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Energy policy formulation for Pakistan
Energy policy formulation for Pakistan An optimization approach T. Riaz
Pakistan is a low income, low energy consumption country. In view of the close interdependence between economic growth and energy consumption, she will need increasing energy supplies in order to maintain her economic growth. This paper develops an energy sector optimization model for the Pakistan economy, which consists of production models for five energy industries, ie oil, gas, coal, electricity. and non-commercial fuels. The model is first used to forecast energy balances for the period I9 75-2006. The model is then employed to formulate a long-term comprehensive energy policy for Pakistan. Finally the suggested policy is compared with the current official energy programme.
Non-OPEC developing nations have suffered most from the effects of the ‘energy crisis’. They have been faced with the problem of rising import costs and reduced export earnings as a consequence of widespread recession. Pakistan’s terms of trade have steadily declined over the years.* Her credit balance of $20.1 million in the financial year 1972-73 had slumped to a deficit balance of $3 133.2 million by 1979-80. Gross per capita income and per capita energy consumption in Pakistan were estimated to be $57.9 (Rs 573) and 9.5 GJ respectively in 19iS,t nearly the world’s lowest. Economic growth requires an expansion in the energy sector which is highly capital intensive, and Pakistan is short of capital. Thus the economic prospects for the country look bleak. Pakistan has hardly any measures available in the short run to deal with the grave situation which has been caused by the high price of energy and her own insignificant position in world trade. In the long run, however, growth must be achieved to provide a reasonable living standard for the increasing population. Thus, to avoid * The
average decline has been 25% since 1973.
Rs 9.9 = 31.
t Gross per capita income is at constant factor cost; GJ = gigajoules.
The author is with the Faculty of Professional Studies, Newcastle upon Tyne Polytechnic, Northumberland Road, Newcastle upon Tyne, NE1 8ST, UK. Final manuscript
received 5 February
0140-9883/81/030191-07
302.00
1981.
0 1981
stagnation and deterioration in the existing inferior living conditions, the long-term planning* of energy supplies becomes crucial. The purpose of this study is to develop a long-term energy sector optimization model for the Pakistan economy and then to formulate a broad energy policy based on the model’s forecasts. General
features
of the energy system and
the proposed model
The energy system, which is composed of demand and supply subsystems, is highly interdependent and complex. Most fuels can act as substitutes for each other, at least in the long run. A variety of energy technologies compete for the same resources. The scarcity of resources and lack of technological know-how force national economies into international markets. Conflicting national policy aims add further complexity. National energy policy must take account of all these contradictions, complexities and interdependencies of the system. The supply subsystem has been divided into five types of energy and 20 types of production activities which are taken as representative of the supply (ie, production, transport and distribution) activities. The main national supply subsystems as well as economic operations corresponding to supply activities, are given below. $ Energy Planning is also important because of the inadequacy of the market system (ie, absence of futures markets) and the existence of externalities.
IPC Business Press
191
Energy policy formulation for Pakistan: T. Riaz The non-commercial energy subsystem Non-commercial energy consists of three fuels, firewood, agricultural wastes and dung. They are perfect substitutes for one another and are used for the same purpose (ie, cooking) and can therefore be aggregated. These fuels have been observed to be inferior to commercial fuels in the sense that with an increase in income people tend to use less of them. In 1975 about 40% of all energy consumed in Pakistan was derived from these sources. The forest base of Pakistan is extremely small, its potential for fuel supplies is limited. Agricultural wastes and dung have considerably more potential, but have high opportunity cost as they can be used as a rich fertilizer. In view of these considerations, plus our concern for rural living conditions and to make our analysis comprehensive, we assume that non-commercial energy requirements can be supplied by the following: l l l l
firewood; biogas; cylinder gas; and kerosene.
The coal subsystem The coal subsystem consists of: l
l
coal production mines; imports/exports
from existing or newly developed of coal.
The oil/gas subsystems These comprise the following: l l l
oil/gas production from oil wells/gasfields; imports/exports of oil/gas; manufacture of oil/gas from coal.
The electric power subsystem Pakistan does not, at present have a fully developed national electric grid system. The majority of the population still live in small, remote villages. Pakistan has embarked on a rural electrification plan, but transmission costs are extremely high and so to evaluate power supplies from national grid against small load generation methods (ie, diesel and solar cell generators) we have made a distinction between the electricity demands of urban and rural areas. For national grid generation the following technologies have been considered: l l l l l
coal-fired plants; oil-fired plants; gas (steam and turbine type) plants; hydro (run of river and storage type plants); and nuclear (conventional and breeder plants).
All of the subsystems above are interlinked through their intermediate demand mechanism. The energy demand subsystem consists of econometric demand models for each type of energy. Each demand has been estimated as a function of relative energy prices and the national product growth rate. The quantity
192
demanded varies directly with the national output 5 and inversely with the relative price. The demand subsystem links the energy sector with the rest of the economy. The demand for electrical energy has been divided into three types, according to base, medium and peak loads. The load duration curve has been divided in accordance with the models worked out at the Pakistan Water and Power Development Authority (WAPDA).’ The time duration of the three load levels has been assumed to remain constant over time. The model, which has been developed to represent the Pakistan energy sector, is a linear programming model4 which incorporates both the internal and the external interdependencies of the sector. The model is comprehensive and can perform a long-run quantitative analysis to clarify energy futures.7 Its objective function seeks energy supplies at the lowest costs to satisfy the final and intermediate demand for each fuel extending to the year 2005. The regional or locational aspects have been ignored.
The model The indices, variables, parameters and the constants of the model are defined in Table 1. The model contains an objective function and a set of constraints. The objective function minimizes the sum of capital costs net of terminal values, variable costs and costs of net trade in energy.** Minimize TC= &
x 1 CXi, + 11 CXjk 1 t i k i
+ cC(Eit i
-IV&) + CC& i
1
-@TCDwt t
(1)
i
The set of primal constraints,
which define the set of all
5 Except for non-commercial energy demand, inversely with the national output.
which varres
4 The main advantages of the lrnear formulation lies in its ability to incorporate a variety of constraints and its operational efficiency. Therefore various energy policies can be tested with ease. ( Some similar models which have been developed for certain other countries can be found in the work of Marine, Carey and Finon (see Ref 2). l * Any costs occurring in a given ‘5 year’ period t are assumed to occur in the middle of that period and are discounted accordingly by a factor of or. The terminal values have been calculated by assuming a 30 year life for each plant, except for diesel and solar, hydro and nuclear plants. Diesel and solar are assumed to have a 10 year life, hydro and nuclear a 50 year !ife. Plants are assumed to depreciate according to the straight line method.
