Pakistan’s Energy Sector Reliance on Imported Fuel & Rising Circular Debt
For decades Pakistan relies on imported fuel to meet its energy demands. With its depleting natural gas reserves, Pakistan had to find alternatives to fill the gap. To meet the energy shortfall, the government decided to install more IPPs that are going to run on RLNG. To correct the power sector deficit, the GOP (2013–18) added: Three RLNG combined cycle power plants in Punjab Haveli Bahadur Shah (1,230MW), Bhiki (1,180MW), and Balloki (1,230MW). The three RLNG plants are located not only quite far from Karachi or Gawadar or Port Qasim and are dependent on timely imports. The average plant factor (the ratio of the average power load of a plant to its rated capacity which is basically measures how often a plant is running at maximum power) is below 58% against the accepted minimum of 85%. In the case of RLNG shortage, the secondary fuel used is HSD. It means a high generation cost whenever there is a surge in the import price of RLNG or deficit of RLNG. Beside, RLNG supplies must accommodate the loss or UFG (Unaccounted for gas is a phenomenon of gas loss which is contingent upon occurrence of various technical factors when gas flows from fields to end consumers) of 7%, further compounding the issue of costs.
2015 power policy resulted in the induction of RLNG-fueled CCPPs. These mega plants were set in Punjab instead of around Karachi, increasing transportation costs — adding to the already bloated tariff.
The Tariff Calculations for the RLNG Power Plants
Reference exchange rate of Rs. 99.6750/ US$ (January 2, 2015) has been used in calculating the reference tariff and the same shall be used for indexations/ adjustments where applicable. But the exchange rate volatility grew more and more as time passed. In May 2023 the per unit cost of electricity is 24.26 (PKR/KWh) (source: NEPRA) which is 140% more than the original cost calculated at approximate of 10 (PKR/KWh).
The Summary of Pakistan-Qatar LNG Deals
The government of Pakistan has signed two long term deals with the Qatar (Qatar Petroleum) for its LNG requirements.
One of which was signed in 2016 and the other was signed in 2021. Both of which are 15 years and 10 years long deals respectively. Pakistan’s first 15 years LNG agreement that was signed in 2016 was to import 3.75 million tons of liquefied natural gas a year from Qatar, which was a major step in filling Pakistan’s energy shortfall. The deal which was Pakistan’s biggest, will help the country add about 3,000 megawatts of gas-fired power-generating capacity as discussed earlier and improve production from fertilizer plants that was hobbled by lack of gas. According to the agreement LNG arriving in any particular month will be priced at 13.37 percent of the preceding three-month average price of a barrel of Brent crude oil. A price review is permitted 10 years after the start of supply. A cancellation option could shorten the deal to 11 years if the parties fail to agree a new price. A period to build up supply is provided for. In 2016, Qatar-gas, the world’s biggest LNG exporter, will supply 2.25 million tons, followed by a ramp-up to 3.75 MT/year from the second quarter of 2017.
The fresh long-term contract had been signed at a rate of 10.2 per cent of Brent for import of 200 million cubic feet a day (mmcfd) LNG as opposed to the previous deal for 500mmcfd in 2015 at a rate 13.37 per cent of Brent.
Pakistan will get 3 million tons of LNG per year from Qatar Petroleum under the deal from January 2022 starting with average of two ships per month, which would be increased to four vessels in next three years.
The new LNG contract has a price renegotiation option after four years rather than 10 years that had been fixed in the earlier signed 15-year contract.
What are the pitfalls of imported fuel?
For imported fuel, obviously the Government of Pakistan has to pay in dollars. Since the Pakistani rupee has not gained stability since 2018 so the price gets fluctuating due to the exchange rate volatility. As exchange rate goes up, the prices of everything including electricity tariff goes up which brings inflation, leads to rising circular debt and so on. Just to give you an idea the Pak Rupee has faced a devaluation of 180% against USD as of today. As mentioned earlier the tariff calculations
The other main thing that should be focused is that in the two agreements the price of the LNG is linked with the preceding three-month average price of a barrel of Brent crude oil. In the international oil the prices depend upon the demand and supply shocks and in simpler words OPEC controls the crude oil prices in the international market.
