The anarchic nature of energy distribution has reached tipping point, with many countries across the globe deficient to the point of paralysis. Will events in Pakistan, Nigeria, Yemen and Japan serve as a wake-up call to the rest of the world?
Just as millions of people will ‘do their bit’ to save energy by switching off their lights during Earth Hour 2012, (March 31, 8.30-9.30 pm local time) the harsh reality for others across the planet will be power blackouts due to energy shortages – a reflection, in part, of oil prices remaining stubbornly high following supply interruptions resulting from the Libyan conflict in 2011 and ongoing tensions in the sensitive Straits of Hormuz, where the progressively disruptive Iran is threatening to shut down shipping lanes.
Against this backdrop, energy subsidies are being used by some states as an economic policy lever to pacify their masses by controlling inflation and protecting disposable incomes.Although this isn’t an issue in most of the rich oil producing states, it is becoming a major problem in places such as Nigeria, where national treasuries are coming under increasing pressure due to revenue shortfalls caused by endemic corruption. And for those states that are heavily reliant on energy imports, due to the relative lack of indigenous energy resources and/or poor infrastructure, the outlook is even bleaker.
In its 2011 World Energy Outlook, the IEA (International Energy Agency) estimated the worldwide cost of fuel subsidies for oil amounted to approximately $190bn in 2010, up from $120bn in 2009. It added that expenditure on all fossil fuel subsidies could rise to $660bn in 2020, from $409bn in 2010.
While the energy subsidies road may be paved with good intentions, the reality is that the richer portions of domestic populations often benefit disproportionately because wealthier households consume more fuel and access to subsidies is invariably not contingent upon income. Indeed, only eight percent of the $409bn spent on fossil fuel subsidies in 2010 went to the poorest 20 percent of the population, according to the IEA.
Good luck Nigeria
With food and energy expenditure taking up a larger proportion of income at lower levels of wealth, it doesn’t take rocket science to realise that removing subsidies will hit the poor much harder if the subsidies haven’t been targeted properly. Nigeria is a case in point. On New Year’s Day this year, President Goodluck Jonathan called for an end to fuel subsidies that had kept gasoline prices artificially low. Virtually overnight, the price of a litre of gasoline more than doubled to 141 naira ($0.86).
The Abuja government has long sought to deregulate the nation’s oil sector, claiming that subsidising oil consumption not only acts as a drain on the public purse, but also is unsustainable over the longer term. It adds that the move will save the treasury more than 1trn naira ($6.12bn) this year and provide scope for improving existing amenities and building much needed infrastructure. Though Nigeria produces around 2.4 million barrels of crude oil a day, roughly 70 percent of its petrol is imported, due to its domestic refineries being inoperative following years of neglect, resulting from corruption.
In a country where fuel subsidies had been in place for 40 years and where the average individual earns less than the price of a gallon of petrol each day, by some estimates, the response to Jonathan’s initiative was swift. Public transportation came to a standstill in some parts of the country while outbreaks of violence occurred in other areas. Factor in threats from Islamic sect Boko Haram – founded a decade ago – whose stated aim is to establish Sharia law across the whole country and the sense of national crisis in Nigeria is unlikely to diminish over the short to medium term at least.
Failure to prosper
In Pakistan, the sense of national crisis is even more palpable, given the deteriorating political landscape that could yet see the military re-enter the political arena after the firing of the country’s defence secretary in January, following a dispute over a memo. The unsigned memo, sent to Washington, sought US help in reining in the power of the military in exchange for favourable security policies – this in turn undermining an already uneasy relationship between the civilian government and the country’s military leadership.
As the political crisis plays out, the country faces a seemingly intractable energy crisis where production cannot be sufficiently increased to meet growing demand.
A government initiative in April 2010, aimed at alleviating chronic energy shortages – including cutting electricity to government offices by 50 percent, banning air conditioners from being operated before 11 am and compelling stores to close early – eventually failed.
State Bank of Pakistan (Pakistan’s Central Bank) noted in its 2011 annual report that the nation’s growth potential appeared to have hit a ceiling, due to insufficient energy supplies. While energy demand had increased significantly during the previous ten years, supply had not matched this growth due to the failure to set up viable new power projects to augment supply, failure to increase natural gas, crude oil and coal exploration, failure to build infrastructure for energy imports and failure to incentivise the development of renewable energy sources.
It added: “While failure to articulate a consistent energy policy has affected the country’s economic performance over an extended period, the recent resurgence of circular debt has presented new challenges.”
Going round in circles
Circular debt – essentially a situation where A owes B, who owes C, who in turn owes A – is particularly relevant in the case of Pakistan. That it has staged resurgence in recent months is due in no small part to the non-payment of electricity subsidies by the government, default on payments by energy consumers, and the build-up of payables and receivables within the energy sector itself.
In this year’s budget the government set a target of providing Rs50bn worth of subsidies to power sector consumers. This is now forecast to increase to Rs350bn.
To address the underlying problem the government is considering adopting the Iranian model of restricting fuel and energy subsidies under which market prices are recovered from consumers who are then compensated through a cash grant. Officials argue that since the original tariff subsidy was untargeted, almost 60 percent of the Rs350bn estimated for the current year would go to the domestic sector, where the richest 20 percent of consumers would enjoy about 70 percent of the subsidy.
