Triconboston Wind Power Project (RRP PAK 50200)

SECTOR OVERVIEW

A. Introduction

1. Energy is arguably one of the most important inputs for economic growth to sustain
industrial and commercial activities. Thirty million people in Pakistan (about 15% of the
population) lack access to electricity, which lessens opportunities for inclusive growth.1 Energy
disruptions and shortages not only result in slower economic growth but also adversely affect
social cohesion. Although the situation has improved with the addition of 3,700 megawatts (MW)
of generation capability between 2010 and 2015, load shedding is common and has often led to
civil strife.2 Due to better load management, the average load shedding, which had peaked to 12
hours a day in urban and industrial areas during 2013, has been reduced to 6 hours a day in
urban areas and 4 hours a day in industrial areas (footnote 2).

B. Sector Structure and Policies

2. Pakistan’s power industry encompasses electricity generation, transmission, and

distribution. The sector has been served by two vertically integrated entities: the Water and Power
Development Authority (WAPDA), which was established in 1958 and services all of Pakistan
except areas around Karachi; and K-Electric Limited (KEL), formerly Karachi Electric Supply
Company, which was established in 1913 and services Karachi and surrounding areas.3

3. The Government of Pakistan opened the power sector to private investment via the 1994
Power Policy. The government created the Private Power and Infrastructure Board to implement
the new energy policy and to facilitate investment through a single-window operation. The policy
was followed by the 1995 Hydroelectric Policy, which was designed to encourage investment in
hydropower generation. The subsequent 2002 Power Policy covered concessions for the
development of all private sector thermal and hydro generation plants above 50 MW, while
projects below 50 MW were left to provincial governments. In 2006, the government announced
the Renewable Energy Power Policy to encourage energy development from renewable sources
to achieve 9,700 MW of renewable power within the energy mix by 2030. The government’s 2013
National Power Policy envisions, by 2017: eliminating load shedding; reducing the average
generation cost from $0.12 per kilowatt-hour (kWh) to $0.10/kWh; decreasing transmission and
distribution (T&D) losses from 23%–25% in 2013 to 16%; and increasing revenue collection from
85% of billing in 2013 to 95%.4

C. Regulation and Reform

4. As part of its power sector reforms, which started in the mid-1990s, the government
established the National Electric Power Regulatory Authority (NEPRA) in 1998. NEPRA is tasked
with regulating all sector aspects—including issuing generation, transmission, and distribution
licenses; and determining the generation, transmission, and distribution tariffs of electric power at
various levels (production, transmission, and consumption).

1 I. Alam. 2014. 30m Pakistanis Without Electricity in 21st Century. The Nation. 27 February.
http://nation.com.pk/national/27-Feb-2014/30m-pakistanis-without-electricity-in-21st-century
2 National Electric Power Regulatory Authority (NEPRA). 2016. State of Industry Report 2015. Islamabad.
3 Friends of Democratic Pakistan Energy Sector Task Force. 2010. Integrated Energy Sector Recovery Report and
Plan: October 2010. Islamabad.
4 Government of Pakistan. 2013. National Power Policy 2013. Islamabad.
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5. In October 2007, WAPDA was split into two entities—WAPDA and Pakistan Electric Power
Company. Since then, WAPDA’s mandate has been to develop and operate water resources,
including hydropower, and it manages about 6,600 MW of the country’s hydroelectric power
assets. Responsibility for the public sector thermal plants and T&D companies was vested in
Pakistan Electric Power Company, which oversees 14 corporate entities: four thermal power
generation companies (GENCOs), nine power distribution companies (DISCOs), and the National
Transmission and Despatch Company (NTDC), the sole grid operator. The NTDC’s role is to
evacuate power from all generation companies (including GENCOs, hydropower stations, and
independent power providers [IPPs]) and supply to DISCOs. The country has a single-buyer
model through the newly formed Central Power Purchasing Authority Guarantee Limited, which
was separated from the NTDC as part of the government’s reform agenda in 2015.

