Pakistan Power Report Q1 2013

BMI View: Pakistan will continue to face chronic power shortages for the next year or more, despiteaggressive pledges and plans announced by government officials and aid promised by various foreignorganisations and diplomats. System inefficiencies prevent plans of the international organisations frombeing effectively implemented, while the poor fiscal position aggravates the situation as private producersare discouraged from increasing investment given the lack of promptness in payment. Hydro power andrenewable energy sources remain as alternatives that states struggle to tap on due to the high capitaloutlays required.

Permanent resolutions and solutions to the power shortage remain out of sight for Pakistan as loadshedding across the country remains on the rise. The shortfall has escalated further as faulty generators,lack of fuel (oil and gas) and low levels of rain compounded the situation. However, with the generalelections in Pakistan due in 2013, the government has raised PKR82bn from debt issuance in September2012 to pay its delayed dues (estimated around PKR400bn or US$4.2bn) to private electricity producersto encourage electricity production. Poor performance from existing generating assets, the lackinvestment in generating capacity, power thefts and an inefficient grid remain obstacles to thegovernment's aim.

The key trends and recent developments in the Pakistani electricity market include:

Iran has begun negotiations with Pakistan in November 2012 on an agreement that would seeIran export 1,000 MW of electricity. Mjid Namjou, Iranian Minister of Energy has furtherexpressed keenness to build another power plant on Iran's border that his country could boost thetotal amount of energy available for export by another 2,000 MW. Pakistan's neighbour hasfurther pledge to complete the gas pipeline by 2014, a move which could alleviate the fuelshortages faced by certain states.

The constructions of the various dams have met with increasing environmental concerns andfinancing issues, which threaten to stall works. For example, the World Bank and otherinternational aid agencies have withdrawn their support for the Diamer-Basha dam project due toenvironmental concerns raised by India. While it remains to be seen if financing will indeedcome through, recent improvements in Pakistan-Iran relations have made other countries such asthe US wary, and has spurred a wave of diplomatic meetings with the Pakistani governmentwhich could prompt the provision of funds for these infrastructure projects. In particular, the UShas agreed to discuss the financing issue of the Diamer-Basha dam in the US-Pakistan EconomicWorking Group meeting held in December.

The Central Power Purchase Agency has requested the National Electric Power RegulatoryAuthority to approval a power tariff hike of PKR39 in January 2013 as the cost of generatingcontinued to rise in October due to the shortage of gas. This comes after a recent tariff increasegranted in October, and this trend is likely to continue as fuel prices continue to raise the cost ofelectricity production.

Progress of talks between India and Pakistan regarding the sale of electricity and petrol remainsslow, with Indian officials citing their Pakistani counterparts keeping a cautious stance. Whileseveral suggestions have been raised during the talks, including building of a pipeline directly toLahore, the Pakistan government remains wary of issues such as security and dependability ofoil imports from India. However, worsening energy shortage in Pakistan may push Pakistaniauthorities to push ahead with negotiations, although imports from India are unlikely to exceedsupplies from Kuwait.

During 2013-2021, Pakistan's overall power generation is expected to increase by an annualaverage of 3.86%, reaching 135.5 terawatt hours (TWh). Driving this growth is an annual 6.39%rise in hydroelectric generation and a 4.14% increase in gas-fired generation. Growth in coalfiredgeneration is likely forecasted to remain at a more subdued pace of an average of 2.17%while oil-fired generation is estimated to suffer an average annual contraction of 0.13%.

A government planning commission has warned in its 2005 energy security plan that unlesspower production capacity is increased by 143 gigawatts (GW) in a phased manner by 2030, itwill not be possible for the country to sustain higher growth rates in the long run. Pakistan islooking for US$8bn of private power project investment to meet its medium-term target.

The government has allotted approximately 39,000 acres of land and increased the rate of returnfor investors in wind power projects to 17%, which implies a tariff rate of 14.6 cents perkilowatt-hour. Approximately half of these projects are projected to be completed by June 2013,and could potentially add 1.8GW of power in the summer, when electricity demand is at itshighest. Although these incentives and guarantees could help bolster the success rate of theseprojects compared to previous attempts, there remains a possibility that global economic woescould delay financing from foreign companies and push back the completion dates.

Following estimated real GDP growth of 3.7% in 2012, BMI forecasts the economy to grow at aspeed of approximately 4.1% between 2013 and 2021. The population is expected to rise steadilyfrom the current size of 180.0mn to 208.5mn during 2013-2021, and net power consumptionlooks set to increase from 77.09TWh to 110.26TWh. This brings puts our projections for theannual growth rate for electricity demand to an average of 3.8% over the forecast period.

Owing partly to the expected short-term rise in net generation, which growth rate lagssignificantly the actual underlying 2013-2021 electricity demand trend, Pakistan is likely tomaintain its import requirements. A falling percentage of transmission and distribution losses -from around 19.9% in 2013 to 18.6% in 2021 - will likely only provide minor supplyimprovements.