ENERGY
ECONOMICS
July 1981
Energy policy formulation for Pakistan: T. Riaz Table 1. Definitions contants. Indices t
of indices, variables, parameters
FXit=Giii
and
indexes the T time periods. For example r = t refers to a ‘five year’ planning period 1980-1984. There are six such periods. indexes the K load level. k =l refers to base load. k = 2 is medium load. k =3 is peak load. indexes the J prospective plant. indexes the I fuel. indexes the V vintage year of plant J installed.
k
J V
Variables fuel output from production process J, time t and load level k. capacity of plant j installed in V and available in time t. import of fuel i in time t. export of fuel i in time t.
Xjt(Xjkt) yjut Mit Eit
cv
4j Lk
9 ?
F
F
hi Dit(k_) _ Rjt/Yit/X;t
per unit variable (excluding fuel). capital and trade costs of fuel supplies. terminal value of per unit capacity installed in tat the end of planning period T. intermediate demand for fuel i from plant j. factor which converts electrical energy into power capacity. discount factor. utilization factor for plant j. factor which converts ‘5 year’ demand into ‘average’ or ‘final’ year demand of period t. factor which determines the maximum hydro power capacity allowed on the system.
feasible activities consists of the following: C aij Xj, + Fit (Mi, - Ei,)
-
C bij Xi, F Fbikj Xjkt = (1 + &)Dit i
ai:
.’
all k (2)
These constraints require that the supply (domestic output and net trade) of fuel i must be sufficient to meet its intermediate as well as its final demand, including any supply losses.
ECONOMICS
T
7~
(3) These constraints require that the plants’ capacities (ie both existing and new) must be sufficient to supply the required level of output in each planning period. Peak demand for nonelectrical fuels is assumed to be met by changing the trade level or from the existing stocks. j = firewood t=l . . . . T
(4)
CjxC I;u
t=l
hydro, ,..,T
(5)
These constraints require that total hydroelectrical capacity should not exceed a certain percentage of total electricity generating capacity. This limit has been imposed to take account of seasonal fluctuations in the availability of hydro capacity resulting from the seasonal variation in water flows. j = biogas, hydro, solar T t=1 )....,
C xjt GRjr r
j = coal, oil, natural gas and firewood (6)
This set of constraints requires that total installed capacities of biogas and hydro-base plants, and total use of coal, domestic oil, natural gas and firewood over the planning period, should not exceed the maximum supportable or estimated capacities of reserves of the country. While the set of constraints (ie (2) to (6)) are the only ones considered in the present model, a number of others (such as security of supplies, environmental protection, etc) can be added to the existing set without difficulty.
i=6
CXikt = (1 + b)Dikt
ENERGY
c
-”
These constraints require that the firewood supplies in planning period t should not exceed a certain maximum level. This set of constraints has been incorporated because of the small forest base in the country.
take the value 1, if fuel i is being supplied by plant j or traded, otherwise their value is zero. factor which represents the supply losses of fuel i final demand of fuel i in time t. total fuel reserves/capacities/output of fuel i in the country,
aij,ait
Xjkt
k
i=l....7 t=l . . . . T j=8....J -v=-2,-1,O ,....
Xj* < Xj*
Parameters c(Xjkt.Yjut.Mit.Eit)
FCLk
XI& -”
July 1981
Data information The computation of the model requires information on costs, planned and existing plants’ capacities, their availability and efficiency, reserves and demand for each fuel. This information is shown in Table 2.
193
Energy policy formulation
for Pakistan: T. Riaz
Table 2. Data used in the computation
of the model.
costsa (Rs) Fuels and plants (J Non-commercial Biogas
1
CC/GJ
VCIGJ
TC/GJ
Availability factor
ciency factor
Final demandb (million
GJ)
GJ)
(X)
(“/.I
GJ)
6301 year 371 year
0.9
Effi-
340 1 .30
Firewood
18.63
2.49
Cylinder gas Kerosene
16.74 12.18
5.10 4.15
Coal Coal extraction Coal import Coal export
44.34
1.03
10.01
gas extractions manufacturing import export
Electricity (main) Electricity (remote) Coal-fired plants Oil-fired plants Gas steam plants Gas turbine plants Hydro-run of river Hydro storage Nuclear conventional Nuclear breeder Solar cell power plants
73
5.18
0.9 650
825 extraction manufacturing import export
0.9
11293
Oil
Natural Gas Gas Gas Gas
Reserves (million
fuels 21.7
Oil Oil Oil Oil
Existing capacities (million
10.59 55.68
3.61 6.17
9.04 55.68
3.61 6.17
14.80
1 780
290.27 0.9 0.8
825
174.9
0.70
24 559
272.5 0.9 0.8
0.70
63.1 25.2 155.80 149.80 140.50 134.70 135.40 174.35
18.61 17.77 16.66 15.27 15.55 19.44
0.473 1.987 35.930 23.785 3.407 23.974
299.30 371.50 48.21
22.22 19.72 5.16
4.322 0.0 0.0
376.271 year
24 7501
0.65 0.65 0.65 0.65 0.60 0.65
0.30 0.30 0.30 0.20
0.70 0.70 0.65
0.38 0.38 0.10
0.80
0.12
dav Diesel power generators
46.28
6.09
0.0
Sources: Most of the above data have been taken from official sources but some has come from the open literature especially that which is related to new technologies, ie synthetic oil/gas: solar cells, breeder reactors, etc. For details of original sources and calculation procedures, see Riaz.3 The loss factor is taken as 0.09 for all non-electric plants and 0.2 for the electric plants. The discount factor is taken as 10%. a CC stands for capital costs, VC for variable costs and TC for trade costs. All costs are at 1975 prices. b Demand projections are based on 4.5% growth rate and constant energy prices in real terms.
