ABBREVIATIONS AEDB Alternative Energy Development Board ADB Asian Development Bank AJK Azad Jammu and Kashmir ARR average revenue requirement Bps Basis Points BTU British Thermal Unit, as a measurement of heat CBM Cooperate Bond Market CFL Compact Fluorescent Lamp CPPA central power purchase agency Cst Centistokes (unit for measurement of viscosity) DFI Development Finance Institution DISCO distribution company E&P Companies Exploration and Production Companies Upstream E3C energy efficiency and energy conservation ECC Economic Coordination Committee of the Cabinet EE Energy Efficiency ENERCON National Energy Conservation Centre ESCO energy service company ESDF energy sector development fund ESTF Energy Sector Task Force of FODP FESCO Faisalabad Electric Supply Company Fls Financial Institutions FODP Friends of Democratic Pakistan FSRU Floating Storage Regasification Unit FY fiscal year GDP gross domestic product GENCO generation company GEPCO Gujranwala Electric Power Company GW Gigawatt GWh Gigawatt-hour HESCO Hyderabad Electric Supply company HPP hydropower project HSD high-speed diesel IESCO Islamabad Electric Supply Company IFEM inland freight equalization margin IFI International Finance Institution IMF International Monetary Fund ABBREVIATIONS IPP independent power producer JPGL Jamshoro Power Generation Company Limited KAPCO Kot Addu Power Company KBBL/day thousand barrels per day KESC Karachi Electricity Supply Company KIBOR Karachi Inter Bank Offered Rate KPT Karachi Port Terminal KV Kilovolt KW Kilowatt Kwh kilowatt hour LDO light diesel oil LESCO Lahore Electric Supply Company LPG liquefied petroleum gas MAF million acre feet MEPCO Multan Electric Power Company Mmbtu Million British Thermal Units Mmcfd million cubic feet per day MOE Ministry of Energy MOF Ministry of Finance MOI Ministry of Industry MOST Ministry of Science and Technology MPNR Ministry of Petroleum and Natural Resources MTOE million tons of oil equivalent MW Megawatt MWP Ministry of Water and Power NBFC Non-banking Finance Company NEPRA National Electric Power Regulatory Authority NGO Non-Governmental Organization NGPS Natural Gas Power Station NSO National Savings Organization NSS national savings scheme NTDC National Transmission and Dispatch Company O&M Operation and Maintenance OGDCL Oil and Gas Development Company Limited OGRA Oil and Gas Regulatory Authority PAEC Pakistan Atomic Energy Commission PC Planning Commission PCSIR Pakistan Council of Scientific and Industrial PEMPPU Research PDF Pakistan Integrated Energy Modeling, Planning PEPCO and Policy Analysis Unit PESCO Project Development Fund PHL Pakistan Electric Power Company ABBREVIATIONS PPA Power Purchase Agreement PPIB Private Power and Infrastructure PPL Pakistan Petroleum Limited PQA Port Qasim Authority PRs Pakistan Rupees PRL Pakistan Refinery Limited PSDF Public Sector Development Fund PSEC Public Sector Energy Company PSO Pakistan State Oil PSQCA Pakistan Standards and Quality Control Authority QESCO Quetta Electric Supply Company RON research octane number RFO Residual Fuel Oil RPP Rental Power Plant SBP State Bank of Pakistan SEA senior energy advisor SECP Security and Exchange Commission of Pakistan SLR statutory liquidity ratio SNGPL Sui Northern Gas Pipeline Limited SSGCL Sui Southern Gas Company Limited T&D Transmission and Distribution TDS tariff differential subsidy TFC term finance certificate (local terminology for bond) UFG unaccounted for gas US$ United States Dollar USAID United States Agency for International Development WAPDA Water and Power Development Authority Note 1: In this report, $ means United States dollars. Note 2: All reference to years e.g. such as 2008-09 mean a one year period from July to June. CONTENTSCONTENTS PREFACE iii EXECUTIVE SUMMARY iv I INTRODUCTION 01 II DIAGNOSTICS 02 II.1 Recent Performance of the Energy Sector 02 II.2 Mapping of the Energy Sector 03 II.2.1 Output and Consumption 03 II.2.2 Diversification 05 II.2.3 Capacity and Investment 06 II.3 Key Issues and Challenges in the Energy Sector 06 II.3.1 Institutional and Structural Fragmentation 06 II.3.2 Incomplete Unbundling and Corporate Governance Issues in Power Sector 07 II.3.3. Stalled Privatization 07 II.3.4. Regulatory Challenges 08 II.3.5. Inefficient and Non-Cost Recovery Tariff Structures 10 II.3.6. Lack of Energy Finance 12 II.3.7. Efficiency Losses 13 II.4 Subsector Analysis 13 II.4.1 Investment in the Power Sector 13 II.4.2 Need for Gas Sector Investments 14 II.4.3 Issues in the Fuels Sector 14 II.4.4 Coal for Energy 15 II.4.5 Renewable Energy Generation Challenges 15 II.5 Conclusion 16 III. SOLUTIONS FOR PAKISTAN'S ENERGY SECTOR 17 III.1 Strengthen Energy Sector Governance and Regulation 17 III.1.1 Institutional and Structural Reforms 17 III.1.2 Regulation 19 III.1.3 Energy Policy 21 III.1.4 Corporate Governance and Financial Control 21 III.2 Rationalize Pricing and Energy Subsidies 21 III.2.1 Power Sector Tariffs 22 III.2.2 Gas Pricing 23 III.2.3 Oil Pricing 23 III.3 Develop Energy Finance Capability 24 III.3.1 Activating Demand 24 III.3.2 Loosening Supply