Pakistan needs a balanced and diverse energy policy to encourage investments in economically feasible and cleaner sources of power generation technologies.
The government’s solution to import more expensive furnace oil and liquefied natural gas (LNG) would only contribute further to the balance of payment crisis, creating a vicious cycle.
Reversing regressive taxation and regulatory barriers on renewables, and carrying out auctions to ensure that held up renewable energy development, should be encouraged to go ahead as planned.
The Pakistan Muslim League Nawaz (PMLN) government recently came into power following the infamous ouster of Pakistan’s ex-Prime Minister Imran Khan. The new government was instantly riddled with a long list of system inefficiencies; unsustainable subsidized petroleum prices, a looming balance of payment crisis, intense heatwaves, and a massive shortfall in the country’s ability to meet its power demand.
All factors are interconnected.
Tightening fuel supplies amidst Russia’s invasion of Ukraine and sky-high prices for oil, coal, and LNG have led to emerging economies like Pakistan being priced out of competition for these commodities, and exposed Pakistan’s weak position on energy security. Pakistan has faced repeated defaults even on term LNG cargoes, while procurement on the spot market leads to an unprecedented economic burden, as Asian spot prices remain upwards of $25/mmbtu.
Unable to secure fuel supplies, almost 3.5 gigawatts (GW) of installed capacity has been forced to shut down, with 1.2GW of RLNG based capacity facing closure since 13th December, 2021. The government’s inability to service debt and clear almost $1.62 billion worth of dues towards the China Pakistan Economic Corridor (CPEC) Independent Power Producers has hurt their ability to secure fuel supplies, resulting in three 1320 megawatts (MW) imported coal power plants taking half of their capacity offline.
Ironically, climate change continues to show the region how this increased dependence on fossil fuels harms the planet, as South Asia continues to be battered by scorching temperatures. As citizens scramble to keep their households cool under the unrelenting heat, the country’s peak demand has surged up to 25GW against a generation of only 18GW. The 7GW gap left by this shortfall is managed by country-wide load shedding of almost 4-12 hours a day. The government’s solution to this has been to import more expensive furnace oil and liquefied natural gas (LNG), contributing further to the balance of payment crisis. A full circle is thus achieved.
Artificially subsidized petroleum prices, combined with pressure by the International Monetary Fund to reverse these subsidies, and legacy issues of circular debt in the power and gas sector, add to the unenviable list of problems this government must face. Understandably, it is floundering to find a solution to all at once.
The key to resolving many of these issues lies in a balanced and diverse energy policy. PMLN’s proclivity toward fossil fuels such as coal and LNG is well known. In fact, during the incumbent government’s previous regime (2013-2018), LNG was introduced to Pakistani markets and various LNG infrastructure including regasification terminals and power plants, was established. The CPEC, which the PMLN considers its biggest achievement to date, was also the catalyst for Pakistan’s coal development.
Even now, the inclination seems to be towards fossil fuel-based fixes, particularly imported LNG, but this doesn’t come cheaply and is still unreliable. To make up for four-in-a-row defaults by Gunvor, Pakistan LNG Limited (PLL) recently secured six LNG cargoes ranging between $24-32/mmbtu on the spot market. In contrast, term cargoes through Gunvor would have cost $12.5/mmbtu on average. The government also seems keen to sign more Government to Government (G2G) and long term contracts. Shahid Khaqan Abbasi, Chairman of the Prime Minister’s National Task Force on Energy, indicated in a recent address that “the Prime Minister during his visit to Saudi Arabia would seek an LNG deal.” If this doesn’t go through, Pakistan could always turn to its other friendly Middle Eastern neighbor, Qatar. While Qatar may have awarded Pakistan favorable long-term contracts in the past, it may not do so anymore. According to Bloomberg, a rush of import deals triggered by a worsening supply crunch has led to top suppliers offering 10-year contracts, starting in 2023, at rates about 75% higher than similar deals signed last year. This could easily mean term prices of around 16-18% of Brent crude, falling in the range of $18-20/mmbtu at current crude oil prices. G2G deals also take time to materialize. The recent deal with Qatar took two years of negotiations to come about, so come this winter, Pakistan will very likely still be going through a vicious cycle of non-supply and power outages.
Meanwhile, economically feasible and cleaner sources of power generation such as wind and solar energy face regressive taxation and regulatory barriers, which discourage investment in these technologies. Energy efficiency and investments in the grid take the back burner, as more immediate challenges take precedent.
While a focus on dispatchable sources of generation may be justified in the near term, it is clear that a fossil-fuel based economy is neither economically nor environmentally sustainable in the longer term. The government must immediately reverse taxes on renewable energy and carry out auctions to ensure that held up renewable energy development goes ahead as planned. The CPEC, which the Prime Minister spoke of prioritizing in his inaugural speech, will be a great way to ensure that capital flows in the right direction and investments are diverted from fossil fuels toward renewables.
The remainder of the year will be crucial to see how the government deals with the energy hydra it currently faces. Will it repeat the mistakes of its predecessors or continue to make the ones it set in motion itself during previous regimes? Or will it finally heed the warnings issued by environmental conditions and global commodity markets, and eventually divest from costly and polluting power generation?
Haneea Isaad is an Energy Finance Analyst at IEEFA.