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Electricity trade prospects among Pakistan and Afghanistan

As the mountain of Pakistan’s circular debt rises due to liquidity challenges and cash shortfall across the energy value chain and consequent non-payment to the power generators and fuel suppliers, the Government of Pakistan has been at its wit’s end to find a solution to the burgeoning problem. The sustained slow growth rate of electricity demand in the country, together with the rapid commissioning of new power plants (for example, the recent coming on line of K-2 nuclear plant and more to follow) implies that the capacity payment obligations that must be made regardless of electricity off-take will further rise in the coming years. These capacity payments of PKR642 billion in FY2019 are expected to rise to PKR 1455 billion by 2023 (see Figure-1). Due to several constraints, the only solution that the government can come up with is to continuously keep raising the electricity tariffs. The average consumer tariff has increased by nearly 47% since early 2019 and is set to increase further by another 25% by end of 2021 as per recently concluded agreement with the IMF and multilateral development partners.

Figure-1: Pakistan’s Energy Price and Capacity Price Payments

The Pakistani public is already strongly voicing its dislike of the rapid rate increases and one wonders how long it will take for this building lava of anger to burst out. The power planners must be wishing that there was an export outlet for Pakistan’s surplus power production so that the payments that have to be made for idle generation capacity can be avoided. Exports could partially alleviate the financial burden due to capacity payments, but our national grid is not connected to any of our neighbours’ grid systems. It appears that by making an investment in a transmission link from Pakistan to Afghanistan it may be possible to export at least some of the available power surplus to that country. This will spread the fixed capacity payments across larger number of units sold and hence reduce the capacity payments, and consequently, lead to a reduction in the Pakistani consumers’ tariffs.

Afghanistan depends on electricity imports to meet nearly 85% of its power needs. To do this, it pays at least $280 million annually for the import of 670 megawatts of power from Iran, Uzbekistan, Tajikistan and Turkmenistan. Ironically, Pakistan is Afghanistan’s only neighbour with which it does not have import arrangement of electricity. With a vast land area of 652,000 km2 (roughly 75% of Pakistan’s total area) and its 34 provinces, mostly remote, Afghanistan’s existing electricity import arrangements are in ‘islands’ mode – i.e., import from each country is limited to the network in a specific region (see Figure-2). This arrangement is of necessity as, unlike most countries, Afghanistan does not have a single integrated national grid. Even if there were a single national grid, synchronizing it with the transmission systems of 4 (four) countries would be a technically complex and expensive affair for system operators of all the countries.

Figure-2: Grid System of Afghanistan having 7 (Seven) ‘Islands’

Due to cold and harsh winters, the winter demand of Afghanistan is 150-180 percent of the summer consumption. Among the various fragmented power networks in Afghanistan, the North East Power System (NEPS), which covers Kabul, is the largest in terms of total demand. Out of the 450 megawatts of power that Afghanistan imports from Uzbekistan, 300 megawatts is drawn for meeting Kabul’s demand alone. Power outages and load shedding have occurred in Kabul city as well as in at least 12 provinces in Afghanistan this year due to a technical failure at Uzbekistani power plants. This happened right in the middle of winter season, just when the country’s demand is at its annual peak load.

Such system outages ought to make the Government of Afghanistan consider a further diversification of its supply sources of power imports as well as develop indigenous power generation options to encourage competition. Afghanistan has somewhat limited resources and lack of private participation inhibits the development of a robust domestic electricity generation infrastructure although the first gas-based IPP plant, which was recently launched, is expected to lead to further such investments. Afghanistan’s efforts to develop renewable energy sources (wind and solar) both in the public and private sectors are gaining speed but, at the same time, it must start thinking about ways to overcome the intermittency factor, which is associated with the renewable sources of energy. For this reason, it would be a part of prudent planning by Afghanistan to explore the possibility of imports from Pakistan.

