Thermal power in times of stagflation

  • File ACJCE
  • File 12, Jun 2022
  • Category IconOpinions
  • Courtesy:  The News

The global spike in energy prices, starting with lifting of coronavirus-induced restrictions and intensifying with the Russian war against Ukraine, has been the largest since the 1973 oil crisis. The historic highs in the prices of oil, gas and coal have triggered the risk of what economists call stagflation.

Stagflation happens when all three major macroeconomic variables—gross domestic product, unemployment and inflation—are going in the wrong direction. It occurs when a stalling or falling GDP, an escalating inflation and an outpouring unemployment hit an economy simultaneously.

Stagflation is attributed most frequently to a negative supply shock, when something crucial to the entire economy is suddenly in short supply or becomes expensive. The war-induced spike in energy prices, causing a slowdown in global economy, is projected to be an economic nightmare for the entire world.

Middle- and low-income economies like Pakistan are especially vulnerable to the developments. All sectors of Pakistan’s economy are likely to suffer varying degrees of harmful consequences of the global economic recession.

The country’s power sector is overwhelmingly dependent on imported oil, gas and coal. Since the power sector is also crucial to other economic sectors, inefficiency on its part is likely to further blight the national economy.

Two thirds (66 percent) of Pakistan’s installed generation capacity is based on thermal power produced using fossil fuels. Contribution of imported fuels like furnace oil, liquefied natural gas (LNG) and coal, to Pakistan’s installed thermal capacity is 6,507 MW (31.9 percent), 5,838MW (28.62 percent) and 3,960MW (19.41 percent) respectively. It amounts to around 80 percent of the total installed capacity of the country’s combined thermal power build-up.

According to the data released by the Federal Bureau of Statistics in May 2022, Pakistan’s oil import bill surged by 95.84 percent to $17.03 billion in the July-April period compared to $8.69 billion in the corresponding period of the last fiscal year. Further breakup of the data shows that crude oil imports increased 75.34 percent in value while those of liquefied natural gas rose by 82.90 percent in value.

It is pertinent to mention here that the largest chunk of imported fuels is consumed by the power sector. The following facts and figures extracted from the Pakistan Energy Book 2020 give a sense about the power sector’s consumption of LNG, coal and petroleum products.

The power sector consumed more than 60 percent LNG in the fiscal year 2019-20. With its share of 191,684 million cubic feet (CFt), the power sector consumed more LNG than fertiliser, cement, transport, domestic, general industries and commercial sectors.

The power sector’s share in the country’s total consumption of coal was 43 percent in FY 2019-20. Compared to other sectors—including cement, steel, brick-kiln and domestic sectors—its coal consumption (10,896,986 tonnes) was the highest.

In terms of the consumption of petroleum products, the power sector was the second largest consumer after the transport sector in FY 2019-20. The total consumption of petroleum products was 17,038,494 tonnes, out of which the power sector’s consumption was 1,526,796 tonnes.

Thermal power is heavy not only on the country’s fuel import bill but also on consumers’ pockets. According to the State of Industry Report 2021 by the National Electric Power Regulatory Authority (NEPRA), several factors account for the high cost of electricity generated by thermal power plants. These include unutilised ‘take or pay’ power generation capacity, impact of ‘must-run’ power plants, old in-efficient power plants, increasing capacity payments, a whopping circular debt, a weak transmission and distribution system, a lack of coordination among relevant power sector stakeholders, improper planning, poor governance, use of primitive technology, taxes, fees and levies in electricity bills etc.

In addition to the economic cost, thermal power has high environmental cost. Carbon dioxide and other greenhouse gases emitted in the wake of fossil fuel combustion for thermal power generation contribute to global warming and climate change.

The policy makers acknowledge the high economic and environmental costs of thermal power generation and promise policies and principles to mitigate these costs.

However, these policies and principles turn out to be a mere lip service. Indicative Generation Capacity Enhancement Plan (IGCEP) 2021-30 prepared by the National Transmission and Despatch Company (NTDC) is the best example of this.

Notwithstanding its ‘least cost principle’, the NTDC included eight thermal power plants of 5,193 MW capacity as committed projects in IGCEP 2021-30. These include five local coal-fired projects of 2,970 MW, two imported coal-based plants of 960 MW and one RLNG-fuelled power plant of 1,263 MW. The candidate projects under the IGCEP 2021-30 also include a local coal-, four imported coal- and two LNG-based thermal power plants.

In preparing the next iteration of the IGCEP this year, the stakeholders cannot afford to be unmindful of the spectre of stagflation. The ‘least cost principle’ will have to be adopted both in letter and spirit.

About the Author

Azhar Lashari works as Project Manager at the Policy Research Institute for Equitable Development (PRIED).

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