ON assuming power, General Musharraf's military-led government initiated a series of economic, social, political and governance reforms. The post 9/11 (New York terror attacks) period was a blessing in disguise for Pakistan's economy, as anxious expatriates started remitting in billions their savings back home, worried about the security of their funds overseas. That provided a boost to the stock exchange and the real estate sector. Western allies in the war against terror also pumped in funds for infrastructure, development, and military. These record FDI inflows brought about an economic boom.

From 2004-2007, the real GDP grew at about seven per cent per annum. This had a direct bearing on electricity consumption which registered a phenomenal average annual growth rate of over 10 per cent. The excess capacity generated by the first IPPs' wave of 1997 to 2001 had made the government complacent until 2006.

While a new investor-friendly Power Policy 2002 was put out in anticipation of expected shortages by the end of the decade, no concrete long-term investment plans were pursued with any zeal. However in 2007, the ever-rising peak demand touched 17,328MW to exceed the net available capacity of 15,482MW, resulting in electricity deficit after a long time (see Figure 1). The gap became the widest in 2009 at 3,900MW and 5000MW in the 2010 summer.

From 2007 to 2008, the government finally managed to execute several PPAs with a new wave of IPPs whose sponsors were mainly domestic business concerns. The 2002 Power Policy with its subsequent 2006 amendments had reverted to the same investor friendly framework of the 1994 policy, except that there was no reference tariff given.

Competitive bidding was encouraged and unsolicited tariff determination by Nepra was subject to negotiations between the IPP and NTDC/KESC based on a reasonable energy and capacity charge. As a result, 13 IPPs with an installed capacity of 2,632MW were commissioned or were scheduled to be commissioned in the 2009 to 2011 timeframe (see Table ).

All the plants are dual-fuel, thus even the more efficient Combined Cycle Gas Turbines (CCGTs) are likely to be running on the costlier RFO or HSD due to a lack of adequate domestic gas supply. Gas import plans like the Iran-Pakistan-India pipeline and LNG imports remain question marks due to slow negotiations and political factors.

Figure shows that a lack of long-term planning has left a big gap between the expanding demand and fairly constant supply for a period of at least six years starting from 2007. Loadshedding has become a way of life in posh urban areas as well as remote villages, some of which have experienced daily outages for as long as 20 hours.

Only the planned new available capacity between 2010 and 2014 of about 7,000MW consisting mainly of IPPs and 14 new rental power plants (RPP) are expected to bridge the demand-supply gap.

Conclusion: Thermal IPPs have been a necessary evil for a Category 2 (capacity-short) developing country like Pakistan, which has limited public financial resources and can induce private investment only by offering attractive fiscal incentives. Their role in meeting the severe capacity constraints both in the 1990s and the late 2000s has been well recognised.

However, the risk to look out for is when the country starts to have surplus power. In that situation, IPPs are almost certainly expected to produce more expensive electricity than existing power plants due to the front end loading of their tariff to cover for their debt obligations, which can prove to be politically difficult.

Donor agencies and government planners should keep in mind that Pakistan is still far from being a fully liberalised and competitive market. It is very difficult to avoid conflicting situations when bringing in a sea of private generation investment unless there is a fully deregulated value chain from generation down to transmission and distribution.

The NTDC would continue to have an affinity for the Gencos' power unless these become truly autonomous entities. Pakistan should have brought in about half the IPP capacity than it did in the 1990s to make it more manageable. A new experiment in liberalisation needs to be carefully managed and implemented, with the commercial capacity and regulatory framework well in place before embarking on it.

There is no doubt that IPPs have played an invaluable role in the country's economy. The reason that IPPs end up being more expensive per unit is due to flawed official energy policy.

An effective strategic gas policy would have seen a greater emphasis on domestic exploration and viable import options. This would have encouraged the development of the more efficient CCGT plants rather than a majority of the dual-fuel RFO run plants that are in vogue, and are susceptible to the high fuel prices seen of late. Sadly, sufficient gas still looks like a remote possibility today.

In fact, IPPs are a cheaper alternative to the very expensive 3-5 years RPPs that are now being brought in as a last-ditch effort to meet the supply deficit. However, the focus should remain on least cost power as the preference for new investments.

The biggest learning lesson has been that the true benefits of private investment can only be derived in a thriving reforms process. The deregulation, liberalisation, and unbundling of the sector should gather more momentum so that all players can compete on an equal footing.

A market-oriented system would encourage not just ex-public players but also private players like the IPPs to maximise efficiencies in order to retain their consumers. If all market players compete fairly, the end objective of the cheapest prices for the end customer should be achievable.