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Burning midnight coal

Published on 28th Jan, Edition 05, 2013

 

It is important for Pakistan to increase the generation capacity of the country; unfortunately relevant ministry couldn’t address the power crisis as quickly as was expected by the people. It’s simply because there has never been a long-term, realistic policy on power generation. Pakistan meets its power requirement from hydro, furnace oil fired steam, combined cycle gas plants and diesel oil fired electricity generating plants. Currently about 30 per cent of Pakistan’s power supply is based on natural gas, 33 per cent on imported oil, 33 per cent on hydro and remaining on coal, nuclear and renewable electricity. Gas and oil are the main source of fuel for the existing power plants. Hence, keeping in view the current power mix, it is essential to concentrate on indigenous and cost effective sources for power generation. Historically different governments in Pakistan tried to fix the power crisis in minimum possible time, which resulted in the installation of many power plants based on the imported oil in the country.

Coal is an important source of energy for the world, particularly for power generation. It is the world’s most abundant and widely distributed fossil fuel, with global proven reserves totaling nearly 1 000 billion tons. Given these characteristics, coal has been a key component of the electricity generation mix worldwide. Coal fuels more than 40 per cent of the world’s electricity, though this figure is much higher in many countries, such as South Africa (93%), Poland (92%), China (79%), India (69%) and the United States (49%). Global oil and gas reserves are not expected to last beyond the next 50 to 70 years, and after that the remaining reserves could become uneconomical to extract. In contrast, the global coal reserves are expected to last for the next 500 to 600 years. Consequently, the future expansion of the country’s electricity generating capacity is envisaged as best met from constructing thermal power plants based on coal. Generally, the use of coal offers a number of advantages; it is often the most economical fuel, especially when compared with natural gas or oil; coal used for power generation is often produced domestically, which enhances energy security; and coal conversion technologies are well established with a long manufacturing and operational history.

Pakistan doesn’t have any coal based power plant though coal’s share in total installed generation is 0.1 per cent, which is redundant Lakhra Coal Power Plant. Country has estimated coal reserves of around 185,175 million tons, which are one of the largest coal reserves of the world. Deposits of Thar coal were discovered almost two decades back. Since then a lot of efforts were made to utilize Thar coal for power generation yet nothing has materialized. As a matter of fact, abundant supply of coal at home will greatly reduce the pressure on oil import bill. Pakistan is a unique place for foreign investment which offers best available power regulatory regime and numerous opportunities in the energy sector. The Government of Pakistan is seeking foreign and local investments for its industrialization and infrastructural development. At this point in time, power generation supply is the key constraint. To eliminate this difficulty, the government has undertaken a long term plan with the help of private sector for installing new power plants across the country.

Installing coal based power plants can play an important role in improving the overall performance of the power sector. Coal based power will bring various benefits for Pakistan; first and foremost benefit would be immense savings in foreign exchange on import of expensive oil. Coal based power plants are labor intensive and will create thousands of new jobs and various other new business opportunities at plant site in particular and in Pakistan in general. It will also provide power security and protection from a wide range of external risks. In order to compete Pakistani goods in international market, it is fundamental that the cost of electricity should be decreased otherwise going forward Pakistan’s goods would not be market competitive. Non-development of indigenous resources and lack of interest have made these things quite miserable.

Although there have been several announcements from the Government circles about the development of the coal based power plants through utilization of indigenous coal reserves, but one does not see any serious investment having actually been made in this area. Government has established a company to develop Thar coal mines, which is indeed a good step towards self reliance but who knows how long it will take to come into reality. There is hardly any project in the world which doesn’t encounter difficulties and have hurdles but in Pakistan the story is different, instead of removing the hurdles and solving the issues our decision makers prefer to abandon the project regardless of its importance to the country and the resources being used on the project.

