Review of literature: Energy Reforms in Developing Countries

The implementation of power sector reforms in developing countries raises questions on

regulatory capability of the developing countries and insufficient regulatory control to
manage these reforms. The development of competitive power market and private investment
in the power sector of developing countries is based on the effective role of independent
regulatory agencies and government which paly active role in ensuring the liberalization and
privatization of the market. The presence of independent regulatory bodies in Asian countries
would develop their utility industries to effectively survive the crisis. It is suggested that the
establishment of multi-sector regulatory within a country would help in inculcating desired
skills to the regulatory officials. The implementation of multi-sector regulation in developed
countries revealed that it gave birth to the problems of political trust and difficult integration.
The exploratory research explained that the informal information exchanges and resource
pooling is very productive and fruitful in streamlining the role of national regulators. This
resource pooling and informal information exchange would boost national trade, ensure
market and network integration and enhance market competition. (Stern, 2000)
Case study analysis and research evidence from developing and transition countries revealed
that promoting market competition in the power sector would not provide desired and
meaningful results unless the legal framework, regulatory agencies and private sector of the
country is well established. The importance of power generation is as important as effective
management of distribution and transmission network in the efficient supply of power. The
uniform application of reform model would not result in improved performance of power
sector unless it should be tailored to address the country based needs and is coherent with the
social and institutional capacity of the country. the power sector reforms should be adapted to
resolve the country specific problems. Although private investment adds efficiency to the
power sector but development public based infrastructure of the power sector is crucial for

controlled management, market efficiency and cost recovery. The implementation of effective
power policies and legal framework would not ensure the success of power sector reform if
the regulatory agencies of the country so not have political independence, professional
expertise and financial capacity to implement regulation in favor of public interest. (Williams
& Ghanadan, Electricity reform in developing and transition countries: A reappraisal, 2006)
Research evidence from developing countries revealed that fuel subsidies are allocated to
large group of people. These subsidies are not very helpful for the financial performance of
the power generating, transmitting and distributing companies. Decreased energy prices by
allocating power subsidies would detriment the financial performance of the federal
institutions in the developing countries. The poor financial performance of important federal
institutions in the power sector would hamper its ability to meet the ever increasing power
demand of the economy. The depriving financial performance of the federal institutions also
proscribe foreign and private investors from investing and developing the power sector in the
developing countries. These problems in the energy sector led to decreased power supply,
increasing power demand, poor power transmission system, underdeveloped distribution
networks and unstable financial situation of important institutions in the economy.
(Nagayama, Electric power sector reform liberalization models and electric power prices in
developing countries: An empirical analysis using international panel data, 2009)
To overcome these power infrastructure and efficiency problems it is not enough to enhance
the economic efficiency and to develop institutional arrangement. In order to ensure the
continuous supply of electricity it is crucial to encourage private investments, the prices of
the power should truly reflect the cost incurred to generate, transmit and distribute the power
and eliminate poverty from the economy. The role of government and institutions is very
significant in accomplishing these power development factors. It involves the clear
identification of roles, responsibilities, authority by government, institutions and market

(Nagayama, Electric power sector reform liberalization models and electric power prices in
developing countries: An empirical analysis using international panel data, 2009). The
analysis of structure and possession of power generating resources influence the process of
structural reforms in the country. It is difficult to allocate and divide power cost from
different capital intensive power plants like nuclear and hydroelectric power plants. The
process of structural reform in the power sector becomes highly critical because of these cost
distribution issues. Moreover, countries with significant oil reserves avoid structural reforms
as power sector of these countries is less dependent on hydroelectric power. (Weinmann &
Bunn, 2004)
Research evidence from developed countries unleashed that reform process in the power
sector of developed countries like UK and USA is to introduce competition and overpower
the monopoly power in the power sector (Newbery & Green, Regulation, public ownership
and privatization of the English electricity industry, 1996). On the other hand, the driving
force behind the structural reforms in the power sector of developing countries is entirely
different from developed countries which in turn produces different reform results. The
process of introducing competitive power market varies from nation to nation and depends on
prior market conditions, prevailing policy and regulatory framework and short term and long
term outcomes. The process of developing and restructuring competitive wholesale and retail
market is very challenging process for most of countries (Joskow, 2006). Regulators and
government play highly significant role in introducing the competitive power markets as they
possess the power and authority to regulate and monitor independent power producers (IPPS)
in electric supply industry. (Newbery, Regulation and competition policy: longer-term
boundaries, 2004)
The technical, financial inefficiency and resource constraints in the developing countries have
made the process of power sector reforms and liberalization highly challenging for policy

