A blueprint for a brighter grid

Given the gruesome challenges of Pakistan’s power sector – high tariffs, inability to offer subsidies due to IMF constraints, excess installed capacity, and inadequate transmission capacity – a sophisticated and innovative power tariff structure is essential for boosting industrial electricity demand.

Drawing from international best practices and conducting a thorough cost-benefit analysis can help design a tariff structure that balances affordability with sustainability and industrial competitiveness, while also considering Pakistan’s unique context.

One effective approach to managing electricity demand and enhancing grid efficiency is the implementation of time-of-use (TOU) and seasonal tariffs. These tariffs incentivize industries to shift their electricity consumption to off-peak hours when the transmission system has greater available capacity, particularly in winter season. Pakistan has already done a successful experiment in this regard, where an innovative tariff scheme in winter for industries increased the winter demand. Likewise, the UK and parts of the European Union have successfully implemented TOU tariffs, offering electricity at significantly lower rates during periods of low demand.

Here in Pakistan, where transmission capacity is only about half of the installed generation capacity, this approach could significantly alleviate stress on the transmission system while encouraging better utilization of existing infrastructure. The costs associated with TOU/seasonal tariffs primarily involve upgrading metering infrastructure and educating consumers, while the benefits include reduced peak load stress, deferred investments in transmission upgrades, and lower overall electricity costs for industries.

While peak shaving is a critical goal, interruptible load programmes may not be feasible for Pakistan at this time. These programmes, which offer industries financial incentives to reduce or shift their demand during peak periods, require a high level of grid stability and consumer trust. South Korea, for example, has successfully implemented such programmes, but the success hinges on a highly reliable grid and a well-established relationship between utilities and industries.

In Pakistan, the existing challenges of grid reliability, along with potential resistance from industries wary of operational disruptions, make interruptible load programs less practical. The costs and risks associated with these programs in the Pakistani context likely outweigh the benefits, suggesting that alternative strategies for peak management may be more effective.

A more viable solution for Pakistan’s context is the development of a capacity auction market. Capacity markets have been effectively utilized in the US, particularly in PJM Interconnection, where industrial consumers bid for capacity, ensuring they secure electricity at competitive rates during periods of surplus capacity. In Pakistan, where there is significant excess installed capacity but limited transmission capacity, a capacity auction market could allow industries to access cheaper electricity during off-peak times, thereby optimizing the use of existing generation resources.

The cost of establishing such a market involves the design of a robust regulatory framework, IT infrastructure for market operations, and capacity-building efforts for market participants. However, the benefits are substantial, including better alignment of supply and demand, reduced capacity payments by making more efficient use of available capacity, and a more transparent and competitive market environment. Additionally, such a market could serve as a platform for attracting foreign investment, as it introduces a level of predictability and efficiency that international investors often seek. The upcoming CTBCM regulations will truly pave the way for the capacity market in Pakistan, however, deregulation of the market should be tagged with competitive market principles and a forward-looking horizon.

To further encourage industrial growth and efficiency, the introduction of performance-based tariffs can play a significant role. Instead of the traditional approach where tariffs are linked to energy efficiency improvements alone, this model would reduce tariffs for industries that demonstrate an increase in production and corresponding electricity consumption, hence enhancing the productive demand of electricity. This concept is similar to the mechanisms seen in countries like Germany, where industries that achieve higher production levels benefit from lower marginal electricity rates, thereby encouraging them to expand operations.

In Pakistan, implementing this model would require establishing clear criteria for measuring production increases and ensuring that the tariff reductions are substantial enough to incentivize higher energy use. In the past, we have experienced distortive subsidies for industries resulting in dead-weight loss. The upfront costs would include setting up monitoring systems and revising tariff structures, but the long-term benefits would include increased industrial productivity, higher electricity demand, and a more vibrant economy. This approach also aligns well with the goal of utilizing excess installed capacity, as industries would be motivated to ramp up production to take advantage of lower tariffs.