D. Sector Challenges

6. Supply–demand gap. Electricity demand in Pakistan has increased by a compounded

annual growth rate of almost 3.4% since FY2011 (footnote 2). NTDC expects electricity demand
to increase by an average of 4.8% per annum till 2023 in its service area.5 Demand in the KEL
service area is expected to increase by about 4.9% per annum based on historical precedence.6

7. Pakistan’s primary commercial energy supplies comprise of thermal power (fired by oil,
natural gas, or coal), conventional hydro, and nuclear electricity. The total installed capacity on
31 December 2015 was 25,025 MW. IPPs (thermal, hydroelectric, and wind) have successfully
installed about 11,574 MW of generation capacity.7 The installed capacity, by generation type, is
shown in Table 1.
Table 1: Power Generation Capacity in Pakistan (2015)
Source MW %
Thermal
Generation companies with Pakistan Electric Power Company 5,762 23.0
K-Electric Limited 1,874 7.5
Independent power producers 8,978 35.9
Captive and/or small power producers 200 0.8
Subtotal 16,814 67.2
Hydroelectric
Water and Power Development Authority 6,902 27.6
Independent power producers 214 0.9
Subtotal 7,116 28.4
Nuclear
Chashma nuclear power plant (1 and 2) 650 2.6
Karachi nuclear power plant 137 0.5
Subtotal 787 3.1
Wind
Connected with the national grid (independent power producers) 308 1.2
Subtotal 308 1.2
Total Installed Generation Capacity 25,025 100.0
MW = megawatt.
Sources: National Electric Power Regulatory Authority. 2016. State of Industry Report 2015. Islamabad;
Alternate Energy Development Board of Pakistan. http://www.aedb.org/index.php/ae-technologies/wind-
power/wind-current-status
Numbers and percentages may not sum precisely because of rounding.

5 NTDC. 2013. Pakistan Electric Power Company Energy Demand Forecast and Power Market Survey 2013–2023,
23rd edition. Lahore.
6 Asian Development Bank (ADB) estimates based on historical data.
7 Includes 1,874 MW from KEL and 200 MW from captive and small power producers.
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8. Pakistan has been experiencing an acute energy shortage since 2009, in part because of
chronic losses, underinvestment, and population increase. The deficit during peak hours reached
5,625 MW during FY2015 (footnote 2). The historical annual supply–demand gap is shown in
Table 2.

Table 2: Supply–Demand Gap during System Peak Hours of National

Transmission and Despatch Company and K-Electric Limited
Generation Demand Surplus or
FY
Capability (MW) (MW) Deficit (MW)
2011 15,430 21,086 (5,656)
2012 14,483 21,536 (7,053)
2013 16,846 21,605 (4,759)
2014 18,771 23,505 (4,734)
2015 19,132 24,757 (5,625)
( ) = deficit, FY = year ending June 30, MW = megawatt.
Source: National Electric Power Regulatory Authority. 2016. State of Industry Report 2015. Islamabad.

9. It is important to note that generation capability is much lower than installed capacity, as
the availability of generating capacity is linked to natural variations in water availability (for
hydroelectric plants and dams), shortages of natural gas, reduction in the thermal efficiency of
public sector generation companies (GENCOs), scheduled and forced outages, and financial
constraints in the energy supply chain stemming from the differential between the cost of
producing and selling power.