makers and regulators. The conservative method of enhancing the financial performance of
power sector institutes by recovering cost incurred have deteriorated the process of power
sector reforms (Williams & Ghanadan, Electricity reform in developing and transition
countries: A reappraisal, 2006). The Indian power market sector has undertaken structural
reforms to develop the competitive market system in the power sector. To encourage private
investors in augmenting the power generation capacity negotiated power purchase
agreements were commenced which lead to no-so pleasant situations. The installation of preemptive load management system has facilitated in stabilizing the grid frequency and in
ensuring the presence of disciplined grids which produces positive results for commercial
users in inter-utility power exchanges. Despite of these initiatives, limited transmission
capacity, regulations governing the open access, and liquidity are some of the challenges
which affected the process of power sector reforms in India. Moreover, uncertain power
prices, capital constraint are some of the major challenges which hinder the process of
meeting the market demand by capitalizing on untapped power generation capacity. (Singh,
Towards a competitive market for electricity and consumer choice in the Indian power sector,
2010)

Liberalization Model:
The analysis of literature unleashed that rising level of power prices trigger the development
and establishment of liberalization models in the economy. However, implementation of
liberalization models does not lessen power prices instead it results in increasing the prices of
electricity. The research evidence suggested that rise in electricity prices in developing
countries limited the accessibility of power to the poor community of the society. the
implementation of liberalization models in the economy is completed in four stages. First of
all is Monopoly Model which is considered as stage before competition or no competition
which is followed by Single Buyer Model. In Single Buyer Model, power generation,

transmission and distribution is separated or disintegrated to introduce long term competitive

bid between the operating parties. The next stage is Wholesale Market model in which whole
sale market of the power sector is liberalized. The final stage is Retail market model in which
wholesale and retail power market is liberalized. (Nagayama, Electric power sector reform
liberalization models and electric power prices in developing countries: An empirical analysis
using international panel data, 2009)

Factors Affecting The Competitive Wholesale Market in Developing

Countries :
Power prices, transmission prices and access to transmission network are major factors which
force the federal and regulatory institutes to cultivate competition in the power sector.
Effective and accurate pricing strategy designed for transmission would enhance the
efficiency of operation, recover the cost incurred, provide access to capital investments and
properly allocate cost to the cost heads (Lai, 2001). Literature evidence suggested that
facilitating open access to transmission network should be accompanies by fair transmission
pricing which is effective strategy to recover the cost and investment. Moreover, transmission
pricing would also ensure efficient and economic transmission signals. All these features of
transmission pricing and open access influence the development of competitive whole sale
power market. Disturbance and disruption in the transmission capacity would affect the
market competition and would transfer power to some transmitting companies serving the far
flung and scarce regions. The efficient pricing of power transmission is also affected by nontradability of transmission rights. These dependencies in the developing countries discourage
the development and establishment of competitive wholesale power market. (Singh, Towards
a competitive market for electricity and consumer choice in the Indian power sector, 2010)

