National Power Policy: A vision for the future
The much-awaited National Energy Policy (NEP) is expected to determine the future of Pakistan’s power sector. Energy being an integral part of economic order of Pakistan, it is incumbent upon the policy makers to ensure a sustainable NEP. The subsequent discussion will attempt to identify factors that are critical in making NEP sustainable i.e. will only consider sustainability factors for the power sector[1].
Sustainable policies are essentially forward-looking adaptive promises to all the stakeholders in power sector. Adaptive nature of the policy dictates that a policy would possess the humility of learning from past mistakes while forward looking element will have the foresight to accommodate for needs of future generations. Future oriented dimensions of such a policy would include making arrangements for: Sector Integration, Inclusiveness and Cultivation of Sector Development.
Accommodations for the future
Each of these elements contain inherent objectives. Inclusiveness will increase the political viability of the power policy via integrating the input of all the stakeholders. Multidimensional development orientation will create the bedrock for evolution that is part of any successful dynamic industry. Power Sector Integration will eliminate any coordination failures that result in lost economic value addition.
Power Sector Integration
Historical experience illustrates that policies devised in isolation will face increased friction during the implementation stage. Such holistic approach was broached by Renewable Energy Policy 2006[2] and Power Policy 2015[3]. This time around, policy needs to enact Positive Policy Planning and Capacity Building to ensure a harmonious approach on a larger scale.
Positive Policy Planning
The most important component of this integration will be taking guidance from Integrated Energy Plan. An Integrated Energy Plan (IEP) is expected to serve as a blue print. For starters, Government will base the issuance of new bids for power production on IEP. Similarly, investors will rely on IEP for their investment decisions. In the absence of such exigent guidance, the inherent risk of the sector will increase translating into more expensive electricity.
It is pertinent to mention that Integrated Energy Plan would seek guidance from Medium Term Budgetary Framework. Doing so would allow the power sector to grow in line with the economy and hence avoid issues such as “capacity trap” and transmission capacity inadequacy. However, the implementation of an IEP is only as good as the capability of the stakeholders managing it.
Capacity Building
Provincialism of Skill Base
With provincialization of the power sector, government sector efforts will have to be replicated with the benefit that the sector would become better at adapting to the local advantages. Therefore, the government needs to aggressively build the capacity at provincial and local level in order to ensure that power sector receives an improvement in governance. Examples of such efforts can include: mandating education from prestigious institutions, such as WAPDA Staff College, for staff of provincial power related bodies[4]. Such human capital accumulation can complement soft capital buildup.
Buildup of Increasing Soft Capital
Potential measures for increasing soft capital of the government’s power sector can include improving the Feasibility Studies for potential projects[5]. Other measures for building soft capital can include government ownership of SCADA data for power plants[6]. Such soft capital will allow the sector to flexibly adapt to changing domestic needs and foreign conditions without compromising the goals of the inclusive Integrated Energy Planning.
Inclusive
Strategic Policies, like NEP, are inclusive in terms of stakeholders and perspectives. The inclusion of stakeholders includes bureaucracy and provincial bodies. The legal and civil bureaucracy[7] can help ensure the creation of a coherent policy that will alleviate legal and local friction in the implementation phase. Currently, legal troubles have been recognized as a source of project delays in projects that involved the laying of transmission generation lines by NTDC. Of course, stakeholders from other sectors such as finance and regulation can help identify a number of potential hurdles that can ironed out at the planning stage. The policy can also aim for perspective inclusiveness by accommodating generation, transmission, distribution, service provision, storage and trading within one single policy[8]. Including all these sub-sectors within the same policy reduces chances of the policy being inconsistent.
Cultivating Sector Development
The Development aspect of a visionary NEP would allow the sector to evolve with the demands of the global and local markets. In that aspect, the NEP can take a number of initiatives. For starters the policy can re-introduce the development for long term financing in the country. Both institutional and market-based financing[9] can be considered for this role. Projects with long term tenors help make electricity more affordable by bringing down the debt component of the tariff.
