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Managing energy demand
LOOKING ahead, all households should consider investing in solar home systems for electricity and solar water heating to reduce energy expenses in the future.
The government has historically provided unreasonably cheap energy (electricity and gas) and did not enforce building standards, appliance standards, or other energy efficiency measures. Meanwhile, we recklessly expanded the transmission and distribution networks. Consumers adjusted to high availability and low-cost energy, and residential demand grew. Today, the challenge is transitioning from cheap, abundant energy to a scenario with expensive and limited supply.
I have argued that residential energy consumption in the country is unsustainable. Both electricity and natural gas are consumed wastefully and do not produce any economic output. I also say that the government needs to curtail the supply to residential and commercial consumers who contribute to peak demand — mainly middle- and high-income consumers.
Utilities are adopting this even in advanced markets like the US; for example, the electric utility company controls the air conditioners and electric vehicle home chargers in Texas and can turn the appliances off during peak load hours. A cruder version of a similar approach can be adopted in Pakistan to reduce peak demand and household energy costs.
Electricity and natural gas prices in Pakistan will increase in the coming years. The capacity payments for the new power generation projects will drive the electricity prices higher, while the increasing contribution of imported LNG will increase the gas prices. The inevitable rupee devaluation will also contribute to an increase in electricity and natural gas prices.
The energy situation in Pakistan is driving the economy down.
The impact of high pricing will be disproportionately more significant for low-income consumers in the country. Lower-income households will need government support to adapt to the changing energy landscape. According to the last Household Integrated Economic Survey in 2019, households spent seven per cent of their average income on energy — mainly electricity and gas. Lower- and middle-income households spent 8.5pc of their income on energy. Since that survey, increasing prices and stagnant income levels are expected to have increased energy expenditures by up to 10pc of household income.
Energy expenditures are around 5pc of household income in most developed and developing countries. The International Energy Agency (IEA) reports 2022 figures for the contribution of energy to average household expenditures: 5.5pc in Mexico, 5pc in Indonesia, 4.8pc in the UK, and around 3pc in the US and Canada. The high expenditure on energy by households in Pakistan should be seen in the context of energy poverty: our per capita energy consumption of only 3,895 kWh/capita/year is among the lowest in the world — one-tenth of Iran, the EU, or China, and almost half that of India.
The energy situation in Pakistan is driving the economy down and contributing to the prevalence of poverty.
Where do we go from here? The government must try to curtail demand to reduce new-generation requirements and other necessary sector reforms. Meanwhile, consumers must adapt to the new energy situation. Energy efficiency and demand-side management are the cheapest ways to reduce energy costs.
Households have a few options for managing their demand. These include solar home systems, energy-efficient appliances, intelligent energy management systems, and low-energy buildings. Appliance replacements and building envelope improvements (such as building insulation solutions) will be demand-driven rather than regulation-driven. The government should introduce the labelling of appliance energy-efficiency ratings and work towards increasing consumer awareness of energy efficiency improvements.
Solar home systems remain the best option to reduce energy costs. Consumers should consider solar PV systems for electricity generation and solar water heaters to reduce gas consumption. Solar water heaters can act as pre-heaters for conventional water heaters, while solar PV systems will supplement the grid electricity.
The current net-metering policy for grid-connected solar systems only applies to three-phase consumers, around 10pc of residential consumers. The remaining 90pc are single-phase consumers. Most single-phase consumers belong to middle- and low-income groups. A grid-interconnection policy for single-phase consumers is essential to enable them to install solar home systems.
The grid-interconnection scheme enables the consumers to inject the excess electricity produced by the solar system into the grid and adjust equivalent units against consumption. Under the current policy, the exported and imported units are netted off, and consumers are expected to be paid the off-peak tariff rate if they have unconsumed excess units.
The current policy needs to be revised to reflect the costs of using the grid as temporary storage. The policy must be changed for all the existing and new consumers. Grid interconnection for solar home systems should shift to gross metering (K-Electric in Karachi already uses gross metering), and the buy-back rate should be around four US cents (Rs12) — roughly the last solar tariff awarded by Nepra. The price should be based on the alternate option for the grid to procure solar power and correctly reflect the costs of using the grid as storage. Even with a lower buy-back price for solar home systems, installing solar electricity systems will still be an attractive investment for households.
However, solar does not reduce the conventional power demand requirement. Pakistan has a peculiar power demand curve. Since residential and commercial consumers drive the demand, the peak load on the grid is after sunset when the consumers turn on their air conditioning in the evening.
For example, in Karachi, the peak demand in the system is at 11 pm. This means that solar power does not help meet the peak demand, and the grid will still require other power generation capacity to meet the peak demand. Solar home systems will only help reduce costs for consumers.
Many upper-income households can afford solar installation, device replacements, and building improvements. Middle- and low-income families will find it challenging to make demand-side adjustments. Instead of investing in new power generation plants, policymakers should consider demand-side management measures and support low-income households.
Subsidising energy for all households is expensive and ineffective. Providing direct support to low-income households to adapt to future energy scenarios will be far more efficient.
The writer is a former member of the Planning Commission.
Published in Dawn, October 5th, 2024
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