In order to develop competitive wholesale market, it is fundamental to ensure the presence of

liberalized fuel markets in the region. Inability to develop liberalized fuel markets would
hinder in attracting further investment for power generation and retain market power to
limited companies having financial resources and capital for power generation. The
establishment of liberalized fuel markets would ensure the establishment of long term fuel
contracts and provide the facility of price hedging. Liberalized fuel markets ensure the
efficient and economic power generation to meet the increasing market demand for
electricity. The burden from public mining companies should be lifted by allocating blocks of
coal mines and encourage new companies to invest in fuel extraction from the natural
reserves. It would divide the market power, ensure the price flexibility and certify the
economic fuel price in the power sector. Besides coal, natural gas could also be deployed as a
fuel for power generation but limited supply of natural gas is a major factor obstructing the
efficient process of power generation. Iran-Pakistan-India gas pipeline project is subjected to
numerous geopolitical concerns and pricing issues. Abundant supply of natural gas facilitated
by this project would be very efficient and economical source of power which would enable
the government and federal institutes to meet the increasing power demand. (Singh, the
economics of iran-pakistan-india Natural Gas pipeline, 2008)
The establishment of competitive whole sale power market also demands systematic market
structure and efficient governance. The prime purpose of developing competitive and
liberalized market is to ensure the sufficient power supply and overcome the technical and
financial shortcomings which hinder the effective process of power generation, transmission
and distribution. The competitive market should possess efficient market design with high
liquidity, efficiency and complete market structure (Hunt, 2002). Limited supply and
availability of power raises issues of liquidity and delivery based contracts discourage the
establishment of competitive wholesale power market. Regulators face the problem of

ensuring market liquidity in exchange related contracts. Active role of government and
strategic planning governed and monitored by regulators would enhance the market liquidity
which would facilitate in efficient price discovery, operational efficiency, flexibility in the use
of utilities and systematic establishment of power generating plants. The competitive market
should be designed to maintain a balance between all the market forces which inhibit power
accumulation and market efficiency. On the other hand, in developed power markets like
European power market focuses on market concentration, and invest in ensuring the security
of supply which helps in developing regional power markets. (Jamasb & Pollitt, 2005)
Subjective implementation and development of competitive market principles in the
developing economies is not possible because of unique regional challenges and market
deviations. The prevailing market structure which represent patterns of ownership, supply
industry and its characteristics, market forces, socio-economic situation and allocation of
power subsidies. Research evidence from Indian market unleashed that promotion of retail
competition would give birth to numerous products and services rather than reducing the
power prices. The establishment of competitive wholesale market would also not limit the
cost for power generation by establishing highly expensive power plants. Moreover, market
forces and dynamics cannot develop the structure of power market in developing countries. It
is difficult to implement the competitive market structure of develop countries into
developing countries because of unique and distinct features. (Singh, Towards a competitive
market for electricity and consumer choice in the Indian power sector, 2010)
Inefficient governance mechanism, weak regulatory policies and ineffective monitoring of
market would lead to power price manipulation. The failure in the system of liberalized or
competitive market is mostly because of failed monitoring, regulatory and governance
mechanism in the economy (Green, 2003). Disclosure of information and complete
transparency is extremely necessary to inhibit the development of market power in the power

sector. After successful establishment of wholesale competitive market, consumers would

reap the benefits of low power tariffs by extending the market liberalization to allow retail
competition. The allocation of multiple distribution parties by giving licenses to numerous
distributors along with multiple power suppliers would ensure the economic develop of
power at reasonable and economic prices to the end consumers. Market demand for power is
very important and crucial element in designing competitive power market which would limit
the market power. Increase in power prices would reduce the consumer demand for electricity
and demand is very important factor influencing prices in competitive market. promoting
competition in retail power market in the form of time variant retail pricing would provide
efficient results in power market. (Borenstein & Holland, 2003)
The prime purpose of implementation of liberalization models in the developing countries is
to stimulate market competition and enhance power sector efficiency but it ends up by
increasing the power supply to ensure the rural electrification and by supporting the poor
community. The success of liberalization models in developing countries is limited because
of increasing power generation cost and government reluctance to pass this cost on to the
consumers because of political concerns. The development of privatization and private
utilities would not help in resolving power sector problems in developing countries unless the
government should shift towards low cost power generation. (Nagayama, Electric power
sector reform liberalization models and electric power prices in developing countries: An
empirical analysis using international panel data, 2009)

