Pakistan needs energy security if it wants sustainable growth

Pakistan has a perennial energy deficit, and that deficit keeps on growing. The growth in an energy deficit is both a function of underinvestment in energy, incessant subsidies, and the inability of the government to price energy at a level that reflects the marginal cost of a molecule of gas or electron of electricity that is produced and dispatched.

The cost of natural gas at the household level is only a small fraction of the marginal cost of gas, resulting in inefficient utilization. Gas losses continue to mount, and a new hydra of gas circular debt is already in place, in addition to the regular circular debt.

As circular debts pile up and the government refuses to take any meaningful decision, the consumer continues to bear the cost of the inefficiencies of the state. Currently, we have a surplus of power generation capacity but need more foreign currency or the ability to afford expensive fuel. If pricing decisions continue to be arbitrary, the crisis will only worsen – eventually leading to complete paralysis. We can witness a partial version of this as the central bank conserves foreign currency while businesses shut down.

A drastic shift in mindset is required in terms of how energy is sourced and how it is priced. If Pakistan is supposed to get on a sustainable growth trajectory, then energy security should be the order of the day. Currently, the country’s energy mix is heavily tilted towards imported fuel, whether imported LNG, coal, or petroleum products. There is a need to shift from imported sources to local or to rationalize consumption.

Thar coal is an indigenous resource that can power the country for decades if the resources are efficiently and effectively managed. Within a few months, it will be possible to produce more than 15 million tons of coal per annum, sufficient to generate more than 2500MW of electricity. We currently have almost 5000MW of power plants that can generate electricity via imported coal.

Through some technical modification, which will require a certain investment, it is possible to convert power plants running on imported coal to running on Thar coal. It is certainly an arduous initiative as it will require bringing everyone on the same page. It will also require investment in scaling up existing mines and establishing a railway line to connect them with the power plants. The infrastructure investment to convert imported power plants to local coal, establish a railway line effectively creating a coal corridor, and scale up mining capacity will cost about $2 billion.

However, once the infrastructure is in place, it is possible to save more than $3 billion yearly in foreign currency liquidity, ensuring we continue to produce affordable electricity using indigenous resources. This infrastructure intervention ensures energy security as reliance on imported fuel decreases and makes electricity more affordable. Recent numbers suggest that the fuel cost for generating electricity via Thar coal is Rs3 per kilowatt-hour.

As coal continues to provide base load, we also need to encourage mass adoption of solar on a household and commercial level. Currently, getting a net metering connection is a painful one that is actively discouraged by the regulator. The development of decentralized solar capacity is essential for creating a competitive electricity market. Ironically, the state is willing to give guaranteed returns on establishing solar power plants to cover a risk that households and businesses alike are willing to take and pay for. It is time our thinking moves away from guaranteeing returns, and towards a more competitive market, not just in letter but also in spirit.

A mix of coal, nuclear, hydel, and solar will greatly reduce the country’s dependence on imported energy and make energy more affordable. The energy mix doesn’t end in electricity. We import more than $12 billion of petroleum products, largely used for automotive consumption.

The state must double down on developing public transport infrastructure to reduce reliance on private vehicles. Countries across the world have done the same. It reduces the cost of commuting for the population and enhances energy security. As the population continues to grow, so will the demand for petroleum products. We can either curtail this demand by interventions such as public transport infrastructure or continue to defer the problem till it becomes too big.

Policymakers and their cronies are oblivious to the problems of future generations. They still live with a surplus mindset, whereas resource constraints are real. Someone somewhere needs to start thinking about future generations and how the country will manage its resources. The population growth rate doesn’t seem to slow down, nor will the demand for staples and energy. If any policymaker or public representative feels an iota of responsibility, they will plan for the future and not just live for daily political theatrics.

The writer is an independent macroeconomist.