Reducing losses in the energy sector

The energy sector seems to be a double-edged weapon; if you don’t have it, you suffer and if you have it and can’t manage it properly, you may suffer more.

This seems to have happened in Pakistan. The high cost of generation, and the transmission and distribution losses are taking a toll on Pakistan’s economy. At 20 percent electricity sector losses and 13 percent gas sector losses, the total losses of electricity and gas sector amount to $3.28 billion. No wonder then that there is a mounting circular debt of Rs1.3 trillion which may keep increasing as energy supplies and demand in these two sectors increase.

It can be safely said that these losses can be reduced to half, saving the economy $1.64 billon per year. On the other hand, losses are a routine matter in this sector. Nepra recently reprimanded the NPCC/CPPAG for causing a loss of Rs24 billion ($185 million) in just the month of January. Similar losses were caused in earlier months as well due to not running plants efficiently for one reason or the other.

However, some good news is coming out of the electricity sector; electricity thieves are being fined and booked. Both the minister and the Ministry of Power and DISCOs are taking interest and action in this respect. However, a structured and organised effort is still lacking. In the gas sector, though, a corresponding zeal appears to be missing. That may be due to a lot of instability in the sector. There was a gas crisis earlier as a result of which MDs of the two gas companies were removed. Then came the new gas tariff and its affordability issue and to top it all SNGPL issued unwarrantedly high bills. Prime Minister Imran Khan ordered an inquiry and as a result SNGPL has been asked to return the extra amounts charged by it. Some heads may roll again. The SSGC has been facing similar instability for the last six to seven years with only acting MDs at the helm of affairs – and even those changing almost every year on average.

However, once stability returns, the gas sector appears to be ready to improve its performance for the following reasons. Ogra has issued a variable two parts UFG (UFG means unaccounted for gas losses) allowance a formula: 5 percent fixed and 2.5 percent variable performance dependent allowance. Currently, SNGPL losses are around 9.5 percent and SSGC losses are 17 percent.Ogra UFG allowance seems to be more relevant to SNGPL than to the SSGC, as 2.5 percent UFG incentive has no practical relevance on a loss level of 17 percent. The SSGC will have to do much more beyond the ambit of the Ogra framework. However, as we will see, Ogra has issued a KPI system wherein it has issued 31 KPIs, which if implemented by the two companies can bring about UFG loss reduction beyond the 7.5 percent range. This is a welcome step by Ogra, which appointed a consulting company to prepare this system.

An important aspect of the KPI system is that it can be transferred to the management, and a performance measurement system of management and senior executives can be tied to it. A reward and punishment system can be linked to it, something unknown in the public sector. Senior management and executives now can be promoted or replaced or earn more emoluments or suffer if this system is practised.

Insightful management can make good use of it and broaden its application in their domains. Nepra and the power division should consider introducing and adopting such a planning and performance monitoring system. With a combined Ministry of Energy, although working in compartments and isolation, it might be easier to borrow rules and practices. Power-sector people including Nepra would note that there is a lot of similarity.

The power sector may have to learn another thing from the gas sector, and that is in the area of smart meters. There is a controversy in the power sector regarding the role of smart meters and in their project structure. The current project as prepared by ADB consultants involves installing smart meters in two of the more efficient DISCOs of IESCO and LESCO, ignoring companies like PESCO, MEPCO, SEPCO and HESCO which need the device more due to their higher T&D loss percentages. There is an argument, and rightly so, that smart meters at consumers’ premises would not be able to capture all kinds of theft, especially upstream of meters.

An alternative proposal is to install smart meters on distribution transformers which can identify defaulter regions at much lesser cost, covering all DISCOs in Pakistan. In order to be effective, 35 million smart meters may have to be installed which may cost $5-6 billion and almost a decade to implement. The alternative scheme of installing smart meters on distribution transformers may require installation of less than one million meters and possibly all large consumers may be covered as well. The current project cost of installing smart meters in IESCO and LESCO, and that too only partially, may be enough for completing the distribution meters coverage in all of Pakistan.

What is the relevance of the gas sector and what lessons are to be learnt by the power sector in this respect? Amazingly, the gas sector is already convinced that installing smart meters on the consumer end may be a costly and impossible idea in the objective situation of the country. The gas sector is installing smart meters on their TBS stations, an equivalent of distribution transformers in gas distribution. They are segmenting and introducing even smaller segments to be able to identify and monitor defaulter segments, whether of theft or physical leakages.

This is the simple logic that some in the power sector are unable to accept and digest. Is it incapacity or lack of understanding at the top? Secretaries take time in coming to grips as they come from a variety of departments. Should Nepra take notice? Unfortunately, there are new people there, no chairperson and some of the members’ positions have not been filled yet. Only the ADB has the wherewithal to solve the problem. They can arrange a review by a third party. Nonetheless, the power division and Nepra may have much to learn from the gas sector and Ogra. I have been arguing for the merger of Nepra and Ogra – as is the norm in many countries. The proposal was accepted in the corridors but conditional on the merger of the two ministries; the latter has been done already. A lot of people are praying for reversion to the unmerged status.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s EnergyIssues: Success and Challenges’.

Email: akhtarali1949@gmail.com