Designing Energy Supply Chains for Prosperity and Sustainability

Yao Zhao, PhD

Professor in

Supply Chain Management

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An energy supply chain is an integrated system where changes made in one part affect other parts. It is also a dynamic system where energy consumption strongly interacts with GDP and thus the available budget. With its complexity, dynamic nature, significant investment and political complications, an effective yet politically feasible design of energy supply chain is far from obvious but essential to a country’s economic prosperity and environmental sustainability.

The strategic planning of energy supply chains is a classic issue but not well addressed in the energy policy and economics literature and barely studied in the operations and supply chain management literature. Our research aims at expanding supply chain management models and principles to address unique features of the energy sector, and to develop new models and guidelines for building up energy supply chains strategically.


Rafique, R., Y. Zhao (2011). Pakistan Energy Crisis - Breaking the Vicious Cycle. Case Study, Rutgers Business School - Newark and New Brunswick.

Pakistan has one of world’s biggest untapped coal reserves, …, Pakistan to tap coal riches to avert energy crisis.” – Reuters, April 13, 2012

Starting story: Ali is a plant manager in a large textile firm in Lahore, Punjab province, Pakistan. The textile industry, the back bone of Pakistan’s economy, had a total export of 5.2 Billion USD in 2010. Ali was educated as a textile engineer and has ten years of industrial experience. Till 2007, Ali was very satisfied with his career and the industrial growth in the textile sector. But now things have changed drastically – the textile industry is facing severe problems due to the power shortages. There are 8-12 hours of electricity load shedding on a daily basis in major cities and industrial sectors of the county. The textile industry is unable to meet the export targets as the daily production is disrupted by long hours of electricity shortage. About 28 million people (38% of the total labor force) associated with the textile sector are facing unemployment due to the power outrage. [1]

The overall economic condition of the country is even worse and it is becoming increasingly difficult for Ali to cover the expenses of his family of two children. Even with 8-12 hours of electricity load shedding, the electricity bill has risen to 25% of his monthly salary. The inflation rate has risen to 17% (2010 est.) and the prices for food items have increased by 33% over a period of two years. Official figures indicate that there is a 20% increase in crime rate due to the increase in unemployment (6% in 2010).

“Is it better to leave the country as everything seems to be in a mess?” Ali says. “There is no job security even in one of the key industrial sectors of the country; expenses are too high and standard of living is deteriorating every day. I see neither a promising career for myself nor a bright future for my family in this country,” he laments.

Rafique, R., Mun, K.G., Y. Zhao. (2014). Energy Supply Chain Design: A Dynamic Model for Energy Security, Economic Prosperity and Sustainability. Technical Report. Rutgers Business School – Newark and New Brunswick, NJ.

Abstract: Many developing countries in Asia and Africa suffer severe energy deficiencies despite their ample reserves of energy resources (e.g., coal, gas/oil and hydro), the so-called dilemma of “resource rich, energy poor” by The Economist. A leading driver of the dilemma is the vicious energy-economy cycle, where the poor economic status, inefficient utilization of limited budget, and energy deficiency reinforced each other and have led these countries into a cycle of economic downfall. How to turn this vicious cycle into a prosperity cycle? It is a classic question but not well answered in the energy policy/economics literature and barely studied in the operations management literature.

We extend supply chain management concepts to address the unique features of the energy sector and present a new class of mathematical models for designing coal-fired energy supply chain. The model captures the interaction among different parts of an integrated energy supply chain from coal mining to power generation and to power consumption. The model incorporates the unique economics of power generation and transmission such as yield losses, and the dynamic nature of an energy supply system such as limited reserves, and the causal relationships between energy consumption and economy. The model attempts to answer the classic question by determining the optimal way to build up an energy supply chain strategically under limited budgets for energy security, economic prosperity and environmental sustainability. Applying the model to Pakistan's recent energy crises, we show that the solutions differ structurally from the government's plan, and can significantly outperform the latter by reducing the energy gaps faster, boosting the economy stronger with much less greenhouse gas emissions.