Electricity crisis and the circular debt
By Amjad Agha
Signals for looming electricity crisis are visible for the last several years, but no steps have so far been taken to rectify the situation.
The main cause of the crisis is the extremely high cost of generation primarily due to faulty fuel mix being used to produce electricity. At present the total generation installed capacity is 21,000MW. The peak demand is 15,000MW, but the production is only 9,000–10,000MW, resulting in 10—12 hours loadshedding.
The root cause of faulty fuel mix is the use of furnace oil as main fuel to produce thermal electricity. The months from January to May have very low hydropower availability since water reservoirs are empty and snow melt does not start till June. The Tarbela reservoir receives about 95 per cent of its water through snow melt. The natural gas is in short supply and is available to produce only 29 per cent of electricity. As over 50 per cent of the current generation is dependent on furnace oil, it is not viable for the government to purchase and provide oil at such high price. Therefore many plants are either shut or producing much below their capacity.
The price of furnace oil has jumped up from Rs2000 per ton in the nineties to its current price of Rs70,000 per ton. The price of furnace oil has risen 30 times since 1990 and seven times since 2005. There were plenty of warnings, and if an appropriate action was taken in the years 2006 – 2008 by arranging alternative fuel, the present crisis could have been avoided.
The alternative fuel is coal that could have been initially imported and subsequently obtained by developing the huge deposit of Thar coal. One hears a lot about Thar coal since last eight years, but zero coal has been obtained from this source until now.
Many proposals came from foreign investors, but no body has been allowed to touch this coal. It is a great national tragedy. The cost of producing electricity from furnace oil is about Rs16 per kwh. This is only the fuel cost; the total cost to consumer for such electricity is about Rs22 – 25/kwh, which includes fixed cost and transmission/distribution losses.
The supply of furnace oil to the IPPs and rental plants is the responsibility of the government, since fuel cost under the agreement signed is a pass through item. The government is unable to pay the fuel cost to the generating companies, with the result the plants are shut or running at a very low capacity. The generating companies are thus unable to pay to the oil companies and a high circular debt is created. At present the circular debt is around Rs400 billion.
Unless this debt is cleared, there will be no immediate improvement in electricity supply. Everyone now seems to accept that alternative fuel to furnace oil is a must but nothing has so far been done. Even if today import of coal is started, it will take about three years before the coal is obtained and some power plants are modified to use different boilers etc. Then again only those plants can be converted to coal which are near the coast. Transportation of large quantities of imported coal upcountry will be a huge task.
The other alternative fuel again for a short period could be natural gas. It is known that additional gas can be extracted from certain fields by applying high pressure. The availability of additional gas will take some time plus the quantity of gas may not be sufficient to totally replace furnace oil. Similarly the open pit mining arrangement for Thar coal will take minimum of three years.
This means that earliest the change can take place is about three years provided the work on the alternatives is started immediately. If industrial production and economic actively is to be restored, the government has no choice but to service the circular debt as a subsidy for the next three years. With the tariff increase already announced, the circular debt will come down, but it will not be possible to burden the consumers any more.
The top priority for the power sector should be to concentrate in opening the Thar coal mines as soon as possible. Experiments on gasification of coal may continue, but open pit mining is the tried and known solution.
In the meantime, the existing furnace oil plants should be converted as early as possible to use coal, initially imported and then the indigenous coal. Additional gas should be extracted from the existing fields to help replace furnace oil. All new thermal plants should be based on coal and these plants be installed near the Thar deposits, so that transportation of coal is avoided.
There is some news of importing 5,000MW of electricity from India. How, and at what cost and when will it be possible is yet unknown. We should concentrate on development of our own resources. Such offers if serious could be examined, but should not deter the country from following its own course.
The country has huge potential to produce hydropower, while there are gas fields waiting to be developed and vast coal deposits exist. Imported natural gas can also be a better and economical fuel than the furnace oil. However for immediate solution of the crisis there seems no option except to fund the circular debt for the next three years.
The present available generation capacity is sufficient to meet the peak demand, provided the fuel required is provided to the operating units. At the same time serious steps must be taken (i) to develop coalmines and gas fields immediately, which is essential to replace the high cost of oil, and (ii) get rid of circular debt and eliminate loadshedding.
We must be determined to use indigenous resources which are plenty. Concentrate on Thar coal, supplemented by natural gas fields existing and new, and hydropower. A number of medium-size hydropower projects are ready to be launched on the Jhelum, Kunhar and Swat rivers, as well as in Dir, and Chitral. These should be taken up even if the mega multipurpose projects like Basha and Kalabagh are not yet started. Doing nothing is no option.