Forecasts from the model The optimal solution of the model forecasts the best energy future within the given set of physical constraints and assumptions. An alternative set of assumptions and constraints can result in a different energy future. Table 3 sets out the capacity, production and trade plans for the Pakistan energy sector. Table 4 shows the total capital and oil import financing requirements of the model and the total foreign exchange needs of the energy sector. These have been calculated using the previously determined foreign exchange element in total costs related to different types of energy projects. Since the capacity expansion plan ends with the plant to be commissioned in 2003, columns 1 and 2 of Table 4 show a decline in total capacity and foreign exchange requirements. This is rather misleading because
194
even if the energy sector has no specific plans beyond 2003, it would still have to plan for financing by at least at the same rate as in previous years. The main inference which one may draw relates to the magnitude of the financial problem.??
Sensitivity
analysis
To check the stability of forecasts the following experiments were conducted. l
The gross national product and fuel price growth rates were allowed to vary from 0.5% to 7.5% and from 0.0% to 20% respectively. Then using different permutations the impact on the expected demand
tt
A full description of the rest of the model’s forecasts can be found in T. Riaz, ‘Long-range energy sector plan for Pakistan’.’
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ECONOMICS
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Energy policy formulation for Pakistan: T. Riaz Table 3. Pakistan energy sector: forecasts of capacity Capacity
expansion, production
GJ).
expansion Power capacity
Fuel capacities
Year
Biogas plants
Coal mine develop ment
Oilfield develop ment
1978 1983 1988 1993 1998 2003
363 40 41 51 56 37
57 385 18 21 40 0
326 -
Total
588
521
326
Production
and trade (million
Gas field develop ment 118 52 116 142 256 465 1149
Oil manufacturing plants
GaJ steam plants
Gas turbine plants -
-
31 246
40 55 71 115 -
303
277
281
13 290 -
Hydrorun of river plants
Hydro storage plants
cell type generators
Total power
50
63 29 30 80 114 -
27 5 6 7 9 10
131 74 91 158 238 306
60
316
64
10 -
and trade Power
Fuels
Year
Biogas produe tion
Firewood production
Coal produetion
Gas produetion
Oilproduetion
1978 1983 1988 1993 1998 2003
1631 1811 2012 2240 2494 2660
118
453 2185 2264 2360 2473 874
1587 2062 2585 3225 4023 5762
1532
Table 4. Financial
requirements
Oil manufacturing 52 1212 1212 1212 1212 -
-
of investment
Oil imports
Coal base generation
Oil base generation
Gas base generation
Hydro generation
Nuclear generation
Solar cell ganeration
Total electricity
0.0 714 1053 1460 1948 3728
0.03 0.47 0.47 0.47 0.45 0.45
0.02 0.02 0.02 0.02 0.06 0.0
30.75 47.4 66.2 90 134 424
257 415 574.5 780 1051 1147
12 12 12 12 12 12
27 33 39 46 55 65
326.8 507.9 692.2 928.5 1252.51 1648.5
and trade plan (billion
Rs, 1975
Investment
prices).
Trade
Year
Total
Foreign exchange component
(All foreign exchange)
Total foreign exchange f2+3)
1978 1983 1988 1993 1998 2003
3.037 3.112 1.393 2.182 2.642 0.450
1.237 1.665 0.716 1.161 1.408 0.225
0.0 1.713 2.527 3.497 4.673 8.915
1.237 3.378 3.243 4.658 6.081 9.140
for each fuel and then in turn on the model’s solution was recorded. A set of disproportionate increases in the prices of oil and natural gas were considered, and their impact recorded. The demand for each fuel was allowed to be twice the amount considered in the reference case model. National fuel reserves were allowed to increase over the planning horizon by their annual historical discovery rates. The model was solved using different discount rates which varied from 5% to 15%. The input/output coefficients of the A matrix were changed to evaluate their impact on the solution. The planning horizon was extended from 30 to 50 years.
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July 1981
l
l
The impact of the availability of delayed and smaller hydro capacity was observed. Two new constraints, security of supplies and pollution control, were introduced and their impact recorded.
The experimentation with the demand levels (the first three experiments) showed that demand variation of up to 25% had no significant structural effect on the forecast. The relatively more expensive oil and gas (the second experiment) had their demands reduced. As a result the trade structure of the model changed showing a reduction in oil imports, commencement of coal imports and the development of extra oil manufacturing capacity in 1988. Finally, when a doubling of the demand levels was
195
Energy policy formulation for Pakistan: T. Riaz facturing facilities as well as the existing and new coal mines, to provide for the higher coal demand resulting from the development of oil manufacturing capacity. Investment in the development of gas fields should be spread over the entire planning period. The gas must act as a substitute for oil, at least up to 1993. It must also provide for thermal power needs up until the 1990s. The investment programme should take account of these two demands. The power industry should develop hydro power capacity to its fullest extent. Thermal power capacity must be based on gas rather than any other fossil fuel. Hydro and gas present the best combination up to 1993. Beyond this all investment in the power industry should be made in nuclear power technology. Electricity is the only long-run viable substitute for other fuels in Pakistan. Rural electrification should be based on solar power. The annual average solar cell production of 140 000 m*, as recommended by the model, seems too optimistic. However, a start must be made to gain some experience and education. which should later be exploited to make use of this power. The best operating schedule for electric plants will be achieved when base load is shared by nuclear, hydro and gas (steam) plants. Medium and peak loads should be met from gas, steam and turbine generation. Major investment in the development of biogas seems most urgent because of its cost effectiveness and its direct impact on the vast majority of people. The social benefits of this programme (ie better living standards, availability of fertilizer, release of pressure on the country’s forests, kerosene and gas, etc) outweigh its costs which can be financed from private funds.
considered it gave the following new features to the optimal solution: A major development of national coal mines and oil manufacturing plants in 1978. A larger development of hydro and gas based power plants during the 1980s and all nuclear power development in the later years. A very large increase in oil and coal imports.