Research Evidence from Nigeria:

Nigeria has also experienced extreme power shortages because of disappointing performance
of power sector and institutional factors which hinder the sustainable development and
economic growth in the country. It was attributed to archaic equipment, insufficient power

generation and transmission capacities, increasing number of technical and commercial losses
in the transmission network. Absence of proper governance mechanism, institutional
negligence, mismanagement of regulatory authorities and deficiency of capital investments
further enhanced the challenges and problems prevalent in the power sector. Economic
growth and development in the country augmented the demand for power which lead to the
situation of power crisis. Insufficient power supply forced nearly 62% of the population to
depend on wood fuel in order to satisfy their energy needs. (Babanyara & Saleh, 2010)
Lack of governance forced majority of power plants in Nigeria in deteriorating condition.
Thermal power plants were subjected to decay because of absence of gas supply and proper
maintenance. The equipment deployed in the infrastructure for transmission and distribution
is outdated and insufficient to meet the increasing power demand of the market (Onakoya,
Onakoya, Jimi-Salami, & Odedairo, 2013). Most of consumers having power supply from
power grid are not metered while those consumers which are metered do not pay their bills. It
hampers private and foreign investment to develop and modernize the power infrastructure.
The power sector of Nigeria is facing extreme challenges because of unethical business
practices in awarding contracts and monitoring of projects. Stakeholder meetings were
organized to resolve the governance issues and enhance the speed of power plant projects but
do not result in productive outcomes. Three years power plant projects were extended to nine
years because of lack of planning and inefficiency of government agencies. These adverse
condition of the power sector makes it difficult for the country to economically develop and
progress. (Usman, Abbasoglu, Ersoy, & Fahrioglu, 2015)
Manufacturing industry of the Nigeria is bearing huge losses because of power shortages and
poor infrastructure supply which has deteriorated the financial performance of the
manufacturing companies as well as the whole economy. Report of the infrastructure
expenditures unleashed that 9% of the variable cost is devoted to infrastructure development

and half of this represent electric power (Lee & Anas, 1992). The economic cost of power
failure is very drastic for the manufacturing sector of the country. A huge amount of
investment is devoted to arrange backup system which would support the industry in case of
power shortages. The cost of this backup system is almost 3 time more than the cost of power
supplied by federal institutes. Small manufacturing industries could not cope with such a
huge cost of backup system which force them to decreased production level and poor
performance. it is estimated that nearly 20-30% of the initial investment of the companies in
manufacturing industry is used for purchasing equipment or facilities which would ensure the
reliable supply of electricity for the processing and successful operations of the company. It
impacts the competitive position and cost competitiveness of the manufacturing companies.
(Adenikinju, 2003)
With the establishment of liberalization in the power sector Federal institutions and
government played their role in regulating and designing policies which would inculcate
transparency and accountability in the power sector. The issuance of power contracts based
on performance and efficiency which would efficiently perform their responsibilities. All the
equipment in the power generation process and transmission network was modified and
replaced with advanced technological equipment. Rehabilitation of existing power plants
with the involvement of private companies and investors would enhance the powe-r
generation capacity of the country. The problem of natural gas shortages disrupted the power
generation from thermal power generating plants. The role of government and regulatory
authorities should be very active in formulating policies which overcome these gas shortages
and ensure continuous power generation from thermal power plants. Nigeria undertook
regional integration which facilitated in sustainable development of the economy. It helped in
capitalizing on the abundant renewable resources of the neighboring regions.
Abbasoglu, Ersoy, & Fahrioglu, 2015)

