Pakistan's energy and economic woes intensify as blackouts reveal deep-rooted issues
Recent events could cost Pakistan its textile contracts, accounting for 8.5% of its gross domestic product.
On 23 January 2023, Pakistan was hit by a massive blackout, leaving nearly 220 million people without power and resulting in $70m in losses for its textile industry. This is not the first time the country has faced a power outage of this magnitude in recent years. Without addressing the root cause of the problem, what is preventing Pakistan from experiencing another blackout?
“The blackout that happened in January 2023 was, effectively, a result of economic turmoil, debt-ridden power companies, poor infrastructure in the distribution network, and heavy dependence on imported fossil fuels to run the grid,” Sooraj Narayan, senior research analyst at Wood Mackenzie, told Asian Power.
The January blackout took place three months after a power outage affected the southern provinces of Pakistan in October 2022 and two years since a nationwide power failure in January 2021.
Narayan explained the government had to ration power through scheduled power shutdowns during low-demand hours amidst energy security threats. He said that whilst this was intended to conserve fuel during the crisis, this posed problems for grid operators that found it difficult to switch the plants back on in time for the morning peak demand.
“This resulted in the country seeing widespread grid blackout,” he said.
The power cuts were intended to help conserve power. It formed part of Pakistan’s energy conservation strategies which also included reduced commercial activities and shorter business hours.
Energy Finance Analyst Haneea Isaad of the Institute for Energy Economics and Financial Analysis, said this has led to a 30% loss in retail sales; whilst Power Analyst Attaurrahman Ojindaram Saibasan of GlobalData, said this has also affected schools, offices, and the country’s manufacturing sector.
A wounded economy
“This is affecting an already wounded economy. Pakistan’s foreign reserves shrank by 50% last year and the Pakistani rupee has reached an all-time low of 260 against the dollar,” Saibasan said. “Unprecedented inflation rate of 25% last year has made fuel and essential food items unaffordable to large sections of the population.”
With lower costs and industry expertise, the country nabbed textile contracts away from China, Bangladesh, and India in 2021, but recent events could cost Pakistan its textile contracts. This could further hurt the economy as the industry accounted for 8.5% of its gross domestic product.
Moreover, Pakistan’s growing foreign debt also puts its relations with other countries on the line. Citing data from the International Monetary Fund (IMF), Saibasan said nearly 30% of Pakistan’s debt is owed to China. “China is now reluctant towards further lending to the spiraling Pakistani economy. It is also a cause of concern for Pakistan which is out of options to overcome the crisis,” it said.
Data from Wood Mackenzie showed Pakistan currently has an installed capacity of 42 gigawatts (GW), largely sourced from gas and liquefied natural gas (LNG) (30%). This is followed by hydro (26%), fuel oil (17%), coal (13%), nuclear (9%), wind and solar (6%), and bagasse (1%).
A 42GW installed capacity would have been enough to meet the 28GW peak demand in Pakistan, but Narayan noted this was particularly difficult to achieve as the energy crisis limited Pakistan’s fuel imports.
“A huge increase in international fuel prices with the advent of the Russia-Ukraine conflict affected the Pakistan economy badly, with the foreign exchange reserves dropping to US$3b by January 2023 end—which is a whopping 80% drop from the US$15b it had one year ago,” Narayan said.
Pakistan is heavily reliant on imported fuels, which it utilises to meet generation needs with gas accounting for 29%, oil for 10%, and coal for 17% of its generation mix. Considering this import reliance, the higher fuel prices and the foreign exchange crisis have led to fewer running LNG plants that slowly eroded the effective operational capacity.
In addition, the energy supply was further slashed as Pakistan’s hydro plants generated 5% less energy than in 2021, based on Wood Mackenzie data. The 26% share of hydro is also much less than the 32% it generated in 2020.
“Rise in energy prices due to the Russian-Ukraine war further wounded an already underperforming and debt-ridden economy,” Saibasab said, noting this has also left Pakistan with overdue payments on energy imports.
