The future is electric

There has been incessant chatter regarding the establishment of an oil refinery in Pakistan — to replace aging infrastructure. Every few weeks there is noise regarding a refinery policy, or a new refinery, to be financed through debt. The estimated capital expenditure for such an endeavour is close to $10 billion. But does such an ambitious undertaking make sense given changing energy and macroeconomic dynamics?

The Return on Equity for oil refineries ranges between 5.0 and 12 per cent, depending on location and scale of refineries. Pakistan does not have any significant crude oil endowments that can be used to refine, wherein most crude that will be refined will already be imported. Effective import substitution through such a capital investment would be for refinery margins only – and thereby may not yield necessary foreign currency savings as envisaged.

More than 80 per cent of all petroleum utilized in the country is in the transportation segment, which can be split into motorcycles, cars, logistics, and public transportation. Oil imports continue to remain the largest category that use up previous foreign currency reserves, without adding much productivity for the same. There are more than 30 million motorcycles in the country, making up almost 38 per cent of transportation demand, followed by cars, logistics, and public transportation. Petroleum products consumed by motorcycles make up almost $5 billion of total petroleum imports in the country.

Given technological advancements, over the last few years, the transition of two-wheelers from petrol to electric has been accelerated. The emergence of battery swapping stations, and extended battery lives with reduction in battery costs has led to improving the economics of electric bikes, seriously threatening the economics of petroleum fueled bikes. The largest customer segment for petroleum is effectively motorcycles.

There is a case to accelerate their transition from petroleum to electric. This will solve two problems at the same time: reduce our petroleum import bill, while increasing consumption of electricity, of the surplus power capacity that exists currently; this is expected to prevail for the better part of the next decade. A transition to electric bikes will not just improve the overall payments position at a macroeconomic level, but also improve household cash flows, as electric mobility is considerably cheaper than petroleum-fueled mobility, particularly in the case of two-wheelers.

More importantly, the transition can be triggered through an enabling policy framework that allows utilization of surplus power capacity via a marginal pricing regime, which aggressively competes against the cost of petroleum, improving economics for households in the process. The capital outlay requirements for the government in this case would be minimal at best, as private parties mobilize the necessary capital to accelerate the transition. In such a scenario, where technology will effectively move the biggest demand cluster away from petroleum, it makes little sense to allocate constrained capital resources to development of infrastructure for which we do not have any comparative or competitive advantage.

The existing fueling infrastructure can be rejigged to become charging or swapping infrastructure, without any major capital requirements. Similarly, in the case of public transportation, a rollout of public transit facilities across the country remains a critical public policy tool in improving mobility, improving household finances, and more importantly reducing reliance on oil imports. Rolling out electric or hybrid public transportation infrastructure will further reduce reliance on imported oil, and improve citizen mobility in the process. It is important to note here that in none of these interventions is any serious capital commitment required from the government – as the same can be done through public-private partnerships, and an enabling policy framework. Similarly, phase out of passenger cars from petroleum to electric will further accelerate the transition from petroleum to electric.

The existence of a compelling case for transition to electric for more than half of the transportation demand in the country over the next five years further weakens the case for investing heavily in an oil refinery. The case is further weakened when we do not have any competitive advantage available through any endowment of oil as a natural resource. But what we do have evolved over the years is a power infrastructure that is increasingly being indigenized, with almost 75 per cent of electricity being generated through indigenous resources. The contribution of indigenous resources will only increase in the future. From a purely economic and financial perspective, it makes little sense to invest heavily in an investment with high single-digit ROE and potentially shrinking demand base.

Long-tailed infrastructure investments are made for decades, rather than years. As battery prices continue to reduce, technology will only get cheaper, inadvertently allowing households to move to electric due to better economics. As demand for oil goes down, any capital investment that is done for decades may end up being stranded. The case for electric has never been stronger – and we have the necessary resources to accelerate the transition with minimal capital outlay.

Such interventions require imagination and an understanding of how mobility works at the level of a household. Such mobility remains very cost conscious. The government can either lead the way in optimizing existing power infrastructure for mobility, or it can risk investing in infrastructure projects that may be stranded in a decade or so, due to evolving technology. The future is electric, and the future is distributed. The sooner we realize this, the better it is for everyone.

The writer is an assistant professor of practice at the School of Business Studies, IBA, Karachi.