Side Constraints (Domestic) 24 III.3.3 Energy Sector Development Fund (ESDF) 25 III.4 Mainstream Energy Efficiency into Energy Policy 26 III.5 Fast Track Investment Projects for Energy Security 27 III.5.1 Power Sector 27 III.5.2 Gas Sector 28 III.5.3 Oil Sector 30 III.5.4 Energy Efficiency Investments 31 III.5.5 Coal 32 III.5.6 Renewable Energy 32 III.7 Conclusions 32 IV. IMPLEMENTATION PLAN 34 IV.1 Result focused Implementation Plan 35 IV.2 Implementation of the Plan 35 IV.3 General Assumptions and Risks for the Effective Implementation of the Plan 35 IV.4 Summary of Investments 42 IV.5 Monitoring and Evaluation of the Implementation Plan 43 WAY FORWARD 45 APPENDIX A: SECTOR GOVERNANCE AND REGULATION 48 Appendix B: FUELS 72 APPENDIX C: NATURAL GAS 87 APPENDIX D: POWER 97 APPENDIX E: HYDROPOWER 103 APPENDIX F: ENERGY EFFICIENCY 112 APPENDIX G: FINANCE 125 APPENDIX H: ENERGY SECTOR DEVELOPMENT FUND 135 PREFACE his report provides a road map to eliminate energy deficits in Pakistan in the next 3 years. It includes a Tdetailed set of recommendations and an action plan to enable the country to achieve full energy security and sustainability. The report was conceived in the midst of Pakistan's current energy crisis. There are severe electricity and gas shortages and prolonged hours of load shedding. These shortages are disrupting the daily lives of Pakistani citizens and restraining opportunities for growth, employment creation, and social development. The war against terror and the consequent deterioration in the security situation have compounded problems in the energy sector by blocking the key foreign and domestic investments needed to jumpstart the sector. While the recent floods have added to the problems, they do not impact the overall assessment and recommendations of this report. The Pakistan Energy Sector Task Force (ESTF) comprising members of the Friends of Democratic Pakistan (FODP) was mobilized to prepare this report on the energy sector inclusive of an action plan. The Asian Development Bank (ADB) was assigned responsibility for organizing the work of the task force. A team of experts contributed by several FODP member countries and international institutions along with focal points seconded by the government comprised the ESTF Secretariat. The secretariat took the technical lead in developing the report. A steering committee co-chaired by the Government of Pakistan and ADB provided regular oversight and direction to the work of the secretariat. The report contains a full set of actions to produce energy sustainability. The value of this report will be measured by the extent to which it enables Pakistan to implement a recovery plan for the energy sector. The Government of Pakistan will need to lead the implementation of the recommendations and actions in the report. The FODP will need to support the government through technical and financial assistance to overcome the present crisis and to set the energy sector on a sustainable footing. An enduring and sustainable partnership between the Government of Pakistan and the FODP will pave the way for the effective implementation of the report. The FODP ESTF expresses its appreciation to the Government of Pakistan for its strong partnership and coordination in preparing this report. Government ministries, agencies, and regulatory entities participated fully in the process and generously shared time and information with the secretariat team. The ESTF records its gratitude to FODP countries that provided technical experts for the secretariat. Special appreciation is due to all members of the FODP ESTF for their valuable contributions and inputs. The report is richer as a result. Rune Stroem Shahid Rafi Co-Chair Energy Sector Task Force Co-Chair Energy Sector Task Force Pakistan Country Director Secretary, Ministry of Water & Power Asian Development Bank Government of Pakistan EXECUTIVE SUMMARY We realize the suffering that load shedding causes our people. We are painfully aware of the darkness it spreads, how children study by candlelight, and how the wheels of industry often stop. President Asif Ali Zardari's Speech at the Joint Session of Parliament Islamabad, April 5, 2010 akistan's energy sector is in a crisis. Electricity shortages in the summer of 2010 have peaked at P5,000 megawatts (MW). Many rural areas have no electricity for up to 20 hours a day. Urban areas are witnessing outages of 8 to 10 hours. Gas shortages have also increased, and there is rationing of piped gas in winter months. Reliance on imported fuels has increased and is increasing the cost of electricity generation and adding to the country's balance of payments problems. The growing energy shortages have made life difficult for Pakistanis across the board. The quality of life of citizens has deteriorated. Economic growth rates have been stunted, and industry and agriculture have suffered. The Government of Pakistan, recognizing the magnitude of the crisis and its effect on the people and the economy, has undertaken emergency measures to address, manage, and reduce the impact of the crisis.