Combine Bargaining Power
Long-term financing is just one of the many ways to reduce tariff in the long-run. Joint EPC contract negotiations can be another way. Currently, EPC negotiations happen individually for each company. This not only increases the cost of doing business[10], but also reduces overall Pakistani negotiation power due to separate negotiations. A joint, government backed negotiation would help bolster the growth of industry via making the industry more transparent and through increasing the value addition to the economy per dollar of investment. This increased added value would help increase interest from the market in the long-run. Experience from such joint negotiations can be replicated towards joint negotiation of debt required for tenors.
Adapting to the changing transmission needs
Apart from investment in generation, transmission related measures should be addressed in NEP. Transmission sector in Pakistan plays a vital role in minimizing circular debt[11] and generation cost reduction[12]. However, the transmission sector is expected to go through two major changes.
First, the central transmission body NTDC, is expected to be replaced by provincial bodies. For some provinces those bodies have already been created while for others, the process of creation has begun. NPP needs to ensure that the creation of these bodies does not come at the cost of the national grid. To ensure this synergy between the provincial and national grids, NEP needs to provide for the creation of mechanism that would govern the trading and capacity of construction among the provinces.
Second, with the introduction of transactive energy, the national grid will have to master the construction of mesh networks. NEP needs to ensure that Pakistani government and private sector create the right legal, technological and financial base for the execution of such projects. Such a change in topology will happen concurrently with an increase in transmission needs for households due to electrification of the transport sector.
Third, due to the ever-increasing demand for transmission capacity, the government has to create the appropriate framework for the introduction of private transmission line companies in the country. Doing so would ensure the tight government coffers in the short-term don’t spiral into medium term transmission constraints.
Finally, NEP needs to ensure appropriate national mechanisms that would allow the respective provinces, as well as the national grid, to trade electricity at a regional level. Currently Pakistan imports cheap electricity from Iran at a rate of 7.14 cents[13]. Moreover, there is potential for Pakistan to export power regionally. Such prospects increase ROE for the generation facilities while at the same time increasing export revenue for the country. Such transmission network can support the industrial revolutions of the future.
Manufacturing ability
Both government actions and private power policies in the past have completely ignored the domestic manufacturing aspect of power projects. This has meant that the industry’s cost curves have not matured into a falling trend. Instead, they have stayed constant in dollar terms with a steep increase in rupee terms. The new NEP has to make adjustments for incentivizing sourcing of EPC components by either mandating minimum local content requirements[14] or through allowing higher ROE[15] ratios for projects with local content.
Developing National Skills
The future belongs to domestic generation of resources, be that in Hydel, Coal or Renewable Energy. Such technologies promise to reduce the dollar component of power production in Pakistan, which is always a sigh of relief for the Current Account Balance of the country. However, these promises will fall flat if the nation is forced to import the required skills to maintain and operate these facilities. Therefore, NEP must allow domestication of skills via bodies such as Sector Skill Councils (SSCs). SSCs are more effective than traditional government programs due their demand-oriented nature.
This discussion will be continued in subsequent Newsletter encompassing: Preparation for the Fourth Industrial Revolution, Solving the “missing money” problem through Capacity Markets and learning from past mistakes.
[1] The caveats of the Energy (Gas, Oil, Coal and other Hydrocarbons) deserve their own separate discussion.
[2] With targets for capacity installation being borrowed from the Medium-Term Budgetary Framework
[3] The policy recognized the introduction of 18th Amendment and gave provinces their due role in the power policy.
[4] Examples of such bodies include Pakhtunkhwa Energy Development Organization (PEDO) and Punjab Power Development Board.
[5] This includes increased in breadth, through higher number of feasibility studies and more depth through collecting data on more
[6] This data can be used for analysis as well as for training Machine Learning Program.
[7] Provincial and Federal
[8] The components of this holistic policy can always be modularized in order to avoid rigidity.
[9] Bond and REIT based.
[10] As each firm has to spend separate man hours negotiating items that can be negotiated jointly.
[11] By ensuring that generated electricity is evacuated into the national grid.
[12] By removing transmission constraints that will allow following the dispatch order (EPP based) to the letter.
[13] Capacity utilization in summers hovers between 70-75%.
[14] After securing relevant WTO exceptions.
[15] Return on Equity