CPPs’ closure to cause Rs391bn annual loss to gas utilities: study

ISLAMABAD: Cutting off the gas-supply to captive power plants (CPPs) and shifting the industry 100 percent to the grid will inevitably translate into a mammoth revenue loss of Rs391 billion a year to Sui gas companies.

More importantly, it would lead to the closure of over 1,400 large units and unlimited smaller units in the textile sector supply chain, leaving around 3 million people jobless apart from causing a drop of 6 percent in export revenue which equates to a loss of around US$3 billion in export earnings.

This has been disclosed in the study launched on Monday by Socioeconomic Insights and Analytics (SIA) on “In-House Power Generation and its Economic Impact,” authored by eminent economist and former PIDE’s vice chancellor Dr Nadeemul Haq and senior research fellow Dr Afia Malik.

The study says that grid electricity is not viable given its high costs and unreliability. “Disconnecting gas to in-house power generation facilities and shifting the industry to the grid will make the industry globally uncompetitive—if it survives. In-house power generation has become integral to industrial processes. Industries have invested billions of rupees in upgrading their generation systems to achieve high efficiencies; shifting them to the grid will waste this investment.”

In-house power generation facilities, particularly combined heat and power (CHP) or cogeneration plants, the study finds out, are even more efficient than government’s RLNG power plants. In-house power generation is closely associated with industrial processes and value addition and should not be considered a separate category based on their effectiveness and benefits for industry.

Cogeneration plants undeniably fall under the category of industrial processes, showcasing remarkable technical and operational efficiency rather than being solely an electricity-generating source. Therefore, these plants must be reclassified as industry (process). It also mentions that the Supreme Court has ruled that industrial consumers who generate electricity in-house for their own use are doing so as part of the industrial process.

Indigenous gas resources are dwindling quickly due to years of mismanagement, politically-motivated decisions and policies, subsidies, and cross-subsidies. Pakistan is now relying on LNG imports. In the LNG sector, gas utilities’ lack proper planning and foresight and excessive government involvement in the supply chain have compromised the reliability and cost of gas/RLNG supply across sectors.

“US$ 0.11/ kWh is the energy-price threshold for the overall manufacturing industry in Pakistan. It is a critical threshold beyond which the industry can no longer sustain its operations and will be compelled to shut down.”

The study argues that the grid is not viable for productive sectors! Allow third party access and wheeling of gas/power with open access for all market participants. Let the market develop—the market will create its demand.

“Due to changing gas market dynamics globally, gas markets in several countries have shifted towards WACOG or price pooling formulas. Given Pakistan’s dwindling local gas resources, and huge difference between the cost of local gas and RLNG, WACOG is the best option for SNGPL and SSGCL consumers, as a starting point.”

The study finds out that complete deregulation of the gas sector is the first-best solution and says open access and wheeling of gas is the only option for sector survival and growth.

By deregulating and liberalising the natural gas sector and its pricing structure, Pakistan can create a more efficient and competitive market, improving service quality and increasing investment in E&P sector.

The study recommended that CTBCM must be implemented fast, and wheeling costs should not factor in sector inefficiencies but based on the principle of marginal cost pricing. In the textile sector, it unfolds that it will result in 3 percent more investment, 3 percent growth in export revenue and reactivation of closed units, unlocking more job opportunities. The reopening of closed production units and activating idle capacity could increase annual exports by up to $9 billion.

“The cost of electricity under a B2B contract, equal to or less than 9 cents/kWh, would incentivise industries to shift away from gas-based CPPs without compromising their competitiveness. It will be feasible to cut off the gas supply to industries only after the development of the wholesale market in five years. Industries have made significant investments in CPPs and should be given sufficient time to recoup those investments.”