10. Primary energy and fuel mix. One of the sector’s main impediments is the dramatic
change in the primary fuel mix since 1990. In the 1980s, hydroelectric power accounted for about
60% of the country’s generated electricity,8 but by 2015 it had dropped to 28% of installed capacity
(footnote 2). This was caused by limited new hydro generation in the public and private sectors,
and the increased reliance on thermal power plants to satisfy power demand. The shift to a higher
share of thermal power—more than 50% of which relies on imported oils—has resulted in power
generation tariffs that are highly susceptible to volatility in international fuel prices. Reliance on
imported energy sources (such as furnace oil and high-speed diesel) is reflected in their large
share, 38.7 gigawatt-hours (or 55.3%), of the total 70.0 gigawatt-hours generated from thermal
sources in FY2015; the rest was generated from natural gas (44.6%) and coal (0.1%) (footnote
2). This increased reliance on imported fuel oil has a major cost stability implication for the sector.
In FY2015, the operating cost of imported furnace oil-based plants was about PRs12/kWh
($0.11/kWh)9 (with a crude oil price of $50–$60 a barrel) to produce electricity, compared with
PRs4.7/kWh ($0.04/kWh) for indigenous gas-based power plants, and about PRs15/kWh
($0.14/kWh) for existing cost plus-based wind power projects.10

11. High transmission and distribution losses. The sector also suffers from high T&D
losses on account of outdated and/or old T&D infrastructure—causing high technical losses,
which are exacerbated by pilferage and theft. System-wide T&D losses are about 21.4% (whereas
average loss reported by the DISCOs was 18.7% and by NTDC was 2.6%) (footnote 2). High
T&D losses directly impact the viability of low-performing DISCOs, as NEPRA allowed (the
DISCOs’) average T&D loss of 15.3% in the end user consumer tariff, whereas the reported

8 J. Rizvi. 2016. Demystifying Pakistan’s Energy Crisis. MIT Technology Review.

http://www.technologyreview.pk/demystifying-pakistans-energy-crisis/
9 An exchange rate of $1 = PRs104.58 has been used in this document.
10 State Bank of Pakistan. http://www.sbp.org.pk/reports/annual/arFY15/Energy.pdf; ADB. 2016. Extended Annual

Report for Zorlu Energy Power Project. Manila.

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average loss was 18.7%—resulting in a revenue gap of PRs41 billion ($390 million) for FY2015
(footnote 2).

12. Circular debt. The often uncontrollable and volatile cost of power generated (most of
which is based on imported fuel), unsustainable T&D losses, and consumer frustration with
brownouts and blackouts means the government generally cannot pass on the full cost of power
to consumers—albeit recently, due to a decrease in international oil prices, it has been able to
move towards cost-recovery pricing for the end consumer. Prolonged payable days across the
energy value chain are commonly known in Pakistan as circular debt.11 High T&D losses are the
main contributing factor for the circular debt. A low collection ratio compounds this problem. The
power sector payables stood at PRs331.5 billion ($3.2 billion) by the end of March 2016. Helped
by lower oil prices, near-cost recovery tariff, collection rates’ strengthening, and further loss
reduction, increase in debt was only marginal (PRs5.5 billion) at the end of March 2016, compared
to the preceding quarter ending December 2015.12

13. Economic dispatch order. The decision to dispatch—and pay—a power-generating

plant is made on the economic merit order principle, i.e., first dispatching a generation unit with
the lowest marginal or operational cost. Since renewable plants are not fossil fuel dependent, they
incur lower marginal costs than other thermal and/or fossil fuel-based plants to produce an
electricity unit, and are dispatched whenever they are available, and always prior to fossil fuel-
based generation plants.

E. Government Strategy

14. The government has incrementally moved to pass on cost-recovery tariffs to consumers
to reduce the quantum of tariff differential subsidy (TDS), which is primarily provided to the
agriculture and residential consumers consuming up to 300 units. The lowering of international oil
prices has assisted this, bringing down the average basket cost of generation (less hydro, solar,
and wind) to PRs9.84/kWh in FY2015 from PRs10.59/kWh in FY2014 (footnote 2). The
government intends to decrease the gap between NEPRA-determined consumer-end tariff and
the government-notified tariff by imposing a surcharge on some consumer categories of different
DISCOs, so that TDS burden is reduced. The historical increase in tariffs is shown in Table 3.
Table 3: Historical Increase in Average Tariffs
(PRs/kWh)

Fiscal Year 2010 2011 2012 2013 2014 2015 CAGR

NTDC Area 5.2 7.0 8.0 8.9 10.3 10.6 15.2%
Karachi Electric Area 7.1 8.3 9.0 11.0 12.2 12.1 11.2%
CAGR = compound annual growth rate, kWh = kilowatt-hour, NTDC = National Transmission Despatch Company.
Source: NTDC. Power System Statistics 2014–2015. Lahore

15. The medium-term emphasis will be on implementing low-cost gas pipeline, coal, and
hydropower projects; the long-term focus is completing large hydropower projects and retiring
high-cost energy projects and contracts, thus ensuring more affordable electricity generation.