(Usman,

It is also recommended that to enhance the power generation capacity of the country to
ensure sustainable development in the country the sources of power generation should be
diversified and involve renewable sources of energy like biomass, hydro, solar and wind
energy. The comprehensive economic viability of these renewable resources and mapping of
these resource potential would facilitate in increasing the energy supply for the country. In
order to overcome transmission and distribution losses in technical and commercial sector,
there should be implementation of effective metering system. It would prevent the financial
losses and improve the financial condition and performance of the power sector. The
establishment of electric cooperative societies and electrical workshop would repair the
damaged electrical equipment and generate employment opportunities for trained members of
the society (Kamalapur & Udaykumar, 2012). Efficient protective measures and strict
implementation of designed policies is crucial to survive the situation of power crisis.
Improved and long term planning in power generation and transmission is the need of the
hour and to resolve the increasing problem of demand and supply gap in electricity.
Systematic and comprehensive procedures should be implemented to ensure sustainable
development in Nigeria. (Usman, Abbasoglu, Ersoy, & Fahrioglu, 2015)

Research Evidence from India:

Being a developing country, power sector of India is facing certain challenges which is
hampering the sustainable development and economic growth in the country. To overcome
the situation of power crisis, India has initiated the wave of power reform to liberalize the
power sector and implement comprehensive legal framework in the government to regulate
and monitor the power industry. The responsibility of power sector in India is shared by states
and federal government. Hence, the political situation of the country largely impacts the
policy making, law enforcement and decision making process. In a way complicated political
scenario of the country hampers the process of reform in the power sector. The state level

authority allocated through power reform could not provide meaningful results because of the
problems in market design and management issues. (Bhattacharyya, The Electricity Act 2003:
will it transform the Indian power sector?, 2005)
Indian government and regulatory authorities attempt to introduce competition in the power
sector by inviting private investors. Legislative reforms are undertaken to promote
competition in the market and to implement this reform Electricity Act 2003 has been passed.
It would make the power generation as non-licensed activity which is the amendment of
electricity act 1998. The companies responsible for power generation would sell the electric
power to licensed parties or may directly distribute electricity. The power producers willing
to sale directly would pay surcharge to the government which would recompense the loss of
regulatory bodies but it negatively affects the market competition (Sankar, 2004). The
electricity act of 2003 also allowed the development of cooperative societies which would
work for the establishment of captive power plants. The establishment of captive power
plants would remove the cross subsidizing consumers as this act frees captive power plants
from regulatory surcharges. This cross subsidy would be diverted to distribution companies.
These captive plants van benefit from economies of scale, defined technical policy provided
by regulatory bodies which would affect the stability of the system, grid management and
energy accounting. Moreover, power transmission is only allowed to licensed parties which is
monitored and regulatory by federal and regulatory authorities and separated the transmission
of power from power generation. The legislative framework presented by the Electricity Act
2003 would result in providing an effective system with large investment opportunities and
strict implementation of subsidy and flexible power tariffs. The separation of tariffs in terms
of functionality would pressurize regulatory authorities to remove cross subsidy.
(Bhattacharyya, The Electricity Act 2003: will it transform the Indian power sector?, 2005)

It was expected that the implementation of power reform would revolutionize the power
sector of India and facilitate in sustainable development of the country. However, it failed to
achieve desired market liberalization and privatization in the power sector. The power reform
model implemented in the form of Electricity Act 2003 failed to provide desired economic,
social, political and financial results. Political instability affected process of implementing
power reforms and failed to privatize the national distribution function. Fragmented political
base and absence of dominant and long term ruling party lead to political instability.
Conflicting interest of political parties limited the effectiveness of power reform in the
economy. Moreover, depriving financial performance of the companies and subsidy pressure
hampered the process of economic development and economic growth. The Electricity Act
2003 failed to impose tariffs and to limit the demand and supply gap because of power
shortage. The ultimate objective of reform which was enhancing access level of power to the
consumers and augmenting power generation through captive power plants was not
rationalized because of political uncertainty and different market characteristics. The reform
policy in case of power sector should be revisited and changed according to the socioeconomic and political situation to reap the desired benefits. (Bhattacharyya, Sustainability of
power sector reform in India: what does recent experience suggest?, 2007)
Electricity tariff structure is used as base for implementing reforms by policy markers but
challenging political situation, market characteristics have hindered in the process of
implementing pricing reform in the economy. The power sector of the India is subjected to
state and federal politics which prevent market based power pricing to be implemented in the
country. The distribution reforms executed in every state are still inefficient and ineffective to
realize the desired results. Power theft is another major challenge which is affecting the
financial performance of the power generation, transmission and distribution companies. the
state level problems of rapidly increasing power theft, corruption, opportunistic behavior of