Decades-old grid network
Saibasan said Pakistan’s energy sector is already struggling with its decades-old national grid network, which was established before its independence in 1947.
The power grid has also failed to secure significant funding over the years due to a highly unstable political scenario, he noted.
“Fluctuating power supply and load shedding has been a regular problem. Frequent power cuts are common in Pakistan with households and businesses relying on diesel generators to overcome the issue,” Saibasan said.
“The country faced a massive blackout in 2021 due to extensive grid failure yet the government did little to overcome the issue.”
Adding insult to injury, Pakistan’s power infrastructure took a hard hit due to the devastating flood between June to October 2022, leading to damages worth more than US$14.9b and a total economic loss of about $15.2b, as estimated by the World Bank.
Fitch Solutions had projected in a report that Pakistan’s power grid will be amongst the poorest performers in the region. In particular, Fitch forecast that transmission and distribution (T&D) losses will average 14% of its total power generation in the next ten years.
The state-owned National Transmission & Despatch Company (NTDC) currently manages Pakistan’s national grid, except Karachid. The NTDC had already tapped banks, such as the Asian Development Bank, World Bank, and the Japan International Cooperation Agency, to help maintain and expand the grid. All in addition to the burden of blackout-related fines imposed by the National Electric Power Regulatory Authority.
In this light, Fitch reported the improvement of Pakistan’s grid network will likely be slow despite plans for upgrades and expansions to existing infrastructure as the government lacks funds.
A cycle of debt
Narayan explained distribution companies have not paid their dues to power generating companies, resulting in power generators’ failing to fully pay their fuel suppliers. This has led to a cycle of revenue recovery difficulties.
“Pakistan’s energy sector has been crippled with circular debt,” he said.
On top of this, the differential tariff system that subsidises electricity tariff for a section of bill-payers, such as the agricultural consumers, and the weak distribution system have likewise left distribution companies in debt.
“This also implied that many industries were being forced to shut down as they had to face high electricity tariffs as part of the differential tariff scheme,” Narayan said.
Narayan said the government should rethink its differential subsidy strategy to ease the burden on distribution companies. Not only will this reduce the circular debt, but it will also ensure that distribution companies are in a position to pay the due debt to power generators, ultimately allowing them to have a higher cost recovery.
Investments should also be directed towards transmission and distribution infrastructure to cut losses and towards renewable energy and storage as a longer-term solution.
Wood Mackenzie estimated that building solar in the market is just 5% more expensive than coal on a levelised cost of energy basis. This is also 40% cheaper compared to gas. Solar power growth was however hampered by the lack of government initiative and high initial capital cost.
The country could also tap international support to help fund hydro as its installed capacity currently stands at 10GW, well below the estimated 17GW and 23GW required capacity by 2030 and 2040, respectively.
In the short-to-medium term, he said the market may consider looking for higher-quality domestic coal as an alternative to low-quality Thar coal. This is to reduce import dependence and improve energy security whilst also keeping power prices stable.
Isaad likewise expected the market will need to use fuel oil or coal in the near term to address the crisis but raised the need for Pakistan to diversify its energy mix with renewables.
“This has to be done first at a policy level and then at a practical level through programs that facilitate the uptake of renewable energy through accessible finance,” she said.
“Grid upgrades are also necessary to remove transmission bottlenecks and ready the grid for the accommodation of renewable energy on a larger scale.”
She noted the country has impressive solar and wind resources and more dispatchable sources, such as hydropower and indigenous coal that could help reduce reliance on imports as well as fill the gap left by natural gas.
Isaad noted getting Pakistan out of this tight spot will also require greater participation from the international community. Aside from financing, there should also be technology transfer through capacity building or direct provision of technology, such as battery storage and grid upgrade.
The government had already reached the IMF for a bailout, but Saibasan said this could only lead to inflation and higher energy prices.
“Pakistan should look for support from international organisations as well as leverage its relationship with US and China to mitigate the current economic scenario, but this would provide only a temporary relief,” Saibasan said.