l l
l
The energy forecasts remained stable with increasing fuel reserves at their annual historical discovery rates. The only effect observed was marginal and it occurred in terms of slightly larger coal and oil manufacturing capacities. The energy forecasts showed a fair degree of stability in relation to the changes in the discount rate and other input/output coefficients (experiments (5) and (6)). However, some marginal changes were observed. For example, a change in hydro availability from 0.6 to 0.5 led to a delay in the commissioning of these plants by at least two planning periods. However, an increase in the nuclear plant availability factor from 0.7 to 0.9 had no effect. A general or relative improvement in the efficiencies of the plants affected the forecasts only marginally. The extension of the planning period had most effect on the power development plan. The gas preservation policy was recommended and, as a result, the forecast changed its preference from a hydro-gas power combination to a nuclear, hydro and solar combination. Gas plants were to act as a standby to meet the peak load requirements. The delayed and smaller hydro power capacity enhanced the commissioning of nuclear plants. The policy to limit SO, emission resulted in increasing the demand for electricity and gas, and dampened the demand for oil, coal, and oil/gas based electricity. This accelerated the development of gas fields and hydro, nuclear and solar power plants. The total cost of limiting SO, emission amounted to Rs 7.646 billion at 1975 prices. The security of supplies could only be assured for a limited period of time within the framework of the approach and by developing nuclear breeder technology. However, the development of such a technology was not considered possible.
A suggested energy policy for Pakistan Due to the long time span, uncertainty, the lack of any dynamic adjustment process and spatial considerations, the major value of the forecasts lies in their ability to provide broad policy guidelines. The optimal forecasts, the sensitivity analysis, and the overwhelming concern for economic growth provide the base on which our suggested long-term energy policy is founded. Investment policy for the energy sector The main features of this policy are outlined below. l
Major and immediate investment should be made to develop existing and new oil wells and oil manu-
196
Energy resources: the depletion rate The model, within its given subjective framework (ie the discount factor, planning period and the minimum cost objective) recommends a rapid depletion policy. However, the sensitivity analysis, which experiments with all the value judgment elements. seems to suggest moderation in the use of certain fuels. Taking account of these slightly contradictory suggestions. and in view of uncertainty, we consider the following to be a good compromise; l l
a rapid depletion policy for oil and coal: and a moderate depletion policy for gas.
The moderate depletion of gas will certainly add further to the financial requirements of the energy sector. However, we feel that this additional cost might be worth bearing as an insurance against any future world ‘crisis’. Trade in energy resources The model shows preference for domestic supplies because of their relative cheapness. Known national reserves are such that the export of any fuel is not considered economic. There is no reason to believe that the
ENERGY
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Energy policy fomulation for Pakistan: i? Riaz export earnings of fuel, when invested, would provide a higher return than the expected rises in fuel prices. Domestic oil reserves cannot for long sustain a growing level of demand and, therefore, imports are required. A prudent policy might be to import the minimum required amount of oil and to make long-term arrangements to import coal from China and India to provide for the oil manufacturing industry. Pricing policy The case for long-run marginal cost pricing remains strong. The marginal costs of fossil fuels are equal to their import prices plus a small amount equal to the cost of transmission and distributional losses. However, in view of the uncertainty, we feel that the prices of all fuels should not only reflect their marginal cost but also their high scarcity value, at least until that time when Pakistan can find an efficient nuclear or solar technology which is both economic and safe. The model’s forecasts in relation to SOa emission are satisfying in the sense that Pakistan’s energy sector is perfectly capable of adopting to a policy of pollution control. Price is the only conservation policy incorporated in the model. However, we feel conservation through higher prices may not achieve its objective because of widespread corruption whereby theft of fuel3 $ is turned into transmission and distributional losses. Therefore, an alternative conservation policy based on incentive will be much more appropriate. The long-run energy policy developed here does, of course, represent only one point of view. It is essential that it should be debated against others. The differences between long-run policies based on value judgments, ie concern for future generations, confidence in future technology, and attitude towards risk, are very large indeed and require wider public debate. The government of Pakistan, in the wake of the energy crisis, has published some broad energy policy guidelines which we summarize below for comparison with our suggested policy. The government’s
long-run
energy
The main points of the government’s policy Ij 5 are as follows. $$ Especially
for electricity
$ 5 See Government
ENERGY
and gas.
of Pakistan.5
ECONOMICS
policy
long-term energy
July 1981
Rapid development of oil and coal resources. A slow rate of development of gas reserves. Development of gas manufacturing (from coal) facilities. Development of the coal-hydro based combination for the power industry. Rural electrification through development of a national grid system. Demand for fuel will continue to grow at historical growth rates. A comparison of the forecasts, without comparing the assumptions, is not justified. However, the government’s exposition of its policy does not involve any discussion of the assumptions or even the methodology of their forecasts, except for the few piecemeal measures which have been mentioned earlier. In view of this we refrain from making any detailed comparison or criticism, except to question (in the light of our own analysis) the wisdom of the government’s suggestions, or lack of them, regarding gas manufacturing facilities, hydra-coal power combination, rural electrification through the national grid system, demand estimation, for domestic rural energy supplies and conservation, etc. All these aspects require careful consideration. We hope that our study will be taken as an opening statement in what should be an important public debate. References Water and Power Development
Authority
of Pakistan,
Power Market Surveys, Lahore. Pakistan. 1970. A. S. Manne, ‘ETA:.a model for energy technology assessment’, Bell Journal of Economics, Vol 7, No 2, 1976; Carey et al, The UK Energy Sector: A Cost Minimizing Model with Fixed Demands, Faculty of
Commerce and Social Sciences, University of Birmingham, Discussion Paper, Series B, No 36, 1978; and D. Finon, ‘Optimisation model for the French energy sector’, Energy Policy, Vol 2, No 2, June 1974, pp 136-151. T. Riaz, Energy Resources: A Case Study of Pakistan, School of Economics. Newcastle uuon Tvne Polvtechnic, Discussion Paper, 1978; T: Riaz: Fuels and Power Industries with Special Reference to Pakistan, School of Economics, Newcastle upon Tyne, Discussion Paper, 1978; and T. Riaz, Energy Demand Projections for Pakistan, School of Economics, Newcastle upon Tyne Polytechnic, Discussion Paper, 1979. T. Riaz, Long-range Energy Sector Plan for Pakistan, School of Economics, Newcastle upon Tyne Polytechnic, Discussion Paper, 1979. Government of Pakistan, Working Papers for the Development Perspective 1975-80, islamabad, 1974.
