The Cost of Unserved Energy: Evidence from Selected Industrial Cities of Pakistan (Article)

This study is ail attempt to explore the cost of unserved energy due to power outages in Pakistan that started in 2007. The study is based on a survey conducted for four major industrial cities of Punjab—Gujrat, Faisalabad, Gujranwala, and Sialkot. In addition to quantification of output losses, the effect on employment, cost of production, and delay in supply orders are also examined. The output loss is quantified using two-dimensional analyses, controlling for variations in the duration of outages and in the shift hours. The survey data reveal that employment has not suffered any significant drop due to alternative energy arrangements. These arrangements, nevertheless, have increased the production cost of the firms. Delays in the delivery of supply orders are also due to energy shortage. The study reports that the total industrial output loss varies between 12 percent and 37 percent, with Punjab as the major affected province. In the two dimensional analysis resulting in nine scenarios for each province, the ranges of losses in billion Rs are 132-400, 109-331, 17-54 and 11-34 for Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan respectively. The overall industrial sector loss in volume ranges between 269-819 billion rupees. In the overall analysis, food and beverages, textile, and chemical product industries are respectively the top three industries on the scale of losses. However, in terms of percentages, the pottery and ceramic industry is the industry that suffered the most.

1. INTRODUCTION

Pakistan has been experiencing the worst energy crisis of its history since 2007. The situation is getting worse with each passing year. It all began with electricity shortfall that gradually turned into deficit in other forms of energy such as gas and petroleum products when both households and firms resorted to these alternative sources of energy. The severe electricity shortfall compelled the authorities to impose load- shedding schedules of more than eight hours at times; however unannounced outages in some cities could be as long as eighteen hours giving rise to a host of problems.

The fundamental reasons behind the current crisis include the slow growth in energy supply, lack of correct estimates for demand forecasts, water shortages, volatility in fuel prices, persistent high transmission and distribution losses, insufficient focus on development of alternative energy sources, the problem of circular debt and, above all, the lack of political commitment on the part of government to deal with these issues. Little or no attention was paid by concerned authorities to the galloping increase in demand and growing shortfall in generation. This is apparent in the absence of coordination between growth and energy policies of the government. [Nasir and Rehman (2011)]. This inefficient management has resulted in stagnant hydel and thermal power supply at 6400 MW and 12400 MW respectively, for the period 2002-2007. Similarly, the transmission and distribution losses of more than 20 percent of total energy supply are another evidence of gross negligence of this vital sector of the national economy. Shahbaz and Feridun (2011) for this reason call on policy-makers to devise proactive policies for investment in expanding generation capacity so that any likely increase in demand for energy is met without costly delays.

Energy-growth causality has been studied extensively in the energy literature. This issue has also been discussed in Pakistan where studies conclude that energy shortage may retard the growth process in the country [see, for instance, Siddiqui (2004) and Aqeel and Butt (2001) among others]. In particular, the industrial sector, being the most energy intensive sector, can be severely affected by this shortfall and subsequently can damage the overall economy. The reduction in output growth due to energy shortfall is also termed as the cost of unserved energy.1 In other words, had the energy been supplied, the output would have been greater and the cost, in terms of lost output, would have been reduced. Various studies have tried to quantify this output loss due to power outages [see, for instance, Bental and Ravid (1982); Bose, et al. (2005); Wijayatunga and Jayalath (2008) and Kaseke (2010)].

The literature on this issue in Pakistan is scant and rare. To our knowledge, only two studies have been published to-date to quantify the production cost, namely, Lahore Chamber of Commerce and Industry (1986) and Pasha, et al. (1989). The objectives of the current study are twofold: in addition to quantification of output loss of industrial sector, it also explores the effect of outages in other sectors such as labour employment, cost of production, and supply orders delays. This study is different from the aforementioned studies in the sense that it performs a two dimensional analysis for quantification of variations in both outage duration and shift hours whereas the earlier studies focused on power outages only.

The rest of the study proceeds as follows: Section 2 discusses the development of power sector in Pakistan. Section 3 discusses the methodological issues. The survey results are analysed in Section 4. Section 5 quantifies the output losses for provinces and the country, while Section 6 concludes the study.