Who is responsible?

How the problem of load shedding spiralled out of hand

The Pakistan Peoples Party (PPP) is naturally apprehensive about the adverse impact of the unprecedented load-shedding during its tenure on its electoral fortunes in the coming elections. In frustration, it is making desperate efforts to mislead the nation through expensive full page advertisements that “if the PML-N government had not stopped 24,000 MW of power projects in 1997, there would be no load shedding today.”

Since this is a grave national issue whose real importance goes far beyond electoral politics, the truth must be fully explained.

Paradoxically, one of the most important underlying causes of today’s load-shedding was, in fact, the energy policy launched by the PPP government in 1994. With dazzling speed, within three months, the government issued 70 Memorandum of Understandings (MOUs) and Letters of Intent (LOIs) to Independent Power Producers (IPPs) for generating 13,000 MW. By 1995, out of these 70 LOIs, firm Letters of Support (LOS) were issued to 27 parties to generate 6,335 MW of electricity. Most of this capacity came into operation in the next 3-4 years, sowing the seeds of a major energy crisis for the future. This should be clear from the following facts:

The 1994 energy policy brought about a decisive shift in the Pakistan energy mix. In 1994, out of the total installed capacity of 11000 MW, 60 percent came from hydro electricity and only 40 percent from thermal capacity. In the next few years, this mix was reversed from 60:40 to 30:70 in favour of thermal capacity based on imported fuel. Every year, this ratio went down further to 20:80 in winter months as hydel generation was reduced due to lower water flows in the rivers.

In 1994-95, the price of crude oil was $10-15 a barrel and the price of furnace oil was only Rs.2540 per ton. As oil price crossed $100 a barrel from 2008 onwards, the cost of generating one unit at IPP thermal plant has increased manifold to Rs18 per KWh when produced on furnace oil and Rs24 per unit when produced through diesel, while the average sale price of electricity in Pakistan is about Rs9 per KWh. In other words, every unit generated by an IPP involves a subsidy of Rs9 to Rs15 per KWh. That is the root cause of the growing problem of circular debt. Since the government does not have the budgetary resources to provide this subsidy, this huge power sector deficit leads to circular debt, which forces utility companies to borrow from the banking system upto their borrowing limits. After that they do not have the cash to import fuel for the power plants. This fiscal year alone the power sector deficit is expected to contribute over Rs700 billion to the circular debt, and because of the enormous subsidy required, our current installed thermal capacity of 13000 MW (excluding hydel capacity of 6500 MW) is generating less than 6000 MW, causing long hours of load-shedding. So the real issue in load-shedding is not capacity, it is the wrong fuel mix brought about by the 1994 energy policy of the PPP government.

Another serious flaw in the 1994 energy policy was the curious decision to offer a fixed capacity price of 6.5 cents per KWh plus the actual cost of fuel as a pass through item. At that time the average cost of power generated by WAPDA was Rs0.90 per unit and the average sale price was Rs1.50 per unit. In an article which was published in a national English daily on 28 November 1994 (‘The Perils of High Cost Imported Energy’), I had warned that the average sale price will be more than double to Rs3.20 per KWh (10 cents) due to the IPPs. In actual fact, it has gone up six fold, without meeting the actual cost of generation.

The real challenge of a viable and sustainable energy policy is twofold: one in meeting the energy needs through maximum reliance on domestic hydel, coal and renewable resources and second in producing energy at a reasonable cost. The1994 Energy Policy ignored both these challenges, and by increasing dependence on imported oil, created a permanent fault line in the country’s energy system. India generates 70 per cent of its electricity from domestic coal, 12 per cent from hydro and only three per cent from oil. Bangladesh uses gas for 90 per cent of its energy needs and only 5 five from oil. Pakistan, on the other hand, is still dependent on oil for 40 per cent of its electric supply, with 29 per cent each from hydel and gas.

In the past decade, Musharraf government, while contributing to the growth of domestic demand for electricity through large scale provision of bank loans for the purchase of air-conditioners and home appliances, (share of domestic energy consumption had jumped to 46 per cent of the total by 2008), did not add any new capacity to the system.

Poor governance of the outgoing PPP-led coalition in the past five years has further compounded the problem of load-shedding. Transmission losses and electricity theft have reached record levels and size of unpaid electricity bills has been growing. These factors account for at least 10 percent of cumulative burden of circular debt despite 250 per cent increase in electricity tariff. The longer term problem of load-shedding can be solved only if we add to the system generating capacity at a cost that is less than the average sale price of Rs9 per KWh but in the past four years PPP government has added rental power at the exorbitant price of Rs25 per KWh. One can only imagine the size of the circular debt if the IPPs, lined up by PPP during 1994-95, were somehow producing 17,000 MW and not 6000 MW!

Another misleading portion of the PPP ads is the reference to Hubco Power Project. This project was initiated in 1991-92 under the first PML-N government and was completed in 1996. The PPP government which took over in 1993, amended the original agreement to give the company under the 1994 energy policy the full pass through cost of fuel in violation of the original agreement. When the then Ehtesab Bureau detected large kickbacks in lieu of this amendment, the announcement of 12 October 1998 was made in the press. But there was no interruption in the generation of electricity from Hubco. Similarly, the other headlines of June 1998 calling for “cancellation of all agreements with foreign companies” were an exaggerated version of the decision to review the pricing formula which PPP government had egregiously allowed to IPPs, in return for large bribes. No agreements were actually cancelled, but based on the report of an expert committee chaired by late Mr. Shaukat Mirza, some of the prices at which WAPDA was purchasing electricity from IPPs were rationalized.

I hope these facts will clearly show that even at election time there should be a limit on false accusations and distortion of historical facts.

The writer is senior vice president of PML-N. He has served as finance minister in 1990-1993 and 1997-1998.