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Pakistan is a low income, low energy consumption country. In view of the close interdependence between economic growth and energy consumption, she will need increasing energy supplies in order to maintain her economic growth. This paper develops an energy sector optimization model for the Pakistan economy, which consists of production models for five energy industries, ie oil, gas, coal, electricity. and non-commercial fuels. The model is first used to forecast energy balances for the period I9 75-2006. The model is then employed to formulate a long-term comprehensive energy policy for Pakistan. Finally the suggested policy is compared with the current official energy programme.
Non-OPEC developing nations have suffered most from the effects of the ‘energy crisis’. They have been faced with the problem of rising import costs and reduced export earnings as a consequence of widespread recession. Pakistan’s terms of trade have steadily declined over the years.* Her credit balance of $20.1 million in the financial year 1972-73 had slumped to a deficit balance of $3 133.2 million by 1979-80. Gross per capita income and per capita energy consumption in Pakistan were estimated to be $57.9 (Rs 573) and 9.5 GJ respectively in 19iS,t nearly the world’s lowest. Economic growth requires an expansion in the energy sector which is highly capital intensive, and Pakistan is short of capital. Thus the economic prospects for the country look bleak. Pakistan has hardly any measures available in the short run to deal with the grave situation which has been caused by the high price of energy and her own insignificant position in world trade. In the long run, however, growth must be achieved to provide a reasonable living standard for the increasing population. Thus, to avoid * The
average decline has been 25% since 1973.
Rs 9.9 = 31.
t Gross per capita income is at constant factor cost; GJ = gigajoules.
The author is with the Faculty of Professional Studies, Newcastle upon Tyne Polytechnic, Northumberland Road, Newcastle upon Tyne, NE1 8ST, UK. Final manuscript
received 5 February
0140-9883/81/030191-07
302.00
1981.
0 1981
stagnation and deterioration in the existing inferior living conditions, the long-term planning* of energy supplies becomes crucial. The purpose of this study is to develop a long-term energy sector optimization model for the Pakistan economy and then to formulate a broad energy policy based on the model’s forecasts. General
features
of the energy system and
the proposed model
The energy system, which is composed of demand and supply subsystems, is highly interdependent and complex. Most fuels can act as substitutes for each other, at least in the long run. A variety of energy technologies compete for the same resources. The scarcity of resources and lack of technological know-how force national economies into international markets. Conflicting national policy aims add further complexity. National energy policy must take account of all these contradictions, complexities and interdependencies of the system. The supply subsystem has been divided into five types of energy and 20 types of production activities which are taken as representative of the supply (ie, production, transport and distribution) activities. The main national supply subsystems as well as economic operations corresponding to supply activities, are given below. $ Energy Planning is also important because of the inadequacy of the market system (ie, absence of futures markets) and the existence of externalities.
IPC Business Press
191
Energy policy formulation for Pakistan: T. Riaz The non-commercial energy subsystem Non-commercial energy consists of three fuels, firewood, agricultural wastes and dung. They are perfect substitutes for one another and are used for the same purpose (ie, cooking) and can therefore be aggregated. These fuels have been observed to be inferior to commercial fuels in the sense that with an increase in income people tend to use less of them. In 1975 about 40% of all energy consumed in Pakistan was derived from these sources. The forest base of Pakistan is extremely small, its potential for fuel supplies is limited. Agricultural wastes and dung have considerably more potential, but have high opportunity cost as they can be used as a rich fertilizer. In view of these considerations, plus our concern for rural living conditions and to make our analysis comprehensive, we assume that non-commercial energy requirements can be supplied by the following: l l l l
firewood; biogas; cylinder gas; and kerosene.
The coal subsystem The coal subsystem consists of: l
l
coal production mines; imports/exports
from existing or newly developed of coal.
The oil/gas subsystems These comprise the following: l l l
oil/gas production from oil wells/gasfields; imports/exports of oil/gas; manufacture of oil/gas from coal.
The electric power subsystem Pakistan does not, at present have a fully developed national electric grid system. The majority of the population still live in small, remote villages. Pakistan has embarked on a rural electrification plan, but transmission costs are extremely high and so to evaluate power supplies from national grid against small load generation methods (ie, diesel and solar cell generators) we have made a distinction between the electricity demands of urban and rural areas. For national grid generation the following technologies have been considered: l l l l l
coal-fired plants; oil-fired plants; gas (steam and turbine type) plants; hydro (run of river and storage type plants); and nuclear (conventional and breeder plants).
All of the subsystems above are interlinked through their intermediate demand mechanism. The energy demand subsystem consists of econometric demand models for each type of energy. Each demand has been estimated as a function of relative energy prices and the national product growth rate. The quantity
192
demanded varies directly with the national output 5 and inversely with the relative price. The demand subsystem links the energy sector with the rest of the economy. The demand for electrical energy has been divided into three types, according to base, medium and peak loads. The load duration curve has been divided in accordance with the models worked out at the Pakistan Water and Power Development Authority (WAPDA).’ The time duration of the three load levels has been assumed to remain constant over time. The model, which has been developed to represent the Pakistan energy sector, is a linear programming model4 which incorporates both the internal and the external interdependencies of the sector. The model is comprehensive and can perform a long-run quantitative analysis to clarify energy futures.7 Its objective function seeks energy supplies at the lowest costs to satisfy the final and intermediate demand for each fuel extending to the year 2005. The regional or locational aspects have been ignored.
The model The indices, variables, parameters and the constants of the model are defined in Table 1. The model contains an objective function and a set of constraints. The objective function minimizes the sum of capital costs net of terminal values, variable costs and costs of net trade in energy.** Minimize TC= &
x 1 CXi, + 11 CXjk 1 t i k i
+ cC(Eit i
-IV&) + CC& i
1
-@TCDwt t
(1)
i
The set of primal constraints,
which define the set of all
5 Except for non-commercial energy demand, inversely with the national output.
which varres
4 The main advantages of the lrnear formulation lies in its ability to incorporate a variety of constraints and its operational efficiency. Therefore various energy policies can be tested with ease. ( Some similar models which have been developed for certain other countries can be found in the work of Marine, Carey and Finon (see Ref 2). l * Any costs occurring in a given ‘5 year’ period t are assumed to occur in the middle of that period and are discounted accordingly by a factor of or. The terminal values have been calculated by assuming a 30 year life for each plant, except for diesel and solar, hydro and nuclear plants. Diesel and solar are assumed to have a 10 year life, hydro and nuclear a 50 year !ife. Plants are assumed to depreciate according to the straight line method.