Decentralized energy solutions, such as microgrids and community grids within industrial zones, can help bypass the limitations of the central transmission grid. Countries like India and China have successfully adopted decentralized energy models to support industrial growth in regions with inadequate grid infrastructure.

The cost of setting up microgrids or captive plants in Pakistan could be shared between public and private sectors through public-private partnerships, with the government providing regulatory support and initial capital investment incentives. The benefits of this approach include reduced transmission and distribution losses, enhanced energy security for industries, and the potential to integrate renewable energy sources more effectively. Moreover, decentralized solutions could lead to lower electricity costs for industries, further boosting industrial competitiveness.

Special tariff packages for Special Economic Zones (SEZs) could serve as a targeted strategy to encourage industrial growth in specific regions. China’s SEZs have benefitted from preferential tariffs that attract investment by offering lower electricity rates and direct grid connections, which in turn have fueled economic development. For Pakistan, designing such tariff packages would involve close collaboration with industrial stakeholders to ensure that the tariffs are competitive and aligned with national energy policies. The cost of implementing these tariffs could be offset by the economic benefits of increased industrial activity, job creation, and export growth.

To further enhance electricity consumption, particularly for residential consumers, revising the slab-based tariff structure could prove effective. Currently, slab-based tariffs in Pakistan tend to penalize higher consumption with progressively higher rates, which discourages larger energy users from increasing their electricity usage. By reversing this structure, with lower rates for higher consumption slabs, industries would be incentivized to expand production and increase their electricity usage. This approach could be particularly beneficial in utilizing the country’s excess generation capacity.

Internationally, countries like South Korea have successfully used a similar approach, offering lower tariffs for bulk users to stimulate industrial growth. In Pakistan, implementing such a revised slab-based structure would involve recalibrating the existing tariff model to balance affordability with revenue sufficiency for distribution utilities.

Promoting solar rooftop installations and net-metering is another strategy that could shift electricity consumption patterns from non-productive residential loads to productive industrial loads. Solar rooftop systems allow residential consumers to generate their own electricity, potentially reducing their reliance on the grid during peak hours.

Finally, encouraging sector coupling initiatives such as Power-to-X (PtX), particularly Power-to-Gas (PtG), presents an innovative solution for managing excess renewable energy during periods of curtailment. In Pakistan’s Thatta region, near the wind corridor, excess wind energy that cannot be transmitted due to grid limitations could be used to produce green hydrogen through electrolysis. This green hydrogen can then be stored and later used in various sectors, including industry and transportation, or even exported.

Germany has been a leader in PtG initiatives, using surplus renewable energy to produce hydrogen and other synthetic fuels, which helps stabilize the grid while promoting renewable energy integration. For Pakistan, investing in PtG infrastructure in wind-rich areas like Thatta could not only provide use for otherwise curtailed wind energy but also position the country as a leader in green hydrogen production, with significant potential for both domestic use and export.

A comprehensive cost-benefit analysis of these proposed strategies reveals a clear path forward for Pakistan’s power sector. The costs, including infrastructure upgrades, market design and incentive programmes, are outweighed by the long-term benefits of enhanced grid efficiency, reduced peak demand, lower capacity payments, and increased industrial competitiveness.

The proposed innovative power tariff structure, informed by international examples and grounded in a detailed cost-benefit analysis, offers a viable solution to the challenges facing Pakistan’s power sector. By implementing these strategies, Pakistan can increase electricity demand in the industrial sector, optimize the use of existing infrastructure, and set the stage for sustainable economic growth.

Regulatory backing, consumer education, and strategic investments will be critical to the successful implementation of these reforms, ensuring that the power sector can meet the demands of a rapidly growing industrial economy.

The writer has a doctorate in energy economics and serves as a research fellow in the Sustainable Development Policy Institute (SDPI). Twitter/X: @Khalidwaleed_ Email: khalidwaleed@sdpi.org