Daily Times

Some major developments in the world’s energy market have shaken the foundation of the electricity business. These are being termed ‘disruptive’ by industry analysts since they have challenged the fundamental operating principles of the traditional electric utilities. Others have been quick to even predict that these forces are driving electric utilities into a ‘death spiral’.

What are these forces? Essentially, these five: (1) the technological strides and cost reductions in renewable energy technologies, like solar photovoltaic, which make these competitive with conventional generation; (2) storage technologies that enable consumers to meet their electricity needs, either bypassing the grid or using it only as a backup; (3) significant reductions in the energy ratings of consumer fixtures and appliances that reduce overall demand on the grid; (4) smart-grid technologies that enable customers to manage their demand to cut electricity bills, and even earn some money; and (5) rising popularity of electric vehicles that impose new demands on the utility grid.

A 2013 report by the Edison Electric Institute in the United States coined the new term, death spiral, to describe the vicious circle in which the above market forces had pushed electric utilities. “To recover their capital investments in supply facilities, utilities needed to raise rates; they found to their dismay that that was actually leading to shrinking of their revenues as more and more customers sought alternatives to the electricity grid.”

The traditional electric utility business model in which power flows in one direction (from power utility to consumers via the grid), and revenues flow in the opposite direction (from consumers to the power company) with prices fixed by a regulator has proved inadequate in handling the new market challenges.

Power started to flow in either direction as some consumers were able to meet their demand by generation at their own end, avoiding the grid totally or using it only as back-up, and not infrequently, selling their excess electricity to the utility. Like power, revenue also started flowing in both directions.

We continue to run the electricity business according to the old, now obsolete, model while the world around us has radically changed

Electric utilities had a very serious decision to make: either continue their business as usual and perish, or transform and align it with the new realities. Since then, a majority of the electric utilities have opted for the latter course, discarding the century-old traditional business model and replacing it with a new approach that did not treat the new market forces as a threat but as an opportunity to offer their customers more value-added services. A few that continued to follow the old course gradually slipped into bankruptcy.

In Pakistan’s power sector, we face a similar dilemma. We continue to run the electricity business according to the old, now obsolete, model while the world around us has radically changed.

Let’s look at a few statistics from the State of Industry Report 2017 from the National Electric Power Regulatory Authority to see where we stand today, and where we are heading.

Average consumption (KWh per consumer) is going down. The decline is more pronounced in the industrial and agricultural sectors – the darlings of utility managers for their constant loads and lower costs of serving. In these two sectors, the average demand has gone down by 20 per cent, indicating that they are switching to either substitute fuels or off-grid electricity.

The system load factor (an indicator of the utilisation and efficiency of supply facilities) is also going down, from 73 per cent a decade ago to only 65 per cent in 2017. This means that power sector is being forced to maintain a large supply capacity to cater to demand that comes on the system only for a fraction of the time-a nightmare for utility managers owing to the heavy cost this imposes on their systems.

A test of our political leadership’s sagacity is the speed with which they grasp the worsening situation in the power sector

The present 33,968 MW installed capacity is to grow at 9 per cent annually to reach 62,184 MW in 2025. However, only 47,750 MW (77 per cent) will be actually available to carry load due to de-rating. This only means that the power sector will be carrying a lot of generating capacity that has already reached the end of its useful life or is facing serious operational issues.

Peak demand, which was 25,227 MW last year, is expected to grow at 4 per cent annually to reach 33,816 MW in 2025, meaning that our power system will be carrying over 40 per cent excess capacity – more than double the reserve margin that is standard in utility business, obviously not without its cost.

In its report, NEPRA laments that capacity part of the tariff was rising since demand was not growing in sync with capacity additions (from Rs 3.4 per unit in 2016 to Rs 5 in 2017). Even if we were to freeze the tariff at its 2017 level (something improbable), and demand grows at 4 percent rate, we will need to pay 800 billion rupees in 2025 as capacity charges alone. Each one-rupee increase in capacity cost will add roughly160 billion rupees to total liability. Consequences of a reduced demand are too obvious to mention. And, this is a conservative estimate; actual situation could be far too grave.

Is our power sector drifting into a death spiral? Going by the above indicators, the answer is, yes. If we continue to handle the situation as usual, that is, raising tariffs to recover costs, we will be pushing this sector towards collapse, as more and more consumers will be forced to seek alternatives to grid electricity, leaving even lesser number in the system to shoulder the stranded costs.

Are we at a point of no return? Fortunately, no. Power sector issues are indeed serious and complex, but definitely not insurmountable. A test of our political leadership’s sagacity is how quickly it is able to grasp the worsening situation in the power sector, and how effectively it responds to fix it.

One thing is certain. If the government continues to do ‘nothing’ to fix the power sector woes, it will continue to get ‘nothing’ as a result.

–To be continued

The writer is a freelance consultant specialising in sustainable energy and power system planning and development. He can be reached at msrahim@hotmail.com