Regulatory policy

Electricity Sector and Gas Allocation Policy – Journal

Pakistan is a lucky country where every citizen has an opinion on matters ranging from politics to economy. However, their opinions are mainly influenced by their opinion leaders, among which the media is the most effective.

If there were a discussion about what is the biggest problem in the country, there would be voices claiming that “corruption” is the biggest problem. Others would say that ‘incompetence’, ‘poor governance’ or ‘delays in justice’ are the main problems. Etc., etc.

However, the media has almost succeeded in convincing the masses that currently the most worrying problem in Pakistan is soaring commodity prices or inflation”. The media are probably right. But then comes the question of what causes inflation? Again, all sorts of opinions can be expressed. Those closer to the corridors of power might blame previous leaders, who in turn might claim that the incompetence of current leaders is the main cause of inflation. Whatever the reason for inflation, the fact remains that there must be a solution or a set of solutions to control it.

One of the underlying factors of inflation is the high cost of electricity, which depends mainly on imported fuels purchased in expensive dollars. But apart from imported fuels and some other factors, much is to blame for poor governance in the electricity sector. In line with the reform program launched in the early 1990s, the electricity sector is now regulated and supervised by the National Electricity Regulatory Authority (Nepra).

The economic impact of obtaining additional 7,865 gigawatt-hour units without additional gas consumption is a strong argument for moving cheap gas from inefficient power plants to efficient ones.

Since its inception, Nepra has developed a voluminous trove of rules and regulations, one of which also results in regular monthly Fuel Cost Adjustment (FCA) procedures, which often lead to an increase in the cost of electricity. . However, any knowledgeable observer observing these debates would notice that there are many improvements in the governance of the electricity sector in Pakistan.

Along with many other important aspects, one would note Nepra’s concerns regarding off-merit operations of power generation units. While Nepra’s Order of Merit guidelines and their apparent non-compliance in subsequent FCA proceedings speak to tons of much-needed governance improvements, one wonders on the very basis of the ‘Order of Merit’ merit” itself that Nepra advises to follow.

The Order of Merit, which ranks power-generating units by their fuel-related costs to produce a single unit (kilowatt-hour or kWh) of electricity, is available and updated monthly on the the National Electricity Dispatch Company (NTDC). It starts with some power generation units in the private and public sectors. Despite their lower efficiencies, these power generation units claim a higher rank in the Order of Merit due to obtaining their fuel (gas) from dedicated low-cost gas fields that cannot be injected into the system of the two Sui distribution companies or diverted to an efficient supply. factories without incurring additional pipeline costs.

But after these power generation units running on dedicated gas fields, there are several gas-fired power generation units (indigenous pipeline quality), mostly owned by public sector generation companies ( Gencos), which rank high in the order of merit despite their low net efficiencies (maximum up to 32.51 percent).

Since their primary fuel is native gas, which is cheap, they remain higher on merit than high-efficiency power generation units running on RLNG (Regasified Liquefied Natural Gas). Since the RLNG is imported and expensive, the Haveli Bahadur Shah, Balloki and Bhikki plants, despite their higher output of up to 61.60 pc, have found their place well below the inefficient units of Gencos and others, in the rank 34. , 35 and 36.

Pipeline-grade indigenous gas is now scarce, and inefficient power plants at the top of the order of merit are not being operated. However, in the past, they had ruthlessly swallowed up the precious natural resources of this country. Unless very large gas recoveries are made, this unscrupulous use of natural gas has led us to a position where we can only see a bleak gas future for the country’s economy.

Read more: Pakistan will run out of gas in a few years, says Fawad Chaudhry

But even if new, less expensive gas recoveries are made, the criteria for distributing electricity production units according to their ranking in order of merit would once again lead to a poor allocation of this resource. The financial and economic impact of this anomaly (provided the gas is available) can be understood by a simple mathematical example.

As per the current Order of Merit for the month of February 2022, the fuel cost component of unit number four of Muzaffargarh Energy Complex (18th on the Order of Merit) is Rs 9.4689/ kWh based on native pipeline quality gas. This fuel cost component is based on its best net efficiency of 32.51 pc. In comparison, the fuel cost component for Quaid-e-Azam Thermal Power Limited (QATPL) Bhikki (36th in order of merit) is Rs 13,154/kWh based on the use of subsidized imported RLNG.

QAPTL Bhikki has a net efficiency of 61.60 pc. If instead of RLNG, QAPTL Bhikki is operated with pipeline quality natural gas, its fuel cost would be reduced from Rs 13,154/kWh to Rs 4,997/kWh. While the difference would be Rs8.1567/kWh [13.154 minus 4.997]the actual saving would be Rs. 4.4716/kWh [9.4689 minus 4.997] – being the replacement perk of the ineffective Unit 4 of the Muzaffargarh Energy Complex.

The saving difference of Rs4.4716/kWh might not catch the eye of many. But with a few simpler calculations, the difference is huge enough to warrant serious attention. Consider allocating 300 MMCFD (million cubic feet per day) of gas to power plants with an efficiency of 61.6 pc instead of 32.51 pc. Not only would this gas replace 7,865 gigawatt hours generated by inefficient plants in one year, but it would also produce an additional 7,038 gigawatt hours of electricity based on 90% annual plant availability.

This economic impact of obtaining additional 7,865 gigawatt-hour units without additional gas consumption is a strong argument for moving cheap gas from inefficient power plants to efficient ones. But the financial impact is simply telling. The total impact of the 4.4716 rupees/kWh saved, multiplied by 14,902.5 gigawatt hours, translates into a huge annual saving of 66.6 billion rupees.

The system inefficiencies, however, go well beyond 32.51 pc and the actual difference would be much larger. However, since indigenous gas reserves are rapidly depleting, calculations of savings based on the order of merit may ultimately not be relevant. But these calculations and these savings highlight two very important aspects: (i) the order of merit, to which Nepra always refers in fuel price adjustments, must be rationalized, (ii) the gas allocation policy of the country must be completely revised.

Some suggestions for the outline of the revised gas allocation policy perhaps; (i) where possible, gas for process industry, heating and cooking is replaced by excess electricity in the country (ii) gas allocations for electricity generation should be strictly based on net efficiency criteria (combined and integrated – considering heating as part of net efficiency) without differentiation of public, private, captive or any other categorization (iii) fertilizer feedstock should be moved from gas to local coal: Thar et al., (iv) Paradigm shift of transportation sector from reliance on CNG to electric vehicle (EV) Electric car charging stations: Existing CNG station owners benefit from tax exemptions and a priority in licensing electric vehicle charging stations.

The writer has served Wapda, PPIB, Hubco and CSAIL.

[email protected]

Posted in Dawn, The Business and Finance Weekly, January 14, 2022