In addition to the circular debt problem, the nation’s natural gas shortage intensified during 2011, severely impacting power generation as well as overall industrial production (especially of textiles and fertilisers). The Central Bank estimates the gas supply shortfall ranged from 10 to 15 percent of demand. Domestic crude oil production similarly fell short of demand, necessitating imports totalling $12.3bn in the 2011 fiscal year. Nearly 70 percent of domestic crude oil demand is met via imports.
Pakistan finds itself in a vicious circle of exploding population growth prompting higher energy demand, in turn leading to energy resources becoming too expensive for many industries as power supplies prove insufficient. Given the nation witnesses a daily power generation shortfall of 5,000 megawatts needed to meet demand, eight-hour blackouts in urban areas (14 hours in rural ones) are a feature of the economic landscape.
Keeping up with the Saudis
Looking ahead, underground coal gasification (converting coal to gas while still in the coal seam, through burning it off and then bringing the gas to the surface), holds some promise, as does the recent fast-tracking of a decision to bring in natural gas from Iran. But as the Central Bank warns: “…energy requirements shall continue to increase if economic growth is to be sustained. Urgent efforts are being undertaken to set up infrastructure for the import of natural gas as well as generation of electricity. However, the public sector’s ability to finance and execute projects is constrained by low tax revenues, creating a gap which only participation from the private sector and international institutions can bridge.’’
In Tajikistan, meanwhile, the long-standing focus has been on improving the country’s creaking power transmission infrastructure, much of which dates back to the Soviet era. Almost all of the nation’s electricity is generated from hydropower, leaving it with high summer surpluses, but significant shortfalls in winter. In August 2010 the Asian Development Bank (ADB) extended a $122m facility to expand and modernise the nation’s electricity transmission system, which will eventually help boost energy trading with neighbouring countries to meet winter shortages.
The facility was also intended to be used to launch a series of reforms, including restructuring Barki Tojik, the state-owned national utility company, and to make operational improvements across the power sector to address issues such as poor planning and maintenance, low service quality, and weak financial management.
Elsewhere, growing political chaos in Yemen, after almost a year of protests demanding the end of President Ali Abdullah Saleh’s 33-year rule, has since created a power vacuum and brought the country to a virtual standstill and close to the point of civil war.
To compound the problem, Somali pirates have taken advantage of the chaos by ramping up attacks and making Yemeni waters off-limits for several international trading companies. In June 2011 the government was forced to import three million barrels of Saudi-donated crude oil to run its Aden refinery after the main pipeline had been shut, following blasts that subsequently unleashed a fuel shortage which saw people getting killed at dry gas stations.
While the pipeline was eventually repaired, the refinery, which produces mainly for the domestic market, was shut down again in October after consecutive blasts. Saudi officials have since indicated the Kingdom will donate a further 500,000 tonnes to its poverty-stricken neighbour. Under the deal, state oil giant Saudi Aramco would buy oil products from the market, but would ask its supplier to discharge the cargo in Yemen instead of Saudi ports. At best, this initiative will only serve as a stop gap measure.
The Japanese response
Where the political will exists however, energy crises can be resolved, as seen in Japan after the massive earthquake in March 2011. The quake and subsequent accident at the Fukushima nuclear power plant proved to be a major game changer domestically. Aside from embarking upon a major national energy saving exercise (Setsuden) as an immediate response to the quake, the government of then Prime Minister Naoto Kan was, by August, pushing for 20 percent of electricity to be generated from alternative energy sources, such as solar and wind, as a longer term objective. And for good reason, given the destruction of the Fukushima plant led to the shut down of all but 15 of Japan’s 54 nuclear reactors.
In addition, utilities were to be mandated, by legislation, to buy electricity generated from these sources at prices set by the government. Major companies such as Toshiba Corp and Mitsubishi Electric Corp have already announced a collaboration to promote next generation energy-saving housing, using solar panels, as well as home appliances linked to a computer network to save power.
Power-saving targets set during the peak summer season – to avoid a wider collapse of power grids – saw major power users asked to cut consumption by 25 percent (20 percent for small industrial users, 15-20 percent for households).
Offices and private households turned lights off and thermostats up, to a minimum 27C, while office workers moved their shifts to early mornings and weekends to avoid using the electricity consumed at nightfall. Department stores and subway stations turned off their air conditioning units and citizens were encouraged to keep computer usage at a minimum. The initiative proved successful to the point that restrictions on power usage were lifted in September, weeks ahead of schedule.
Tokyo, this time round, had managed to dodge a bullet in terms of avoiding blackouts, as peak use fell below 2010 levels. Clearly it had served as a wake-up call.
Unsurprisingly, public support for renewable energy solutions in a non-oil producing nation such as Japan – and where nuclear power generates over 30 percent of the nation’s energy needs – has moved up the national agenda, not least because the Fukishima accident demonstrated that blackouts are a very real possibility should a similar magnitude quake occur in the future. If the post-quake response in Japan has demonstrated national political will to reserve energy supplies, its absence in Nigeria and Pakistan, at present, means the road ahead may prove to be a long hard slog.