ADB’s ADO 2012: Power shortage constraining economic growth

* Supply and demand gap of 5,000MW in FY11 hits manufacturing sector hardest

ISLAMABAD: The power shortage is the main factor constraining economic growth as the supply and demand gap at peak hours reached over 5,000 megawatts (MW) in fiscal year 2010-11, which reduced economic output, hitting manufacturing sector the hardest.

Asian Development Outlook (ADO) 2012 released by Asian Development Bank revealed on Wednesday.

Policy challenge—efficiency constraints: According to the ADO 2012, power is the main constraint for economic growth, as load shedding intensifies and becomes less predictable. Estimates from the Planning Commission suggest that losses arising from power and gas shortages held down gross domestic product (GDP) growth by 3.0 to 4.0 percentage points in FY 2011 and FY 2012. Improved management of power resources could ameliorate predictability of load shedding to allow the private sector to better schedule work and minimise costs. The current system, with tariff and collections below cost recovery, is a major deterrent to investment for capacity expansion in the sector.

Cost recovery has not yet been achieved despite substantial increases in tariffs over the past two years, and measures to bring down costs have not been effective. For every unit of power sold, there is a loss to the sector reflected in the form of subsidies or accumulation of losses in the state-owned power companies. An outstanding accumulation of Rs 220 billion was carried into FY 2012, and an additional financing of 1.0 percent to 1.5 percent of the GDP is likely to be required in FY 2012. Implementation of many of the actions taken by the government has been complicated by legal challenges.

The cause of the power sector crisis can be divided into three pillars: cost-efficient generation capacity not keeping up with demand, financial issues, and management issues. The supply and demand gap has widened because of a lack of investment in energy. The government has in fact added 1,604 MW to the system by commissioning six new independent power producers (1,264 MW) and a nuclear power plant (340 MW). A 49.5 MW wind power plant has recently obtained financing.

However, other domestic resources (hydro, gas and coal) have not grown enough to cover demand, thereby increasing reliance on imported fuel oil. The energy mix has changed from predominantly hydro to thermal, which consists of domestic gas and imported fuel oil.

Industrial, retail and fertilizer users are competing for the depleting gas supply, the preferred fuel for existing thermal plants. Plans to increase domestic gas production, import liquefied natural gas, pipe gas from neighbouring countries, or bring in electricity from Central Asia have yet to materialise. Financial issues are rooted in the fact that the cost recovery tariff determined by the National Electric Power Regulatory Authority is not applied to customers. Thus the government bears the differential as a subsidy. Losses and costs excluded from the tariff formula also accumulate at the public sector company level. The lack of financing leads to arrears for the power generation and fuel companies.

Timely payment to these companies, essential for the sector’s reliability, has become increasingly difficult, partly because of increased dependence on imported fuel, which is subject to wide price fluctuations. The cost of (oil-based) power generation in the country escalated by almost 40 percent in the two fiscal years ending FY 2011. Despite steep increases in tariff and fuel price adjustments, customer tariffs remain below cost recovery, requiring large government subsidies to keep the system operating.

The focus on massively increasing spending on power subsidies, reforms, and efficiency measures has been unable to remedy the accumulation of arrears in the system. To improve management, the government has appointed independent boards for the public power companies to select chief executive officers for these companies. Efforts are also ongoing to decrease commercial and technical losses (around 20 percent). However, these efforts have been overshadowed by the increase in costs and unwillingness of some customers to pay the higher tariffs. For a sustainable and reliable power sector, a multi-year plan with solid support from customers and other stakeholders needs to be implemented. staff report

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