|Project Rationale and Linkage to Country/Regional Strategy
Pakistan is exploring options to reduce load shedding and power cost but has few medium-term options for affordable, dependable power supply. Natural gas was the main fuel used for Pakistan's base-load power plants, but the country's dwindling reserves of gas have resulted in increasing use of high-cost imported fuel oil for power generation. This has increased power generation costs and exacerbated the existing financial shortfall, both within the sector and the national economy. Compared to existing, inefficient HFO-fired plants, the higher efficiency supercritical generation units and diversification away from imported fuel oil will enable Pakistan to increase its reliable supply of electricity and lower both costs and greenhouse gas (GHG) emissions.
Energy crisis. Pakistan's energy crisis depresses its economic performance and fuels social instability. Power shortages equaled about one-third of total demand (4,000 to 5,000 MW) during most of FY2012 (ending July 2012). Increasing, unpredictable load shedding is estimated to constrain annual gross domestic product (GDP) growth by at least 2%. Small- and medium-sized enterprises that employ the largest number of people, but cannot afford back-up electricity generators and fuel, experience the largest impact. GDP growth has averaged 3% since 2007, while GDP growth of 7% is required to generate enough employment to absorb new labor market entrants. Low economic growth creates an environment for recruitment by societys radical elements. The government introduced, as a priority, the new National Energy (Power) Policy (Power Policy) to tackle these issues. As a first step, PRs480 billion was paid to fuel companies and independent power producers to clear payment arrears. The government is also pursuing tariff rationalization and energy efficiency measures such as conservation, transmission and distribution loss reduction, and rehabilitation of existing power plants.
High-power generation cost. Pakistan has 23,538 MW of installed power generation capacity and 14,000 MW of available capacity on average. Many HFO-fired power plants are not fully utilized because of a shortage of funds for fuel. The increase in HFO-fired power generation is the major reason the cost-recovery tariff (average tariff) has continuously increased. The government has increased the base tariff by 106% from February 2008 to June 2013, while the subsidy has increased to PRs5.79 per kilowatt-hour (kWh). For fiscal and economic sustainability, the government must lower electricity generation costs and increase supply to reduce shortages.
Lowering the generation cost. The government aims to increase coal-based power generation while decreasing expensive HFO generation. This will require converting existing HFO generation units, replacing old inefficient units, and constructing new plants. The imported HFO costs several times more than domestic or imported coal, and has higher sulfur content. Electricity generated from coal, through medium-term fuel supply contracts, will also help stabilize the power price. The Power Policy includes plans to diversify the energy mix, and the National Electric Power Regulatory Authority (NEPRA) recently announced a new upfront tariff calculation methodology to encourage investment in coal-fired power projects.
Renewable and gas-based generation. To improve energy security and affordability, the government will also pursue large hydropower, gas, and other projects using domestic resources. Pakistan has a low carbon footprint because of the large amount of hydropower and natural gas-based power generation. However, hydropower's contribution to total generation has declined, and accounted for just 26% of power generated in 2012. Only 6,716 MW of a potential of over 40,000 MW of hydropower has been tapped, making hydropower from large dams the ideal solution. However, the long implementation and complex safeguard issues mean this is a long-term option. Domestic gas-fired generation will decline from the current 26% because of depletion of existing fields, and competing demand from industry, transport, and retail customers unless domestic gas supplies are increased. Wind and solar corridors are being explored, but their outputs are variable and would not meet the base-load requirements.
Power generation mix. Oil-fired power generation is expensive, and is used for less than 5% of world generation. To be competitive economically, Pakistan cannot afford a continued reliance on expensive imported oil for 34% of power generation. Pakistan has one of the lowest carbon emissions, just 19% of the world's average. Potential coal reserves in Pakistan may generate 100,000 MW of power for 350 years. Globally, coal-based power plants generate 40% of power, but account for just 0.07% of generation in Pakistan. Poverty reduction and provision of basic necessities to the poor are immediate challenges for Pakistan.
ADB interventions. ADB is engaged in the Pakistan energy sector through its multitranche financing facilities, which fund energy efficiency, transmission, distribution, and renewable energy projects. As the sectors largest donor, ADB conducts policy dialogue on reforms, planning and implementation, and provides periodic sector assessments to country reviews of the International Monetary Fund. Ongoing reforms follow the recommendations in the report of the Friends of Democratic Pakistan Energy Task Force, which ADB co-chaired with the government. The report addresses diversification of existing fuel sources. The project is included in the country operation business plan for Pakistan.