Pakistan, with its diverse mix of power plants, is in a position to contribute towards Afghanistan’s efforts to overcome its seasonal shortages and time-of-day deficits on a sustainable basis (Pakistan’s current power generation mix is balanced and is 32% hydropower based, 32% gas based, 21% coal based, 10% nuclear and remaining is renewable). It is to be noted that due to a harsher winter in Kabul and lack of other space heating and water heating fuels viz. natural gas, it relies on electric heating. Pakistan, on the other hand, has surplus power in winters which it can sell to Afghanistan. Winter demand in Pakistan is nearly 35% of the summer peak which is converse to the demand pattern in Kabul and hence offers a good supply-demand match between the two countries. A 2020 Lahore University of Management (LUMS) study has determined that the upcoming nuclear and coal plants are more than sufficient to cover Pakistan’s base-load demand. The author is, therefore, of the view that a part of the emerging power surplus in Pakistan can be directed towards export to Afghanistan on a sustained basis.

The feasibility study of the presently under-construction CASA-1000 transmission line from Kyrgyzstan-Tajikistan to Afghanistan-Pakistan considered two options for offtake of electricity to meet Afghanistan’s need. These are: (i) Build a DC-to-AC converter station in Kabul to offtake 300 MW power for meeting Kabul’s need; and (ii) Not build the converter station in Kabul but instead build a back-feed AC line to Kabul from the final terminal point of the DC line at Nowshera. Now that the first option has been foreclosed and the converter station at Kabul is no longer being built under the CASA project, the second option – delivering 300 MW power from Nowshera grid station to Kabul and Jalalabad through a double-circuit transmission line – can be initiated. The link from Nowshera to Kabul through Jalalabad can be a highly viable proposition as this corridor constitutes one of Afghanistan’s major regions of electricity demand (see Figure-3).

Figure-3: The CASA-1000 Transmission Line Route and Proposed Nowshera-Kabul 220 KV Line

The 270 km long, 220 kV double circuit AC line from Nowshera to Kabul via Jalalabad is estimated to cost approximately US$ 105 million (+ 10%). Of this, US$ 70 million will be for building the infrastructure on the Afghan side of border and US$ 35 million is the requirement for the segment inside the Pakistani border. It is expected that the leading MDBs (Multi-lateral Development Banks) will be interested in participating in this regional project. The possibility to build the transmission line under a broad PPP (Public-Private-Partnership) arrangement in which the private sector partners in both countries as well as the two governments are involved is also worth exploring

The technical aspects of the project are relatively less difficult to agree on compared to the arduous path that will have be navigated to reach an agreement on the terms of electricity trade that are equitable for both countries. Firstly, as the agreement must extend several years into the future, a reliable assessment of expected surplus in the Pakistani system and shortage on the Afghan side will need to be made. Also, Pakistan will need to provide comfort that the electricity exports will continue to be available on a long-term, sustainable basis, while Afghanistan must demonstrate the ability to recover the cost from its consumers and pay for the purchased electricity. The MDBs under various regional cooperation frameworks can play an instrumental role in moving these negotiations forward Just as they did in the case of CASA-1000 project.

It is to be noted that Afghanistan imports from its neighbouring countries at rates that are far below the average production cost in the Pakistani system (which is currently 10 US cents per unit although it is expected to come down in the coming years). Therefore, it will start any negotiations with Pakistan from the benchmark of a far lower tariff similar to what it pays to import power from other neighbouring countries. For Pakistan, rather than not dispatch power at all, it maybe wise to sell at a price that can offset at least part of the capacity charges that it has to pay regardless of whether it uses the output or not. Setting the power export tariff is indeed a complex exercise and would require a rigorous analysis and a serious commitment of both the parties through conducting honest negotiations.

There is a renewed interest in normalization and opening of trade routes with our neighbours but little headway is seen on the ground in terms of tangible initiatives. The time has come to walk the talk and to enter into a dialog for making arrangements for trade links and electricity trade must figure prominently in forging forward a new business relationship. To do this, engagements at the technical level between the two countries should begin at the earliest as there is a long distance to be covered before the power trade contract can be successfully concluded.

Given the past experience of developing the multi-country CASA-1000 project (in which Afghanistan, Kyrgyz Republic, Pakistan and Tajikistan are partners), the process of arriving at an agreement for the interconnection can take at least a few years. Therefore, a beginning has to be made on an urgent basis because the earlier the transmission link between the two countries is successfully commissioned the sooner its benefits will start accruing to the two neighbouring countries.

The author is the former Director of Energy at Islamic Development Bank. He successfully steered the financial close of the US$ 1.2 billion CASA-1000 Project which is presently under construction.

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