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Monday, April 22, 2024

CCoE proposes moratorium on gas supply to CPPs

The Cabinet Committee (CCoE) has recently proposed discontinuation of natural gas supply for CPPs in an attempt to enhance power consumption from the national grid.

During a meeting chaired by Minister for Planning and Development Asad Umar, the Cabinet Committee on Energy (CCoE) decided to ban natural gas connections and disconnect supplies for captive power plants (CPPs) in order to manage the country’s gas shortage.

The plan is to encourage electricity consumption from the national grid which is currently facing a capacity trap while reducing demand for gas.  The meeting “approved the applicability of the policy from Feb 1 for the general industry and from March for the export-oriented industry”, said an official statement. The proposal of discontinuing fresh gas supply for CPP’s was put forward by the Petroleum Division and was discussed extensively during the meeting.

The policy will only be applied to industries which are connected to the power grid and therefore have a substitute electricity source. Pakistan has been facing an acute shortage of natural gas and the natural gas resources are declining quickly with no significant discoveries in sight. Inefficient use of the resource, along with depleting reserves has resulted in the government formulating this policy. On the other hand, surplus power capacity generation has become another issue that needs to be dealt with and a major part could be absorbed in these industrial units at competitive rates and reliable supplies.

The Petroleum Division informed the committee that gas would still be supplied to those industries where utilization of gas is an integral part of the process or where the main purpose of gas usage is not power generation.

Industries not connected to the power grid presently would be encouraged to shift to the national power grid from the gas-based captive power generation. This process is expected to be completed by December.

These measures aim to make around 50 million cubic feet per day (mmcfd) of natural gas available for use in the power sector which would then replace costly power generation on backup fuels. Around 3,000MW load is expected to move to the power grid in the long run which would help in offloading circular debt. The goal of this policy is to improve the overall utilization efficiency of the scarce resource as large power plants are 30 per cent more cost-effective than CPPs.

This policy will apply to all industries, including those classified as zero-rated or export-oriented industries, across the country both on gas and RLNG and a transparent and verifiable process for implementation of the new measure would be arranged as well. The committee also ordered for a third-party verification for this process and directed that enough time should be granted to industries to apply for new connections from the electric utilities. The DISCOs would also be directed to expeditiously process new connections and guarantee quality of supply to industries.

Is moratorium on gas supply to CPPs a viable solution?

To start with, captive share of gas consumption is only 8% of the total gas consumed and CPPs gas usage is not consumptive but economic. This means that it leads to continuous growth which in turn results in employment generation and enhanced exports. Moreover, CPPs are not exactly inefficient when compared to bulk power generation as the efficiency of the IPPs (Engro Power, Orient Power, Saif Power, Sapphire Power, Foundation Power, Halmore Power) is 50% at generation level but once the line losses and commercial inefficiencies of the DISCOs are considered, effectiveness at the point of consumption is merely 42%.

Moreover, the government has not done enough groundwork while formulating this policy aimed at encouraging grid electricity. It is evident that the current infrastructure would be unable to support 3,000 MW of additional electricity to industries resulting in irregular supply and fluctuations which would damage costly equipment and would cause production losses.

There is no denying the fact that Pakistan is currently facing a crisis due to wasteful use of natural gas energy and to counter it, it needs to step up its efforts to reduce the costs and overconsumption of this scarce resource. The government needs to keep a check on the production of large quantities of appliances by small-scale manufacturers that do not meet the international standards of safety as these contribute majorly to the inefficient utilization of the natural gas.

According to World Bank, inefficient appliances in the residential sector are estimated to cause gas waste to the magnitude of 30,000 – 40,000 MMCF per year. But inefficient appliances are just a part of the problem as the main damage is caused by careless customer usage. Pakistan has the capacity to save up to 10-15% (10-12 MTOE) of primary energy supply through energy efficiency but the residential consumers have no incentive to shift to more cost-effective appliances due to low gas prices.

More synchronized action needed to tackle resource depletion

The natural gas reserves in Pakistan are declining at an ever-increasing rate. To save this scarce resource from depleting rapidly, the government would need to adopt a multitude of approaches. Appropriate polices, regulatory frameworks and suitable strategies would need to be developed to combat this challenge.

Regular audit checks by SNGPL and SSGC should be conducted to confirm if quality equipment has been installed and is in use. Price signals and incentives should be used to encourage efficient utilization of the energy. The government would also need to impose penalties in case of violations to deter misuse of the resource. And most importantly, the public should be educated on how it can benefit from efficient use of energy. The government departments can also play their part by replacing and upgrading existing inefficient equipment for free to save up energy.

Finally, the government should also reevaluate its decision of discontinuing fresh gas supply to CPPs as there are a variety of benefits of utilizing gas in captive including reliability, high efficiency, no theft, no financial subsidies and no drainage of foreign reserves.