ENERGY
ECONOMICS
July 1981
Energy policy formulation for Pakistan: T. Riaz Table 1. Definitions contants. Indices t
of indices, variables, parameters
FXit=Giii
and
indexes the T time periods. For example r = t refers to a ‘five year’ planning period 1980-1984. There are six such periods. indexes the K load level. k =l refers to base load. k = 2 is medium load. k =3 is peak load. indexes the J prospective plant. indexes the I fuel. indexes the V vintage year of plant J installed.
k
J V
Variables fuel output from production process J, time t and load level k. capacity of plant j installed in V and available in time t. import of fuel i in time t. export of fuel i in time t.
Xjt(Xjkt) yjut Mit Eit
cv
4j Lk
9 ?
F
F
hi Dit(k_) _ Rjt/Yit/X;t
per unit variable (excluding fuel). capital and trade costs of fuel supplies. terminal value of per unit capacity installed in tat the end of planning period T. intermediate demand for fuel i from plant j. factor which converts electrical energy into power capacity. discount factor. utilization factor for plant j. factor which converts ‘5 year’ demand into ‘average’ or ‘final’ year demand of period t. factor which determines the maximum hydro power capacity allowed on the system.
feasible activities consists of the following: C aij Xj, + Fit (Mi, - Ei,)
-
C bij Xi, F Fbikj Xjkt = (1 + &)Dit i
ai:
.’
all k (2)
These constraints require that the supply (domestic output and net trade) of fuel i must be sufficient to meet its intermediate as well as its final demand, including any supply losses.
ECONOMICS
T
7~
(3) These constraints require that the plants’ capacities (ie both existing and new) must be sufficient to supply the required level of output in each planning period. Peak demand for nonelectrical fuels is assumed to be met by changing the trade level or from the existing stocks. j = firewood t=l . . . . T
(4)
CjxC I;u
t=l
hydro, ,..,T
(5)
These constraints require that total hydroelectrical capacity should not exceed a certain percentage of total electricity generating capacity. This limit has been imposed to take account of seasonal fluctuations in the availability of hydro capacity resulting from the seasonal variation in water flows. j = biogas, hydro, solar T t=1 )....,
C xjt GRjr r
j = coal, oil, natural gas and firewood (6)
This set of constraints requires that total installed capacities of biogas and hydro-base plants, and total use of coal, domestic oil, natural gas and firewood over the planning period, should not exceed the maximum supportable or estimated capacities of reserves of the country. While the set of constraints (ie (2) to (6)) are the only ones considered in the present model, a number of others (such as security of supplies, environmental protection, etc) can be added to the existing set without difficulty.
i=6
CXikt = (1 + b)Dikt
ENERGY
c
-”
These constraints require that the firewood supplies in planning period t should not exceed a certain maximum level. This set of constraints has been incorporated because of the small forest base in the country.
take the value 1, if fuel i is being supplied by plant j or traded, otherwise their value is zero. factor which represents the supply losses of fuel i final demand of fuel i in time t. total fuel reserves/capacities/output of fuel i in the country,
aij,ait
Xjkt
k
i=l....7 t=l . . . . T j=8....J -v=-2,-1,O ,....
Xj* < Xj*
Parameters c(Xjkt.Yjut.Mit.Eit)
FCLk
XI& -”
July 1981
Data information The computation of the model requires information on costs, planned and existing plants’ capacities, their availability and efficiency, reserves and demand for each fuel. This information is shown in Table 2.
193
Energy policy formulation
for Pakistan: T. Riaz
Table 2. Data used in the computation
of the model.
costsa (Rs) Fuels and plants (J Non-commercial Biogas
1
CC/GJ
VCIGJ
TC/GJ
Availability factor
ciency factor
Final demandb (million
GJ)
GJ)
(X)
(“/.I
GJ)
6301 year 371 year
0.9
Effi-
340 1 .30
Firewood
18.63
2.49
Cylinder gas Kerosene
16.74 12.18
5.10 4.15
Coal Coal extraction Coal import Coal export
44.34
1.03
10.01
gas extractions manufacturing import export
Electricity (main) Electricity (remote) Coal-fired plants Oil-fired plants Gas steam plants Gas turbine plants Hydro-run of river Hydro storage Nuclear conventional Nuclear breeder Solar cell power plants
73
5.18
0.9 650
825 extraction manufacturing import export
0.9
11293
Oil
Natural Gas Gas Gas Gas
Reserves (million
fuels 21.7
Oil Oil Oil Oil
Existing capacities (million
10.59 55.68
3.61 6.17
9.04 55.68
3.61 6.17
14.80
1 780
290.27 0.9 0.8
825
174.9
0.70
24 559
272.5 0.9 0.8
0.70
63.1 25.2 155.80 149.80 140.50 134.70 135.40 174.35
18.61 17.77 16.66 15.27 15.55 19.44
0.473 1.987 35.930 23.785 3.407 23.974
299.30 371.50 48.21
22.22 19.72 5.16
4.322 0.0 0.0
376.271 year
24 7501
0.65 0.65 0.65 0.65 0.60 0.65
0.30 0.30 0.30 0.20
0.70 0.70 0.65
0.38 0.38 0.10
0.80
0.12
dav Diesel power generators
46.28
6.09
0.0
Sources: Most of the above data have been taken from official sources but some has come from the open literature especially that which is related to new technologies, ie synthetic oil/gas: solar cells, breeder reactors, etc. For details of original sources and calculation procedures, see Riaz.3 The loss factor is taken as 0.09 for all non-electric plants and 0.2 for the electric plants. The discount factor is taken as 10%. a CC stands for capital costs, VC for variable costs and TC for trade costs. All costs are at 1975 prices. b Demand projections are based on 4.5% growth rate and constant energy prices in real terms.