political parties and artificial decrease in power prices has stagnated the power improvement
initiatives. Extreme power shortages have forced the industrial consumers to depart from
state provided power system to self-developed on-site power generation system. on site
power generation would ensure the consistent and reliable supply of power to run the
industry. (Joseph, 2010)
The establishment of captive power plants developed dual track economy in the country
which include state-run and market-run power plants. The purpose of this initiative was to
attract private investors in the power market but political interference at state level have
limited the effectiveness of captive power plants. The wave of independent regulatory bodies
is developing in the power sector which is implemented in India power sector as well.
Regulatory agencies in the power sector of India have embedded interests which demand to
formulate and implement revolutionary decision which would support development and
change in the power sector. The policy should ensure high political reflectivity, scrutinized
system of power transmission to the end consumers, open access level, promising power
development institutes and regulatory agencies. Successful implementation of these power
reforms in India and other developing countries would generate fruitful results for the
economy. The prime purpose of these regulations is to de-politicize the power sector and to
devolve the legal power and authority of regulatory agencies for efficient management and
governance mechanism. (Dubash & Rao, 2008)

Research evidence from Argentina:

Argentina is the first developing country which has successfully implemented the power
sector reforms and policies which would promote liberalization and privatization of utilities
in the economy. The development policies of Washington Consensus are very popular
globally which facilitate the inculcation of liberalization, fiscal austerity and privatization in

the economy to overcome the issues of inflation and demand-supply gap prevalent in the
developing countries (Birdsall & Nellis, 2003). The power sector of Argentina was
restructured effectively by vertically disintegrating the three important elements of power
sector which are power generation, transmission and distribution. The market for power
generation was transformed into competitive market while the markets for power
transmission and distribution were transformed to regulated monopolies. The infrastructure of
the companies in the power sector was redesigned to make the power theft challenging and
difficult for the consumers (Bouille, Dubrovsky, & Maurer, 2002). Privatization of the power
sector also controlled the problem of technical losses in the transmission network. Low
income consumers were having illegal power connections in the state run power system. To
formalize these illegal consumers, four years contract was signed by the private distributors
and government which ensures the installation of 10,000 new meter connections within a
month. (Delfino & Casarin, 2001)
The power sector of Argentina presented an example that reforms could be successfully
implemented in a developing country and provide desired results. Political uncertainty and
political interference in setting the power prices limited the effectiveness of well-organized
power markets and regulated power networks. The power reforms revolutionize the power
market and resolve the situation of power crisis. The transformation of power generation into
competitive and less concentrated market results in reducing the power prices, increased
productivity and attracted new foreign investment for establishing new power generation
plants.

The establishment of private ownership in power transmission and distribution

limited the problem of technical losses, improved cost efficiency and investment rate.
However, the regulatory framework of the country was subjected to political influence which
made the regulated income generated from the network companies highly uncertain. The
opportunistic behavior of government and regulatory agencies made it difficult to set power

prices according to market forces. Macroeconomic crisis of 2002 largely affected the power
sector of Argentina. Political interference and government reluctance to neutralize the effect
of crisis results in power shortages, lack if investment and deteriorating international relations
which stagnated the overall economic activity in the country. (Pollitt, 2008)

Research Evidence from Pakistan:

