COVID 19 and it’s impact on Pakistan’s Power Sector
The novel COVID – 19 has delivered the economic shock of years long recession within a quarter. This will reverberate throughout the value chain. Power sector forms a very important part of that value chain.
The biggest shock to the power sector will come in the form of a demand reduction. This demand reduction will result in reduced economic activity in commercial and industrial sector which consumed 30% of the power in 2017-18 (according HDIP). This leaves the household, government and agricultural sector. Agricultural sector may see sustained demand due to the fact that the country might have to rely on a domestic crop for meeting food security needs. However, the household and government sector will see a fall in demand. Though empirical evidence from New York shows a meagre jump of 4% and 7% on weekends and weekdays respectively, that is unlikely to hold true for Pakistan due to two reasons. First, a number of commercial activities such as tuition centres, offices and clinics are run in residential houses on household connections. As these activities’ shutdown, the consumption associated with households is expected to fall down. Second, Pakistani households have lower electricity penetration for doing household work. Moreover, even if the demand for household electricity consumption were to increase, electricity up to 300 units is cross subsidised by the government which would further contribute to recovery rate issues in the long run.
To make matters worse the lockdown has come in the high demand months of April, May June and July. According to Energy Purchase Reports for 2019, 37.5% of the electricity procurement for 2019 happened between May to July 2019. Therefore, the power demand will be very sensitive to the government’s decision about the timing of the lockdown.
However, a few factors will ensure that 2020 is a low demand year for the power sector. First, industrial sector might see lower demand due to fall in global demand for textiles, disruption of global value chain, closure of borders and fall in demand for cement and other consumables.
Affordability of Power
Luckily, the international conditions have contributed to potential reduction in cost of generating power. This reduction in costs will be stimulated by a decrease in price of Coal, Gas and Oil. Indirectly, the reduction in their cost has decreased the current account deficit. This in turn has reduced depreciation pressure on the currency and hence appreciation pressure on the tariff. Moreover, COVID 19 induced quantitative easing can come to the aid of firms performing financial close for investments in Coal generation and Hydel projects. If the power projects are able to lock in these loans at such low rates, the sector will benefit from their low financing costs.
Though it is important to note that these positive effects remain contingent on a number of factors. First there is assumption that there is no “whiplash” from the oil sector. A whiplash will occur when some oilfields will close down due to inability to sustain operations, and hence would remain closed even after the global demand has recovered. Second, we assume that new projects are not hampered by unavailability of critical capital required to complete projects in their country.
Aggravated cash flow issues
Pakistani Power Sector, which has historically suffered from cash flow availability on the back of dismal DISCO performance, will see its performance worsen with COVID 19. For starters, the government has allowed consumers to submit their bills in multiple instalments. Then, most of the billing in DISCOS is done manually. Some of that billing might not be done accurately or on time. This can lead to billing-delay induced cashflow issues. Both these concerns would further contribute to the current figure of Circular Debt.
Reduction in Investment
In the medium term (1-5 years) the power sector will see reduced interest by investors because of a number of reasons. First, the disruption of the global value chain is bound to lead to delayed growth in demand and power sectors are going to be wary of that investment. This will especially hold true if different countries disagree on the length of quarantine and decide to close borders as a form of precaution. Apart from demand related issues, government will also be less willing to provide financial support for investment in these projects due to sudden increase in medical spending. The private sector might not be able to fill that gap due to financier concerns about the ability of project managers to construct new projects on time given the current condition of the global supply chain. Moreover, investment in interest in Renewable Electricity might wane due to the expectation of an oil glut well into the first quarter of 2021.
The Power sector in Pakistan will suffer due to COVID 19. These difficulties will come in the form of reduced electricity demand, lesser investment and a challenging cash flow situation. The reduced electricity demand will result from the reduced commercial , household and industrial demand. Moreover, wary investors in the power sector will prefer to wait out the uncertain medium term. Furthermore, the country’s circular debt crises is expected to get a whole lot worse due to cash flow constraints induced by COVID 19.
 Includes government schools and public dealing offices.
 In the form of higher tariffs for commercial sector and via indirect taxation.