Forecasts from the model The optimal solution of the model forecasts the best energy future within the given set of physical constraints and assumptions. An alternative set of assumptions and constraints can result in a different energy future. Table 3 sets out the capacity, production and trade plans for the Pakistan energy sector. Table 4 shows the total capital and oil import financing requirements of the model and the total foreign exchange needs of the energy sector. These have been calculated using the previously determined foreign exchange element in total costs related to different types of energy projects. Since the capacity expansion plan ends with the plant to be commissioned in 2003, columns 1 and 2 of Table 4 show a decline in total capacity and foreign exchange requirements. This is rather misleading because
194
even if the energy sector has no specific plans beyond 2003, it would still have to plan for financing by at least at the same rate as in previous years. The main inference which one may draw relates to the magnitude of the financial problem.??
Sensitivity
analysis
To check the stability of forecasts the following experiments were conducted. l
The gross national product and fuel price growth rates were allowed to vary from 0.5% to 7.5% and from 0.0% to 20% respectively. Then using different permutations the impact on the expected demand
tt
A full description of the rest of the model’s forecasts can be found in T. Riaz, ‘Long-range energy sector plan for Pakistan’.’
ENERGY
ECONOMICS
July 1981
Energy policy formulation for Pakistan: T. Riaz Table 3. Pakistan energy sector: forecasts of capacity Capacity
expansion, production
GJ).
expansion Power capacity
Fuel capacities
Year
Biogas plants
Coal mine develop ment
Oilfield develop ment
1978 1983 1988 1993 1998 2003
363 40 41 51 56 37
57 385 18 21 40 0
326 -
Total
588
521
326
Production
and trade (million
Gas field develop ment 118 52 116 142 256 465 1149
Oil manufacturing plants
GaJ steam plants
Gas turbine plants -
-
31 246
40 55 71 115 -
303
277
281
13 290 -
Hydrorun of river plants
Hydro storage plants
cell type generators
Total power
50
63 29 30 80 114 -
27 5 6 7 9 10
131 74 91 158 238 306
60
316
64
10 -
and trade Power
Fuels
Year
Biogas produe tion
Firewood production
Coal produetion
Gas produetion
Oilproduetion
1978 1983 1988 1993 1998 2003
1631 1811 2012 2240 2494 2660
118
453 2185 2264 2360 2473 874
1587 2062 2585 3225 4023 5762
1532
Table 4. Financial
requirements
Oil manufacturing 52 1212 1212 1212 1212 -
-
of investment
Oil imports
Coal base generation
Oil base generation
Gas base generation
Hydro generation
Nuclear generation
Solar cell ganeration
Total electricity
0.0 714 1053 1460 1948 3728
0.03 0.47 0.47 0.47 0.45 0.45
0.02 0.02 0.02 0.02 0.06 0.0
30.75 47.4 66.2 90 134 424
257 415 574.5 780 1051 1147
12 12 12 12 12 12
27 33 39 46 55 65
326.8 507.9 692.2 928.5 1252.51 1648.5
and trade plan (billion
Rs, 1975
Investment
prices).
Trade
Year
Total
Foreign exchange component
(All foreign exchange)
Total foreign exchange f2+3)
1978 1983 1988 1993 1998 2003
3.037 3.112 1.393 2.182 2.642 0.450
1.237 1.665 0.716 1.161 1.408 0.225
0.0 1.713 2.527 3.497 4.673 8.915
1.237 3.378 3.243 4.658 6.081 9.140
for each fuel and then in turn on the model’s solution was recorded. A set of disproportionate increases in the prices of oil and natural gas were considered, and their impact recorded. The demand for each fuel was allowed to be twice the amount considered in the reference case model. National fuel reserves were allowed to increase over the planning horizon by their annual historical discovery rates. The model was solved using different discount rates which varied from 5% to 15%. The input/output coefficients of the A matrix were changed to evaluate their impact on the solution. The planning horizon was extended from 30 to 50 years.
ENERGY
ECONOMICS
July 1981
l
l
The impact of the availability of delayed and smaller hydro capacity was observed. Two new constraints, security of supplies and pollution control, were introduced and their impact recorded.
The experimentation with the demand levels (the first three experiments) showed that demand variation of up to 25% had no significant structural effect on the forecast. The relatively more expensive oil and gas (the second experiment) had their demands reduced. As a result the trade structure of the model changed showing a reduction in oil imports, commencement of coal imports and the development of extra oil manufacturing capacity in 1988. Finally, when a doubling of the demand levels was
195
Energy policy formulation for Pakistan: T. Riaz facturing facilities as well as the existing and new coal mines, to provide for the higher coal demand resulting from the development of oil manufacturing capacity. Investment in the development of gas fields should be spread over the entire planning period. The gas must act as a substitute for oil, at least up to 1993. It must also provide for thermal power needs up until the 1990s. The investment programme should take account of these two demands. The power industry should develop hydro power capacity to its fullest extent. Thermal power capacity must be based on gas rather than any other fossil fuel. Hydro and gas present the best combination up to 1993. Beyond this all investment in the power industry should be made in nuclear power technology. Electricity is the only long-run viable substitute for other fuels in Pakistan. Rural electrification should be based on solar power. The annual average solar cell production of 140 000 m*, as recommended by the model, seems too optimistic. However, a start must be made to gain some experience and education. which should later be exploited to make use of this power. The best operating schedule for electric plants will be achieved when base load is shared by nuclear, hydro and gas (steam) plants. Medium and peak loads should be met from gas, steam and turbine generation. Major investment in the development of biogas seems most urgent because of its cost effectiveness and its direct impact on the vast majority of people. The social benefits of this programme (ie better living standards, availability of fertilizer, release of pressure on the country’s forests, kerosene and gas, etc) outweigh its costs which can be financed from private funds.
considered it gave the following new features to the optimal solution: A major development of national coal mines and oil manufacturing plants in 1978. A larger development of hydro and gas based power plants during the 1980s and all nuclear power development in the later years. A very large increase in oil and coal imports.