Increasing power shortages in the country, damage the economic growth and development.
The power sector of Pakistan has experienced series of impulsive and irresponsible energy
policies, issues of governance and institutionalization which hampered the developmental
process of power sector and shadowed the economic power generation sources. To ensure the
successful operations and effective role of power sector in the economy it is necessary to
restructure the whole energy sector and redesign the policy framework of the country. It
would capture the interest and attention of private investors which would closely monitor the
performance of the energy sector and mitigate governance issues prevailing in the federal
institutions. These power sector reforms would help in overcoming the energy crisis and
ensure the economic growth and progress in the country. Important elements from similar
country situations could be used as benchmark to resolve the policy and governance
problems. (Kessides, Chaos in power: Pakistan's electricity crisis, 2013)
The four major consumption users which are residential, commercial, agricultural and
manufacturing consumers have been analyzed and investigated to examine the nature and

direction of relationship between power consumption, power prices and economic activity in
the form of GDP growth and development in Pakistan. The results of the research exhibit
stable relationship between power consumption and economic growth in the long run
however, there are certain deviations from the equilibrium in the short run. The economy of
Pakistan is suffering because of unplanned power shortages and limited power generation
capacity which hampered the economic growth and development in the country. The
government should play active role in ensuring sustainable power supply to the nation. There
is need for long term planning and infrastructure development in the power sector and it
would augment the economic activity in the country. Pakistan has significant hydro power
capacity with decreased variable cost and decreased environmental impact than thermal and
nuclear power plants but cyclical and seasonal variations in the availability of water limited
the use of hydro power. (Jamil & Ahmad, 2010)
The power generation planning and production of the country should be coherent with the
pace of economic growth and economic planning of GDP in the country. The efficient use of
power generated by the country should be able to meet the economic demand of the nation.
The sustainable growth in the country is possible only by planning the power generation
capacity and active participation of public and private sectors for efficient transmission and
distribution of electricity (Jamil & Ahmad, 2010). The base of power energy policy is based
on the economic, environmental and political elements which would authorize the nature and
type of technological development in the power generation sector which would meet the
increasing power demand in the country. The power sector of Pakistan is experiencing
financial crisis and lack of proper investment because of standardized management and
maintenance procedures for the power plants. It has reduced the power generation capacity,
abuse of subsidies and power tariffs and improper planning of energy demand which results
in power shortages. (Perwez, Sohail, Hassan, & Zia, 2015)

The regulator agencies and federal authorities in Pakistan are promoting the energy
conservation measures which objects to sink the energy demand by deploying proficient
power appliances and intends to change the behavior pattern of users. It would also help in
ensuring the secure delivery of power to the consumers and maintain security. Literature
suggests that it is considered as most viable option to overcome the ever increasing power
demand and energy conservation helps in resolving the short term power shortage. Besides
energy conservation, the power sector of Pakistan is facing challenges of ineffective
regulatory framework and governance structure, ineffective and unreliable regulatory
agencies, increasing number of transmission and distribution losses, power theft, tariff
structures set below cost, poor maintenance and differential subsidies. All these factors
limited the effectiveness of energy conservation policies designed to limit the gap between
supply and demand. In order to overcome these structural issues, it is necessary to restructure
the power sector from centralized power system to decentralized system with the
development of privatized and liberalized power markets. The performance of regulatory
bodies could be improved by establishing an institutional mechanism and implement
stringent government policies and administrative procedures which would encourage private
investment in the power sector. The policy makers of Pakistan should reconsider the existing
power policies as they failed to provide desired results and have proven insufficient to meet
the

required

power

demand.

