Pakistan's Future Power Generation Mix: an Exploratory Scenario Analysis
Total Page：16
File Type：pdf, Size：1020Kb
Hanan Ishaque Pakistan's Future Power Generation Mix: An Exploratory Scenario Analysis DOCTORAL THESIS submitted in fulfilment of the requirements for the degree of Doktor der Sozial- und Wirtschaftswissenschaften Alpen-Adria-Universität Klagenfurt Fakultät für Wirtschaftswissenschaften Supervisor Ao.Univ.-Prof. Mag. Dr. Norbert Wohlgemuth Alpen-Adria-Universität Klagenfurt Institut für Volkswirtschaftslehre Evaluator Ao.Univ.-Prof. Mag. Dr. Norbert Wohlgemuth Alpen-Adria-Universität Klagenfurt Institut für Volkswirtschaftslehre Evaluator em. Univ.-Prof. Dr. Stefan Schleicher Universität Graz Klagenfurt, April 2018 i Affidavit I hereby declare in lieu of an oath that - the submitted academic thesis is entirely my own work and that no auxiliary materials have been used other than those indicated, - I have fully disclosed all assistance received from third parties during the process of writing the thesis, including any significant advice from supervisors, - any contents taken from the works of third parties or my own works that have been included either literally or in spirit have been appropriately marked and the respective source of the information has been clearly identified with precise bibliographical references (e.g. in footnotes), - to date, I have not submitted this thesis to an examining authority either in Austria or abroad and that - when passing on copies of the academic thesis (e.g. in bound, printed or digital form), I will ensure that each copy is fully consistent with the submitted digital version. I understand that the digital version of the academic thesis submitted will be used for the purpose of conducting a plagiarism assessment. I am aware that a declaration contrary to the facts will have legal consequences. Klagenfurt, 17-04-2018 (Signature)* (Place, date) *For reasons linked to data protection it is not necessary to sign the affidavit. Instead, the electronic version should include the abbreviation “e.h.” after the name. © Alpen-Adria-Universität Klagenfurt, Studien- und Prüfungsabteilung Version 2018-01-09 ii Table of Contents Acknowledgments ………………… iv Chapter 1 Introduction ………………… 1 Revisiting income and price elasticities of Chapter 2 ………………… 10 electricity demand in Pakistan Is it wise to compromise renewable energy future for the sake of expediency? An analysis of Chapter 3 ………………… 33 Pakistan’s long-term electricity generation pathways Quantifying the potential impact of climate change mitigation policies on Pakistan’s power Chapter 4 ………………… 67 sector CO2 emissions: A bottom-up analysis through 2050 Evaluating the implicit cost of CO abatement Chapter 5 2 ………………… 99 with renewable energy incentives in Pakistan Chapter 6 Conclusion and way ……………….. 122 Appendix ………………… 127 iii Acknowledgements I would start by thanking my supervisor, Prof. Norbert Wohlgemuth, for his invaluable help, moral support, and patience in guiding me through my dissertation. I appreciate him being always accessible and for responding to my requests for meeting or feedback promptly and positively. I also want to thank my former colleagues and friends in Pakistan for their contribution, academic or otherwise, to my work. The work relies on economic and power sector data for Pakistan; I am especially indebted to Mr. Aftab Ahmed Awan for sharing the data and reports. I extend my gratitude to Verein zur Förderung der Wirtschaftswissenschaften and Forschungsservice for providing financial support for my conference participations. Finally, I would like to acknowledge the Higher Education Commission of Pakistan for the grant of scholarship in cooperation with the OeAD, Austria, without which, this work would not have been possible. iv Chapter 1 Introduction 1 Introduction Background and Motivation Energy is an important input for the production of good and services and its use is mainly determined by economic growth [1]. Pakistan’s economy is growing and the current growth, accompanied by an increase in energy consumption, has worsened the existing energy demand-supply gap. During the last decade, an average annual growth in electricity consumption of 2.7% was recorded for a corresponding economic growth of 3.6% [2,3]. Historically, due to the cyclical nature of country’s macroeconomic performance and subdued investments in the energy sector, every period of robust economic growth was followed by an energy crisis. The first major mismatch between electricity demand and supply occurred in the 1990s after the supply failed to keep pace with the decade-long rapid economic growth [4]. It was only in the 1990s that Pakistan allowed independent power producers (IPPs) to invest in its energy sector which soon turned the deficit into a surplus. However, the shortfall