l l
l
The energy forecasts remained stable with increasing fuel reserves at their annual historical discovery rates. The only effect observed was marginal and it occurred in terms of slightly larger coal and oil manufacturing capacities. The energy forecasts showed a fair degree of stability in relation to the changes in the discount rate and other input/output coefficients (experiments (5) and (6)). However, some marginal changes were observed. For example, a change in hydro availability from 0.6 to 0.5 led to a delay in the commissioning of these plants by at least two planning periods. However, an increase in the nuclear plant availability factor from 0.7 to 0.9 had no effect. A general or relative improvement in the efficiencies of the plants affected the forecasts only marginally. The extension of the planning period had most effect on the power development plan. The gas preservation policy was recommended and, as a result, the forecast changed its preference from a hydro-gas power combination to a nuclear, hydro and solar combination. Gas plants were to act as a standby to meet the peak load requirements. The delayed and smaller hydro power capacity enhanced the commissioning of nuclear plants. The policy to limit SO, emission resulted in increasing the demand for electricity and gas, and dampened the demand for oil, coal, and oil/gas based electricity. This accelerated the development of gas fields and hydro, nuclear and solar power plants. The total cost of limiting SO, emission amounted to Rs 7.646 billion at 1975 prices. The security of supplies could only be assured for a limited period of time within the framework of the approach and by developing nuclear breeder technology. However, the development of such a technology was not considered possible.
A suggested energy policy for Pakistan Due to the long time span, uncertainty, the lack of any dynamic adjustment process and spatial considerations, the major value of the forecasts lies in their ability to provide broad policy guidelines. The optimal forecasts, the sensitivity analysis, and the overwhelming concern for economic growth provide the base on which our suggested long-term energy policy is founded. Investment policy for the energy sector The main features of this policy are outlined below. l
Major and immediate investment should be made to develop existing and new oil wells and oil manu-
196
Energy resources: the depletion rate The model, within its given subjective framework (ie the discount factor, planning period and the minimum cost objective) recommends a rapid depletion policy. However, the sensitivity analysis, which experiments with all the value judgment elements. seems to suggest moderation in the use of certain fuels. Taking account of these slightly contradictory suggestions. and in view of uncertainty, we consider the following to be a good compromise; l l
a rapid depletion policy for oil and coal: and a moderate depletion policy for gas.
The moderate depletion of gas will certainly add further to the financial requirements of the energy sector. However, we feel that this additional cost might be worth bearing as an insurance against any future world ‘crisis’. Trade in energy resources The model shows preference for domestic supplies because of their relative cheapness. Known national reserves are such that the export of any fuel is not considered economic. There is no reason to believe that the
ENERGY
ECONOMICS
July 1981
Energy policy fomulation for Pakistan: i? Riaz export earnings of fuel, when invested, would provide a higher return than the expected rises in fuel prices. Domestic oil reserves cannot for long sustain a growing level of demand and, therefore, imports are required. A prudent policy might be to import the minimum required amount of oil and to make long-term arrangements to import coal from China and India to provide for the oil manufacturing industry. Pricing policy The case for long-run marginal cost pricing remains strong. The marginal costs of fossil fuels are equal to their import prices plus a small amount equal to the cost of transmission and distributional losses. However, in view of the uncertainty, we feel that the prices of all fuels should not only reflect their marginal cost but also their high scarcity value, at least until that time when Pakistan can find an efficient nuclear or solar technology which is both economic and safe. The model’s forecasts in relation to SOa emission are satisfying in the sense that Pakistan’s energy sector is perfectly capable of adopting to a policy of pollution control. Price is the only conservation policy incorporated in the model. However, we feel conservation through higher prices may not achieve its objective because of widespread corruption whereby theft of fuel3 $ is turned into transmission and distributional losses. Therefore, an alternative conservation policy based on incentive will be much more appropriate. The long-run energy policy developed here does, of course, represent only one point of view. It is essential that it should be debated against others. The differences between long-run policies based on value judgments, ie concern for future generations, confidence in future technology, and attitude towards risk, are very large indeed and require wider public debate. The government of Pakistan, in the wake of the energy crisis, has published some broad energy policy guidelines which we summarize below for comparison with our suggested policy. The government’s
long-run
energy
The main points of the government’s policy Ij 5 are as follows. $$ Especially
for electricity
$ 5 See Government
ENERGY
and gas.
of Pakistan.5
ECONOMICS
policy
long-term energy
July 1981
Rapid development of oil and coal resources. A slow rate of development of gas reserves. Development of gas manufacturing (from coal) facilities. Development of the coal-hydro based combination for the power industry. Rural electrification through development of a national grid system. Demand for fuel will continue to grow at historical growth rates. A comparison of the forecasts, without comparing the assumptions, is not justified. However, the government’s exposition of its policy does not involve any discussion of the assumptions or even the methodology of their forecasts, except for the few piecemeal measures which have been mentioned earlier. In view of this we refrain from making any detailed comparison or criticism, except to question (in the light of our own analysis) the wisdom of the government’s suggestions, or lack of them, regarding gas manufacturing facilities, hydra-coal power combination, rural electrification through the national grid system, demand estimation, for domestic rural energy supplies and conservation, etc. All these aspects require careful consideration. We hope that our study will be taken as an opening statement in what should be an important public debate. References Water and Power Development
Authority
of Pakistan,
Power Market Surveys, Lahore. Pakistan. 1970. A. S. Manne, ‘ETA:.a model for energy technology assessment’, Bell Journal of Economics, Vol 7, No 2, 1976; Carey et al, The UK Energy Sector: A Cost Minimizing Model with Fixed Demands, Faculty of
Commerce and Social Sciences, University of Birmingham, Discussion Paper, Series B, No 36, 1978; and D. Finon, ‘Optimisation model for the French energy sector’, Energy Policy, Vol 2, No 2, June 1974, pp 136-151. T. Riaz, Energy Resources: A Case Study of Pakistan, School of Economics. Newcastle uuon Tvne Polvtechnic, Discussion Paper, 1978; T: Riaz: Fuels and Power Industries with Special Reference to Pakistan, School of Economics, Newcastle upon Tyne, Discussion Paper, 1978; and T. Riaz, Energy Demand Projections for Pakistan, School of Economics, Newcastle upon Tyne Polytechnic, Discussion Paper, 1979. T. Riaz, Long-range Energy Sector Plan for Pakistan, School of Economics, Newcastle upon Tyne Polytechnic, Discussion Paper, 1979. Government of Pakistan, Working Papers for the Development Perspective 1975-80, islamabad, 1974.
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