(Perwez,

Sohail,

Hassan,

&

Zia,

2015)

The economic cost of power outages and undependable supply of power is quite profound for
the industries operating in Pakistan. The cost of power outages is higher than the level of
power tariffs delegated to the industrial sector of the country. The deployment of load
management strategy would facilitate in reducing the cost of power outages to the industry as
well as whole society. Frequent power outages result in increasing the spoilage cost, time

losses and affect the output level of industries. The economic cost of power outage with long
duration and less frequency is less costly and damaging than shorter durations of large
frequency. It is expected that loss minimizing strategy would be more effective to neutralize
the effect of power outages. Distinguishing power feeders according to the type of consumer
and nature of industry would be more fruitful than the policy of equal curtailment. The
comprehensive implementation of distinguished power feeders would save cost and provide
economic output to every industry. The subsidized power tariffs for domestic and agricultural
consumers and artificially low prices by policy makers have prioritized electricity from other
sources of energy. The prime purpose of setting low power tariffs is to encourage agricultural
development and progress. The low pricing of power has resulted in increasing the demand of
power for domestic as well as agricultural consumption. (Pasha, Ghaus, & Malik, 1989)
The power tariff structure for domestic consumers is based on Incremental Block Tariff (IBT)
which explained that unite prices would increase with the amount of electricity used. One of
the major reason for using IBT as tariff base is to protect small users.

Power Tariff Structure For Residential Or Domestic Users.

Sources: (Trimble, Yoshida, & Saqib, 2011)

Subsidy is the amount of difference between the cost of supply and unit price of supply. The
data collected on March 2008 revealed that the unit prices of the power supplied is less that
unit cost in all the brackets of power tariff which resulted in subsidies. There was deficiency

of cross subsidization in high volume and low volume users which was the prime objective of
IBT structure. The increasing cost of power generation along with commercial and technical
losses have made it difficult for the power sector to recover the cost. the large amount of
subsidy has generated significant fiscal burden on the government and economy. (Trimble,
Yoshida, & Saqib, 2011)
Pakistan Power Subsidy: Budgeted vs Actual

The government should play active role in adjusting and remodeling the fuel pricing strategy.
It would help in eluding the worsening of real economic fiscal gains on subsidies. Along with
adjustment in fuel prices, the power sector should adopt cost recovery approach. It would be
possible be increasing the tariff amounts in real terms rather than nominal terms and simplify
the structure of tariff by charging uniform unit price form the consumers. The power sector

demands comprehensive implementation of tariff and pricing policies which would help in
recovering cost and preserve fiscal gains. (Trimble, Yoshida, & Saqib, 2011)
The electric supply industry of Pakistan is dominated by Water and Power Development
Authority (WAPDA), Karachi Electricity Supply Company (KESC) and Pakistan Atomic
Energy Commission (PAEC). Inefficiency and lack of proper monitoring and control
procedures have forced Independent Power Producers (IPPs) to penetrate and serve the
market. The institute of WAPDA was established in 1958 to coordinate and regulate the water
and power sectors of the country. In 2007, this institute was restructured to increase its
efficiency and delegated the given authority to two institutes of WAPDA which was
authorized to manage the water and hydro power sector in the country and Pakistan Electric
Power Company (PEPCO) was further segmented into 4 Generation Companies (GENCOs),
National Transmission Dispatch Company (NTDC), and 9 Distribution Companies(DISCOs).
PEPCO was central body controlling, monitoring the power sector reforms and facilitate to
transform power sector into efficient and progressive hand in the economy. (Kessides, Chaos
in power: Pakistan's electricity crisis, 2013)
The electric supply industry of Pakistan is well established and restructured to meet the
increasing demands of consumers. Power theft is major problem which is causing economic
losses to the utilities. The transmission and distribution losses in the country are associated
with the governance problems. Absence of civil rights, lack of accountability, absence of
transparent institutes, political uncertainty and ineffective government policies have
generated flaws in the governance system which encourage power theft in the form of fraud,
stealing of electricity, billing irregularities and unpaid bills. Besides regulatory
mismanagement, corruption in the power sector has encouraged thieves to steal. Power theft
negatively affect the operations, profitability and financial performance of companies
indulged in the power sector. Pakistan along with India and Bangladesh have high ratio of

power theft and corruption has stagnated the power sector. Regulatory agencies in Pakistan
should have effective governance and control procedures to control the situation of increasing
power theft in the economy. (Smith, 2004)

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