saudi Arabia, which constitutes 90 percent of its total bill. If Saudis were to lose
out on such a substantial proportion of its sales, it would be hazardous for its economy and
prestige. Such a scenario would allow Iran leverage over its rival in this great game.

However, this is not the only aspect of the rivalry playing out in the energy geopolitics. The
province of Balochistan, the site of envisioned projects under CPEC’s umbrella, could become a
battleground for Saudi-Iran rivalry. Anti-Iran militants have carried out cross-border strikes into
the Iranian province of Sistan from Balochistan. Tehran has accused Pakistan and KSA of
financing these militants in order to undermine the construction of Chabahar port, financed by
India to enable it access to Afghanistan and to the gas wealth of Central Asia via land. Saudi
analysts have expressed antagonism against this project since it is believed that the foundation of
Chabahar will empower Iran to expend its influence into the “Persian Gulf and Indian Ocean”.
(Kugelman) Consequently, the Saudi government has expressed support for the insurgents,
endorsing their “legitimate struggle” against the regime.
The net result of various studies have shown that with population growth, industrial development
and increasing income per capita in households, the demand for energy has exponentially
increased in Pakistan. With the inability to meet said demands, industrial, service and
agricultural sectors have incurred losses. At present, 60 percent of Pakistan’s foreign exchange is
exhausted on the import of fossil fuels. The imported estimate is around “308.9 thousand barrels
of oil per day” surpassing the domestic production of less than “63,000 barrels”. Additionally,
despite the presence of “187 billion tonnes of coal reserves” in the country, it is a hefty importer
of coal. (Rehman 1)

Policy makers in the past have suggested multiple short-term solutions to this crisis, with
importing electricity from Iran to the inauguration of ‘micro hydro projects, solar panels and
diesel electricity generation’. Recently, it is viewed that if set in a planned timely manner, CPEC
will be able to permanently alleviate the energy crises is Pakistan. However, this highlights a
certain environmental implication with the inability of host country to meet the goals for
reducing “carbon emissions under the Paris Climate Agreement”. (Downs 6) While China may
be able to tackle its problems of environmental contamination at home, it’s subverting the
disastrous risks to rest of Asia with the investments in substantial “coal-fired power generation”.
(Downs 5)

Policy Recommendations
Conclusion

This paper analyzes the impact of CPEC energy projects on the energy production forecasting for
Pakistan. Using the AR(1) time series specification, we successfully managed to forecast
production capacity and generation and estimated the current shortfall could be expunged by …
if there are no delays to the Commercial Operation dates of the projects. CPEC does indeed
provide a comprehensive short-term solution to Pakistan’s energy woes.

However in order to reap the full benefits and make this investment model sustainable for the
long-run, it is quintessential for the Pakistani government to design an effective energy policy.
Demand-side issues require greater attention, especially with the significant trade and
distribution losses combined with theft and outdated equipment which are significantly below
international standards. Akin to this, indigenous sources of energy production such as local coal
fields should be preferred in lieu of costly imported coal. Renewable energy policy should be on
forefront of government planning keeping in line with long term environment sustainability and
cost-effectiveness.

Supply-side issues do not cease with the massive energy inputs to CPEC by themselves - in
addition to these mega projects, bureaucratic reforms and the reduction in cumbersome red-tape
procedures needs to be achieved. If the afore-mentioned policy measures are taken into public
policy paradigms, it will not only produce economic gains for Pakistan but the rest of the region
as well.

Works Cited
Downs, Erica. “Asia's Energy Security and China's Belt and Road Initiative.” ​Complex

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<​www.nbr.org/publication/asias-energy-security-and-chinas-belt-and-road-initiative/​>

“How-Will-CPEC-Boost-Pakistan-Economy | Deloitte Pakistan|CCG.” ​Deloitte United

States,​ 24 June 2016.

<

www2.deloitte.com/pk/en/pages/ccg/articles/how-will-cpec-boost-pakistan-econo

my.html>

Kaura, Vinay. "India-Afghanistan Relations in the Modi-Ghani Era." ​Indian Journal of

Asian Affairs​ (2017): 18.

Kugelman, Michael. “The China-Pakistan Economic Corridor and Energy Geopolitics in

Asia.” Wilson Center, 16 Jan. 2018.

<

www.wilsoncenter.org/blog-post/the-china-pakistan-economic-corridor-and-energ

y-geopolitics-asia>

Golley, Jane and Adam Ingle. "Prosperity." ANU Press, 2018. 56-57.

Rehman, Syed, et al. “The Future of Sustainable Energy Production in Pakistan: A

System Dynamics-Based Approach for Estimating Hubbert Peaks.” Energies, vol.

10, no. 11, 2017, p. 1858.

KPT jetty,
 Maj nasar, divisional officer of nasr division

Abdullah, muawin division

Platoon 5

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Literatu