Friday, July 22, 2011

China to support Pakistan for Nuclear Energy

China has agreed to assist Pakistan to build two nuclear reactors to help cobat the energy crises in pakistan. While the deal is still not signed mentioned below is a brief of the issues Pakistan is facing for energy.

ENERGY and Circular debt issues

Energy sector issues and developments continued to severely constrain Pakistan’s economy in 2009‐10. Against a backdrop of a sharp increase in the international price of oil through calendar 2009, which put enormous upward pressure on the cost structure in the power generation (and transport) sector, in particular, large domestic supply shortages of electricity and gas occurred.
Lower accumulation of water reserves in dams compounded the severity.

The cumulative effect of the energy crisis on the economy is estimated at upward of 2 percent of GDP during 2009‐10 alone. Developments outlined above engendered a negative feedback loop in the electricity sector, giving rise to the inter‐corporate “circular” debt issue in the entire energy supply chain.

Since this occurred at a time of a doubling of the international oil price, the effect on the cost structure of the utilities was amplified greatly. With no change allowed in the electricity tariff between 2003 and 2007, the compounded effect on the viability of the energy sector has been devastating.

This “imbalance” between cost of generation and distribution, and the final tariff, is the root cause of the circular debt issue, with each downstream player in the energy chain being forced to delay payments to upstream entities (for fuel supplies). The net effect is a declining effective utilization of available generation capacity in the system. The cumulative effect has been that the growth rate of Pakistan’s primary energy supply, which began decelerating in 2007‐08, has turned negative in 2008‐09 and 2009‐10 (July‐March).

Circular Debt Situation and Steps Taken

Despite the available generation capacity of about 19,505 megawatt, Pepco plants have not been able to produce more than 12,000 megawatt due to non-availability of fuel to function their units. KESC having dependable capacity of less than 1200 megawatt could not meet their demand touching 2500 megawatt. The demand is somewhat half of the actual requirement because a large number of industrial and commercial companies have gone for self generation.

The inter-corporate circular debt has crossed over Rs400 billion or US$50 billion. Due to technical and financial reasons a good number of companies are defaulting. Oil firms are reluctant to ensure smooth supplies and Independent Power Producers (IPPS) are supplying less than their generating capacity because of the financial turmoil to purchase fuel. Public sector companies and government bodies have enormous payment arrears. Karachi Electric Supply Company (KESC) has not paid bills worth Rs80 billion, Sindh Government Rs12 billion, Balochistan Rs4 billion, AJK Rs3 billion and even the Ministry of Finance and defence-linked institutions were on the defaulters' list.

To overcome the energy crisis temporarily the federal government cleared Rs80.15 billion. The government paid Rs35.458 billion to Hubco and Rs31.868 billion to Kapco and the remaining to several major energy companies. The government -- five months ago from this current financial year -- decided to float Terms Finance Certificates (TFCs) of Rs98 billion to resolve the mounting circular debt issue. Earlier the government had intended to float TFCs worth Rs75-80 billion. In the third week of May the government came with an announcement that it has already generated Rs81.5 billion through term finance certificate to settle the issue of circular debt. This is not enough as the remaining part is yet to be cleared. In a bid to silence the general public, traders, industrialists and even agriculturists, temporarily, the government issued Rs24 billion to Pepco under the head of energy circular debt.

According to the sources, out of this amount Rs7 billion will be paid to PSO while the remaining amount will be paid to Hubco, KESC, Sui Southern Gas Company and Kapco. The government also has another option to float the Sukuk Bonds, valuing Rs25 billion in Dubai, for a period of five years and Rs50 billion bonds by associating banks and insurance companies to create the liquidity to resolve this circular debt macro issue permanently. This measure not seems to be in the pipeline as yet and therefore this option will be enforced by the government or not is difficult to comment.

The Asian Development Bank has given a favourable sign of extending the credit line of $500 million to $1billion to Pakistan Electronic Power Authority (PEPCO) to get rid of the circular debt in the energy sector. There are not any positive practical signs whether the government has approached ADB in this context or not. According to official sources the World Bank has shown its inability to provide loan to Pakistan giving the reason that it has no space to provide the credit for this specific issue

The inability to increase the consumers’ energy tariff prior to fiscal year 2007‐08 even though generation cost kept increasing, gave rise to substantial cost‐tariff differential. This situation was further complicated by the increase in the international price of oil during 2008, a major input in the generation of electricity. As the subsidy element (difference between cost and tariff) grew, large amounts of circular debt were created whereby power producing companies were unable to receive payments from distribution companies, in‐turn the power producers could not make payments to the fuel suppliers.

Circular Debt Resolution
On 01‐06‐2009 Rs 214 billion
On 30‐06‐2009 Rs 216 billion
On 18‐05‐2010 Rs 120 billion
In addition, the net position of overall circular debt is witnessing a declining trend during July‐April 2009‐10. As the end‐month net position of overall circular debt declined from Rs. 190,953 million in July 2009 to Rs. 103,939 million in the month of April 2010.

• Assumption of Rs. 301.0 billion by Power Holding Company will to be complete soon. Markup payments of loan are being made regularly. Rs. 40.0 billion paid.
• Power tariff differential claim (subsidy) paid to power sector companies. Rs. 95.0 billion.
• Government has picked up entire past liability of FATA of Rs 85.0 billion.
• Government of Pakistan picked up PEPCO’s receivables on account of FATA’s current dues. Rs. 16.7 billion.
• Office of Government Adjuster has been activated to improve recoveries from provinces.
• PEPCO is being persuaded to pro‐actively recover the dues from defaulting private consumers.
• Power tariff are being reviewed regularly to recover the cost of power.
• Measures are being taken to restructure the sector in order to improve its efficiency.
• Energy Summit has been convened on 19‐20 April, 2010 to resolve Power Sector issues.
• An amount of Rs. 116.0 billion will be provided to the system under a plan submitted by Finance Division.
• Out of which Rs. 66.0 billion will be disbursed by Federal Government. Rest by the Provincial Governments.

Energy consumption in all sources has witnessed a negative growth rate during 2008‐09 mainly on the back of lower economic activity and circular debt problem during the period.
Whereas, due to revival in the macroeconomic activity, the energy consumption in petroleum products, gas and coal has witnessed a positive growth rates of 8.1 percent, 3.0 percent and 10.0 percent respectively during July‐March 2009‐10 over the corresponding period last year. While the decline of 1.7 percent in energy consumption of electricity is mainly owed to circular debt problem during July‐March 2009‐10.

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