PAKISTAN’S energy crisis and its viable solutions have been extensively debated in the recent past. Two factors that must be kept in mind when discussing any solution are affordability (cost and pricing) and availability (net thermal efficiency/usage) of fuel and electricity. There are no quick fixes to this problem, but some options exist to accelerate the resolution of the issues.

Given the size of the deficit in the power sector, alternate energy solutions can be supplemental at best. The mainstream fuel requirements will continue to come from coal, natural gas and hydro, as possibly the most viable options for large-scale baseline power generation.

However, in the short- to medium-term, contrary to the popular belief about coal, it is natural gas that is the most viable fuel to address the large power deficit in the quickest possible way, at the most affordable cost. Here is why I believe natural gas remains the preferred option over coal.

The data provided in this essay is from internal industry documents that take a detailed look at the pricing and gestation periods of various fuel and power projects. The studies themselves cannot be cited, but here is what the data suggests.

In the short- to medium-term, contrary to the popular belief about coal, it is natural gas that is the most viable fuel to address the large power deficit in the quickest possible way at the most affordable cost

The typical lead time for setting up coal-based power plants is 4-5 years and building medium-sized dams is 7-10 years, whilst a gas-based power project could be converted into 9-12 months, or even earlier, on an already producing field. The conversion of existing residual fuel oil (RFO) based power plants to coal is perhaps the fastest solution with a 15-18-month gestation period, but it has a glass ceiling of 3000-3500MW.

On the other hand, given the estimated over 66 trillion cubic feet of explored and unexplored gas reserves in Pakistan, the availability of natural gas for power can easily address the current deficit. With better allocation of the existing resources and improved exploration and production (E&P) activities, natural gas can actually emerge as the most superior option for meeting baseline power generation requirements in the immediate future.

E&P activities have been lacklustre in the last few years largely due to security concerns in the oil and gas rich territories, as well as unattractive well-head prices. Additional domestic gas production is surely a way to reduce the deficit and the cost of power generation. The (indicative) supply curve for domestic gas in Pakistan shows that 85pc of domestic gas costs the country less than $5/mmbtu.

On the other hand, the cost of RFO and LNG is about three times this level. The weighted average cost of gas (WACOG) for domestic gas is in the range of $3.2/mmbtu, which is why Pakistan is able to have such low retail prices of gas. The WACOG level indicates how low domestic gas prices are in Pakistan, where not all of the gas potential has been realised as yet. Therefore, it is critical that Pakistan gives higher priority to further domestic gas production.

The Petroleum Policy 2012 offers prices which are considered adequate by many in the E&P industry, and also allow E&P companies to apply for conversion of their existing fields to the 2012 policy prices. This can bring fresh investment to the upstream gas sector, and, if guided carefully, more gas can be brought into the system in the coming 12 to 36 months.

Even if further domestic gas comes in at the $6/mmbtu offered under the 2012 policy, it will be much cheaper than any imported fuel, which is actually $20/mmbtu. This would mean that the power to the eventual consumers will be available at an estimated cost of $0.08/Rs8 per KwH, which is more than half the current tariff level.

Hence, this becomes the most viable solution to the problem, both in terms of affordability and availability, in the shortest possible time. This may require the laying of distribution infrastructure for connectivity of these power plants to the grid, which could be achieved within 24-36 months and must be pursued simultaneously.

Stated above is a solution to address the immediate power shortages for which the estimated timeline is 1-3 years. For the medium-term (4-6 years), coal, particularly locally mined, would be the best fuel option. The long term (seven years and beyond) solution lies in hydropower projects. To achieve a proper fuel mix, alternate fuels — to the extent of say one quarter of the total — is an absolute essential from the long-term energy security perspective. This can be achieved at the lowest possible costs, which should not cross single digits ever.

The writer is a founding partner of Burj Capital, an energy sector private equity and advisory company

Published in Dawn, Economic & Business, September 1st, 2014