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Pakistan’s Power Sector: In need for urgent financial assistance [free access]

November 14, 2018

Pakistan’s power sector is reeling under great stress. High debt, non cost-reflective tariffs, a high default rate, high subsidies and poor power quality are some of the issues hampering sector performance. As per a recent report prepared by a special senate panel, Pakistan’s circular debt currently stands at PRK1,196 billion, of which the receivables of distribution companies amount to a share of around 70 per cent (PKR824 billion).

 

The mounting circular debt comes at a time when the government is struggling to address issues of high inflation, soaring current account deficits, falling foreign capital flows and dwindling foreign currency reserves. This has resulted in a situation where the government is facing a cash crunch to meet its short-term financial commitments and is thus seeking financial assistance from countries like Saudi Arabia and China as well as the International Monetary Fund (IMF).

 

Current state of the power sector

As of mid-2017, Pakistan’s installed generation capacity was around 28,400 MW. Over the past five years, the generation base has increased at a compound annual growth rate (CAGR) of 4.5 per cent. Against this, the consumer demand is around 25,000 MW. Despite the availability of surplus generation capacity, the country continues to face a power shortage and experience load shedding and breakdowns. A key contributor to this is the limited capacity of the transmission and distribution (T&D) network to transfer the available generation. Currently, the country’s T&D network is capable of supplying around 22,000 MW, representing a shortfall of around 3,000 MW to meet the demand.

 

The country’s T&D network comprises over 609,000 km of line length. The grid network has increased at a CAGR of only 1.8 per cent in the past five years. As of June 2017, the transmission network comprised around 17,300 km of lines at the 132 kV level. Since 2013, around 2,765 km of high voltage lines have been added to the grid, reflecting a growth similar to that of the generation capacity. However, growth of the distribution network has slowed significantly. Since 2013, the distribution network has increased at a CAGR of 1.7 per cent, reaching around 553,230 km as of June 2017. Meanwhile, around 3.7 million consumers have been connected to the grid since 2013, representing a CAGR of 4 per cent. The mismatch of the growth in consumer base and generation vis-à-vis the growth in grid network has led to grid congestion and load-shedding.

 

Currently, T&D losses at the distribution level stand at around 17.95 per cent. The distribution utilities have been unable to consistently reduce these losses. Over the past decade, T&D losses have declined by only 1.1 per cent from 19.05 per cent in 2008. The high T&D losses are also one of the contributors to the country’s circular debt, with a share of around 15 per cent.

 

 

Figure 1:  Growth in distribution line length (km)

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Note: Data is as of June for the mentioned years

Source: National Electric Power Regulatory Authority

 

 

Figure 2: Growth in transmission line length (km)

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Note: Data is as of June for the mentioned years

Source: National Electric Power Regulatory Authority

 

 

Figure 3: Trend in distribution losses (%)

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Note: Data is as of June for the mentioned years

Source: National Electric Power Regulatory Authority

 

Expansion plans

As per the estimates of the two grid developers National Transmission and Despatch Centre (NTDC) and K-Electric, electricity demand is expected to increase at a CAGR of 8.11 per cent between 2018 and 2027, with the major contributor being textile industries.

 

To meet future demand, there are plans to augment both generation and grid capacity. It is estimated that the installed generation capacity will be increased by 12.24 GW during 2018–2024. Of the total proposed capacity, around 7.7 GW will be thermal energy based and the remaining will be based on hydropower projects. These projects, if completed as per the schedule, will help Pakistan meet its increasing power shortage and become a power surplus country.

 

Several of the planned generation projects are part of the China Pakistan Economic Corridor (CPEC). The CPEC is a framework to enhance regional connectivity between China and Pakistan by expanding geographical linkages through the creation of an integrated transportation system (covering road, rail and air) and an information network system; as well as strengthen cooperation in the fields of oil and gas, electricity and power grids. The projects under CPEC are either financed with government-to-government loans, or through investment and grants.

 

Generation projects involving over 9,000 MW of capacity (mostly coal-based and a few wind, solar and hydro plants) have been identified as priority projects under CPEC. In addition, around 2,700 MW of generation projects are being actively promoted or have been identified as potential projects to be supported under CPEC.

 

Further, several plans are already in place for expanding the capacity of the T&D network. About PKR700 billion worth of investment has been planned for Pakistan’s power transmission network expansion during 2018–22. Currently, projects involving the construction of over 4,520 km of transmission lines and 7,370 MVA of transformer capacity are under development. NTDC will develop about 95 per cent of the planned line length while K-Electric will develop the rest, with the latter accounting for all the projects proposed at the 132 kV level.