F. ADB Interventions

11 This shortfall flows through the entire energy supply chain, from electricity producers to fuel suppliers, oil refineries,
and exploration and production companies—resulting in a shortage of fuel supply to the GENCOs and a reduction in
power generated by IPPs, which increases brownouts and blackouts.
12 International Monetary Fund (IMF). 2016. Country Report No. 16/207 (June). Washington, DC.
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16. In addition to its private sector operations, the Asian Development Bank (ADB) is engaged
in Pakistan’s energy sector through its public sector operations. Recent interventions include: a
program loan of $400 million to reform the energy sector, including improving its governance;
loans for the development of a new 660 MW supercritical coal-fired power generation unit at
Jamshoro Thermal Power Station in Sindh Province to increase reliable power output and lower
fuel costs; various multitranche financing facilities for investment programs to promote more
energy-efficient technologies; and transmission, distribution, and renewable energy projects.13

17. As the sector’s largest development partner, ADB holds regular policy dialogue on
reforms, planning, and implementation; and provides periodic sector assessments for
International Monetary Fund (IMF) country reviews. Ongoing reforms follow recommendations of
the Friends of Democratic Pakistan Energy Task Force report, which ADB co-chaired with the
government (footnote 3). These are related to (i) strengthening energy sector governance,
(ii) rationalizing pricing and energy subsidies, (iii) developing energy finance capability,
(iv) mainstreaming energy efficiency into energy policy, and (v) fast-tracking investment projects
for energy security.

G. International Monetary Fund’s Extended Fund Facility

18. As part of the extended fund facility program, the government committed to undertake
broad-based reforms in various sectors, including energy. Energy sector reforms included (i)
developing a 3-year plan for phasing out the TDS and bringing tariffs to cost recovery levels;
(ii) eliminating accumulated circular debt by August 2013 (PRs503 billion); (iii) tackling losses by
improving collections and efficiencies, entailing measures such as instituting a fast-track judicial
system to improve enforcement and implementing revenue-based brownouts; (iv) submitting a
draft Pakistan Energy Efficiency and Conservation Act to the Council of Common Interests (an
interprovincial constitutional body) by September 2013; (v) prioritizing the use of gas and coal
rather than fuel oil in electricity generation, rehabilitating generation plants, and continuing to
develop hydropower projects; (vi) building NEPRA’s capacity, and reducing the tariff
determination period from 8–10 months to 90 days for the tariff to be determined for FY2014
onwards; and (vii) building the institutional capacity of all energy sector public sector entities.14

19. In the 12th review (carried end July 2016) of the extended fund facility program, the IMF
reported that Pakistan made key progress towards macroeconomic stability, laying foundation for
higher more inclusive growth.15 In the energy sector: (i) power blackouts declined, (ii) distribution
losses were reduced, (iii) payment collection rates increased, (iii) energy subsidies were reduced,
(iv) electricity tariffs were increased, and (v) surcharges were introduced to allow for cost recovery.

13 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic and
Policy-Based Loan for Subprogram 2 to the Islamic Republic of Pakistan for the Sustainable Energy Sector Reform
Program. Manila; ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed
Loan to the Islamic Republic of Pakistan for the Jamshoro Generation Project. Manila.
14 IMF. 2013. Country Report No. 13/287 (September). Washington, DC.
15 IMF Website. http://www.imf.org/external/country/PAK (accessed 16 August 2016).