When the first agreement was signed in 2016 the average Crude Oil Brent price as $43.67 in that year, which increased to $54.25 in 2017 and $71.34 in 2018 and $64.28 2019 and $41.96 in 2020 and $70.86 in 2021 and $100.93 in 2022. Consequently the price of RLNG per MMBtu which was 13.2% and 10.2% percent of Brent respectively kept increasing for most of time except in 2020 which not only lead to increase in the tariff (exchange rate of Rs. 99.6750/ US$ was used for calculation of it on January 2, 2015) of electricity produced by three RLNG combined cycle power plants but also the increase in the power sector circular debt.
When we analyze the data from 2016 onwards to 2022 there has been 370% increase in the circular debt which is huge for the government having almost no fiscal space with no option left except to take more loans and float bonds at high interest rate to payback its debt.
Where we went wrong?
What we can say about it? Almost 40% of the power generation is based on the imported fuel mainly RLNG, coal, and furnace oil. Any increase in the international fuel prices or devaluation of the Pakistani rupee often leads to load shedding and worsening of the circular debt problem. In the 1990s, there was space to undertake long-term policy decisions but the decisions weren’t taken.
The dynamics of the electricity supply chain have changed significantly with the exhaustion of the indigenous natural gas resources. In the Power Generation Policy 2015, preference was given to RLNG and coal, but not reducing dependence on imported fuels. All the new projects are increasingly dependent on imported fuels.
Our dependence on imported RLNG has increased from 0.7% in FY2015 to 25% in FY2022. Whereas, in FY2022, due to RLNG shortage, expensive and inefficient plants were forced to operate causing the financial impact. The share of coal in the electricity fuel mix has increased from 0.5% in FY2014 to 13% in FY2022. Despite the fact of having vast and abundance reserves in the form of Thar Coal, still most of the new coal fired power plants are fueled by imported coal, which has become extremely expensive after rupee devaluation. Failure to add new hydro capacity in the system over the years and continued dependence on the imported fuels resulted in an unbearable financial burden of subsidies and circular debt.
In our planning strategies, the utilization of the indigenous resources has always been at the forefront, but unfortunately these plans have not been implemented. Wind and solar are quickly becoming cheapest sources of generation technologies, yet the share of wind and solar energy projects is relatively small.
Renewables are increasingly competing on an economic basis in energy markets globally. Due to the lack of energy market and comprehensive planning for the future, coal and RLNG plants will keep Pakistan’s reliance on expensive imported fuels in the coming years. In Pakistan, geo-political factors and the urge for fixing things in the short-term without focusing on the long-term planning and strategies have stood in the way of improving renewables’ competitiveness.
What can be done?
The most important thing is the optimal utilization of indigenous resources. Already three operational units in Thar generates almost 1000 MW of power using indigenous coal but still it is not enough. Pakistan has 175 billion tons of coal reserves in Tharparkar alone, equivalent to 50 billion tons of oil equivalent (TOE) which is more than Saudi Arabian and Iranian oil reserves. The reserves equal to 2,000 trillion cubic feet (TCF) of gas which is 68 times higher than Pakistan’s total gas reserves.
Thar coal can meet Pakistan’s electricity demand for several centuries and, as all the coal reserves will not be utilized for power production, there could be many other uses for the excess coal.
Pakistan needs to reduce its dependence on imported fuel and focus on indigenous resources and alternative sources of energy, such as renewable energy. The government has already taken some steps in this direction by announcing policies to promote renewable energy, including setting a target of 30% of the country’s energy mix to be sourced from renewable energy by 2030.
Overall, Pakistan can escape the imported fuel dilemma and rising circular debt by adopting a comprehensive approach that focuses on reducing its dependence on imported fuel, relying on indigenous resources, promoting renewable energy, and addressing the structural issues in the power sector. However, this will require a sustained effort and commitment from the government, private sector, and other stakeholders.