started to emerge again in the year 2006 and culminated in the worst crisis in country’s history. The power deficit once surpassed 8.5 gigawatt (GW), more than 40% of the total demand [5]. The resulting power outages, that continue even today, not only disrupted the personal lives but cost the economy dearly in terms of foregone growth. The total economic cost of power cuts was estimated to be 7% of the GDP in a single year [6]. Notwithstanding the increase in energy consumption stimulated by economic growth, the scarcity of energy has been a binding constraint to economic growth as demonstrated by Stern and Kander [7] using an augmented neo-classical model. The planners are, therefore, faced with a challenge of meeting the unmet power demand for growth and development while ensuring energy provision for future requirements driven by a subsequent rise in income and ever-growing population. Institutional and Regulatory Framework Before discussing the problems in governance and policy, or lack thereof, a brief description of the institutional structure of Pakistan’s power sector is important. Before the government instituted restructuring of the power sector in 1994, two vertically 2 integrated government-owned utilities formed Pakistan’s electricity sector; Karachi Electric Supply Company (KESC), serving the city of Karachi and suburbia; and Water and Power Development Authority (WAPDA), served the rest of the country. These two companies owned and operated all the components of power supply infrastructure from electricity generation to transmission and distribution [8]. To rid the electricity supply sector mired in inefficiencies, excessive government control, and cash-flow problems due to subsidies, a power sector reform plan was introduced in 1992. Electricity generation was privatized by introducing a new power policy in 1994 [9] and Private power infrastructure board was established to facilitate private investment. IPPs were provided tariff and fiscal incentives along with long-term power purchase guarantees. In the second phase of the reform, a regulator, National Electric Power Regulatory Authority (NEPRA) was established in 1995 and WAPDA was unbundled in 2002 to separate its generation, transmission and distribution functions. Four public sector thermal power generation companies (GENCOs) were created while hydropower generation remained within the ambit of WAPDA. The transmission of electric power was entrusted to the National Transmission and Dispatch Company (NTDC). Nine electricity distribution companies (DISCO) were also established to operate in all regions expect Karachi and adjoining areas that remained under the KESC which continued to operate as a vertically integrated company. The plan also included privatization of all the unbundled companies and for that purpose, Pakistan Electric Power Company (PEPCO) was given their control to ensure a smooth transfer of ownership [10]. This part of the plan was not materialized and the government has the majority shareholding to date. A very basic form of wholesale electricity market based on a single-buyer model exists in Pakistan. The IPPs must enter long-term power purchase agreements (PPA) to sell electricity at a point of grid network to the single-buyer acting as market operator. In the current market structure, NTDC and DICSOs operate as transmission and distribution monopolies owned by the government, respectively. The generation segment of the market, however, is moderately competitive. Unlike the wholesale electricity markets, power tariff is determined by the government on regulator’s (NEPRA) recommendations. The tariff, based on the cost of service principle, allows sufficient rate of return to all 3 segments of the supply chain besides covering generation and transmission costs and distribution margins [11]. The end-user tariffs are set by the government below the recommended tariff and the differential is paid as subsidies. The part of losses, incurred by the utilities, which is not covered by consumer tariffs is also compensated by providing subsidies. The Policy Conundrum The government of Pakistan introduced several policies during the last two decades aiming to meet the growing demand for electricity and increase the generation capacity by facilitating private sector investment. The process that started with the power policy of 1994 played an important role in shaping the electricity sector. The lucrative PPAs offered to the IPPs resulted in an addition of 3000 MW of capacity addition but these new investments remained confined to the fossil-fuel based plants [12]. Although similar incentives were made available to hydropower projects in hydropower policy 1995 [13], the shorter gestation period of thermal power plants and expectation of low oil prices concentrated the investments in oil and