 

Most of the planned transmission projects aim at connecting upcoming generation capacity. Key upcoming projects include the transmission network for dispersal of power from Dasu hydropower project Stage I, the Guddu project, and from the Diamer Bhasha hydropower project.

 

A major transmission project under development is the ±660 kV high voltage direct current (HVDC) Matiari–Lahore transmission line project. The project is part of the CPEC and is being developed on a build, own, operate and transfer (BOOT) basis by China Electric Power Equipment and Technology Company Limited (CET), a wholly-owned subsidiary of China’s largest grid developer, State Grid Corporation of China (SGCC). While CET will be responsible for the construction of the project, NTDC will take responsibility for operation and maintenance (O&M) works post commissioning.

 

The HVDC project involves the construction of an 878-km line to connect the district Matiari near Hyderabad from a converter station located in Sindh, to the Punjab province district Nankana Sahib near Lahore. The line will help in transmitting electricity generated from the coal reserves of Thar in Pakistan to urban centres in Punjab. Two converter stations, one at Matiari and another at Lahore, will also be set up under the project. The project work is expected to be completed by March 2021.

 

The CPEC also includes the ±660 kV Matiari (Port Qasim)–Faisalabad project, which is also to be developed by CET on a similar model as that of the Matiari–Lahore link. However, a second study for the Port Qasim–Faisalabad line has been ordered to reassess the need for the project.

 

Pakistan is also part of the CASA 1000 project, which aims to facilitate the trade of 1,300 MW of electricity among four Asian countries—Tajikistan, the Kyrgyz Republic, Afghanistan and Pakistan. The project will transport surplus energy from hydroelectric power projects in Kyrgyzstan and Tajikistan to the power-deficit countries of Pakistan (1,000 MW) and Afghanistan (300 MW). The grids of the four countries will be linked via HVDC and high voltage alternating current (HVAC) lines aggregating 1,275 km of line length. Two converter stations, one in Tajikistan (at Sangtuda) and another in Nowshera, Pakistan, will also be set up. Almost three-fourths of the line length will pass through Afghanistan.

 

NTDC has received financial aid from the Asian Development Bank (ADB) and the World Bank for executing projects identified under its Power Sector Development Plan (PSDP). China’s Shanghai Electric Power (SEP), which recently acquired a 66.4 per cent stake in K-Electric Limited, has announced USD9 billion worth of investments to further develop the company’s infrastructure and generation facilities to help minimise and eliminate load-shedding.

 

Bailout attempts

 

Pakistan is struggling to overcome a chronic energy shortage, which has hampered growth and forced many factories to close. The country’s power sector has been grappling with low levels of investment. The state-owned utilities have been performing poorly owing to financial and administrative constraints. While multilateral institutions and the Chinese government have promised financial help, the unstable political and economic environment has hindered the implementation of projects. The government has been unable to efficiently utilise the promised aid and several projects are facing delays.

 

The debt-ridden government is struggling to find solutions to end the continuously increasing circular debt, mainly attributable to the power sector. The country’s national bank currently holds just over USD7.7 billion in foreign exchange reserves, which can buy only two months’ worth of imports.

 

The newly-elected government has approached Saudi Arabia and China to help resolve the country’s balance of payments crisis. The country required USD12 billion to address is immediate financial woes, which is being filled by USD6 billion in assistance each from Saudi Arabia and China. Saudi Arabia’s assistance will be provided through a USD3 billion loan to Pakistan's central bank for a year to help maintain reserves at a safe level, and USD3 billion in deferred payments on oil purchases. The terms of China’s assistance are still being negotiated.

 

The government has also approached the IMF for a USD7-8 billion bailout package. If approved, it would be the country’s 13th IMF package since the 1980s. The last IMF package received was in 2013, in the amount of USD6.6 billion. The country recently initiated talks with the IMF to receive a three-year assistance package. However, IMF is expected to impose strict economic conditions, such as reduction of debt, devaluing the country's currency, balancing the budget with spending cuts and tax increases, curbing imports to tame the trade deficit, liberalisation of activities, privatisation, etc., in exchange for the bailout package.

 

Given the widening current account deficit (amounting to USD18 billion in 2016-17) and the ballooning budget deficit (6.6 per cent of economic output), securing the IMF package will be critical to helping Pakistan overcome the existing financial crunch.