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Peak shifting, tariff reforms critical to address energy sector challenges

January 27, 2025

Amir Saeed

Peak shifting and tariff reforms are crucial for addressing challenges in Pakistan's electricity sector, optimising energy demand and ensuring long-term sustainability.

The National Electric Power Regulatory Authority’s State of the Industry Report 2024 highlights critical challenges facing Pakistan's electricity sector, emphasising the need for innovative strategies to manage growing electricity demands. The report indicates that planning generation capacity around peak demand, while ensuring optimal utilisation of existing plants, is essential to avoid surplus capacity.

However, inefficiencies and a tariff policy that penalises higher consumption have suppressed demand, leading to idle capacity. This situation not only increases consumer-end tariffs due to capacity payments but also exacerbates circular debt issues, threatening the sector's sustainability.

To tackle these issues, Nepra underscores the importance of strategies like peak shifting, which redistributes electricity usage from peak to off-peak hours, and reduced tariffs for higher consumption, particularly targeting industrial and business sectors. These measures aim to stimulate electricity demand and encourage participation in a competitive market.

By promoting such reforms, Nepra seeks to balance supply and demand, reduce financial burdens on consumers, and ensure the long-term viability of Pakistan’s power sector while fulfilling its regulatory mandate. Talking to WealthPK, Afia Malik, an energy expert at Pakistan Institute of Development Economics (PIDE), highlighted that peak-load shifting manages electricity demand by moving consumption from peak to off-peak hours.

“Load shifting involves changing the time when electricity is used while keeping the total consumption the same. This adjustment is typically feasible when time-of-use tariffs are available. Implementing this strategy can lower operational costs by utilising reduced energy rates during off-peak hours, ultimately leading to overall savings on energy expenses.”

She further highlighted that it does not necessitate any new capital investment in technology or infrastructure. “By optimising the timing of energy use, businesses can improve their overall energy efficiency. However, this approach may disrupt normal operations or require changes to work schedules, which may not be feasible for all business activities or industrial processes.” On the contrary, Afia pointed out that peak shaving benefits businesses with high energy demand and expensive tariffs.

“It allows them to reduce their peak demand and achieve significant cost savings. Typically, peak shaving involves utilising on-site energy generation methods such as captive power plants on cheaper fuels, solar installations, or energy storage systems. During periods of peak demand, these systems activate to lessen the amount of energy drawn from the grid.”

“This strategy helps businesses avoid high costs associated with peak demand charges while also preventing contributing to grid overload without requiring substantial changes to operational schedules. However, implementing peak shaving does necessitate a significant capital investment in on-site generation or energy storage systems, along with regular maintenance,” the PIDE energy expert emphasised.

She added that high tariffs and unreliable supplies have led the industrial sector in Pakistan to invest in self-generating units, particularly gas-based captive power plants. “Now, industry is increasingly transitioning towards captive solar plants.” “In Pakistan, there is an excess of installed capacity, and consumption has declined over the last two years.

As a result, the initial impact on power grid management may not be significant, which could positively influence economic competitiveness,” she noted. However, she warned that higher consumption from reduced tariffs will lead to grid overloads and reliability issues, particularly in areas with outdated infrastructure. “Despite a surplus in generation capacity, the country has significant supply bottlenecks due to overloaded and obsolete transmission and distribution (T&D) systems.

The generation capacity expansion over the years has not been matched by equivalent expansion/upgradation in T&D infrastructure.” “While reduced tariffs will enhance the economic competitiveness of our businesses, particularly in the export-oriented sector, the reliability and availability of electricity are even more critical for productive sectors. Continuous electricity supply is essential; without it, industries may have to limit production or seek alternative energy sources,” she noted.

Afia also highlighted that a considerable portion of business electricity demand is met through self-generating units (captive power plants or captive solar). “The existing power infrastructure is insufficient to fulfill the energy needs currently satisfied by self-generation. Therefore, in addition to lower tariffs, more 11KV and 132KV grid stations, along with expansion/upgradation of T&D infrastructure, are necessary.”

“Additionally, greenhouse gas emissions are an increasing concern, making the shift to cleaner energy more critical. The European Union plans to introduce the Carbon Border Adjustment Mechanism (C-BAM) in 2026, further emphasising the need for this transition. For Pakistan’s industrial sector, moving towards green energy is essential for complying with global environmental regulations and effectively participating in the international market,” the PIDE energy expert underscored.’

She concluded that the world is moving towards sustainable energy systems. “Declining costs of green energy and battery storage systems present viable solutions to the country’s energy challenges (overreliance on fossil fuels, persistent power shortages, and inefficiencies within its grid infrastructure). It can enhance economic competitiveness by improving operational efficiency.”

Credit: INP-WealthPk