Continuous negligence of indigenous resource has made Pakistan’s power policy directionless. This negligence, absence of priorities and focusing on expensive foreign fuel has made cheap electricity and self reliance a day dream. Like India, Pakistan should also develop a strategy where power plants be constructed on both local and imported coal depending upon the requirement and available infrastructure. There are various arguments in favor of imported coal like diversification of fuel, lesser dependence on Middle East oil, cost effectiveness as compared to furnace oil, quick solution to current power crises etc… A coal based power plant is constructed according to the specifications of the coal, Thar coal is of lignite quality whereas Pakistan imports bituminous and Sub-bituminous fromIndonesia, Australia and South Africa. Efficiency of the power project drops if boiler is designed on lignite but runs on bituminous. This is the core issue why imported coal is criticized and objected and is widely argued that if imported coal is allowed then Thar coal mines will not be developed. One of the probable solutions of this problem can be allowing the refurbishment cost of boiler to IPP by the government when Thar coal mine is developed so that there would be no drop of efficiency and no incremental maintenance cost, provided Thar coal mine is also developed.

 

So far Thar coal mines could not be developed – without going into the reasons – it takes at least four/five years for a coal mine to develop; Thar coal mines will be developed by 2017, if everything goes as per plan. First information which lenders ask is the source of fuel after getting profile of the sponsors of a power project. As a matter of fact, banks and financial institutions are reluctant to finance a project whose fuel supply is not secured; the situation will be 180 degree different with the development of Thar coal. Pakistan’s first and foremost priority should be to develop Thar coal mines and then installing a mine mouth coal power plant will not be a difficult task. Engro has a joint venture with the Government of Sindh on the Thar coal mine block I, the joint venture group is trying hard to sign a coal supply agreement with the state run GENCOs’, for which GENCOs’ have shown no interest. Reason for refusal by GENCOs’ is simple; they don’t want to lose their USAID and ADB financing and want to convert their oil based power plants to coal in the shortest possible time. But if they bound themselves to the Thar coal then it is not be possible to convert the oil based power plants before 2018 and will also not fulfill the purpose of conversion i.e. savings in oil import bill. There are few more coal mines other than Thar in Pakistan but work on those projects are also slow as sponsors of those projects are not financially sound and facing difficulty in getting loans from local and international market.

Pakistan can save millions of dollars by utilizing its indigenous resource and if for some reason milling is further delayed, coal can be procure internationally, which is still cheaper than imported oil. A lot of companies in the private sector are trying to establish coal based power plants in Pakistan and financing is not possible without having a long term coal supply agreement. Securing a long term coal contract for all the proposed projects from the international market would be difficult though spot buying can be done but it will increase the fuel cost. Fuel tariff of Thar coal power plant will be lesser than the tariff of power plants based on imported furnace oil and will remain cheaper than imported oil. It is being said that Indonesian coal price be taken as benchmark for the price determination of local coal. Few have serious reservations on this argument; if Pakistanis can get cheap indigenous commodity in place of an expensive imported then why to increase the price of local commodity deliberately to make it relatively cheaper than imported. Tariff is calculated on certain assumptions both fixed and variable like estimated capital cost, debt pricing, fuel price, calorific value of fuel, rupee dollar parity etc. A slight change in any of these parameters can change the annual/ levelized tariff considerably. Once the project is commissioned, changes in variables are addressed through indexation. Therefore, indexation to be allowed has much more implications than the parameters employed for tariff determination. In the interest of Pakistan, it would be better if Government of Pakistan takes the responsibility of procuring coal from the international and local market and sells it to the power plants by establishing a corporation like Pakistan State Oil. This will help in controlling the coal price otherwise objective of saving millions from coal power generation will not be accomplished.

Upfront tariff is a price which Government of Pakistan through WAPDA is willing to pay to the IPP for the purchase of electricity and is unsolicitedly determined and declared by NEPRA on certain assumptions. On one hand certain reservations have been shown on these tariffs while on the other these are used to gauge the pocket of the Government. Besides investor, equipment manufacturer, supplier, construction contractor, services providers, and lenders are vigilant enough to judge the parameters of the offered tariff. They figure out the margins and adjust their price accordingly on account of excuses like booming industry, huge demand, and shortage of equipment due to massive orders etc… It wouldn’t be wrong to say that such tariffs are regarded as minimum price by the Investor and its EPC contractor, where both start negotiating from above this price. In January 2008, NEPRA declared upfront levelized tariff for power plant based on Thar coal on the forceful insistence of Government of Sindh which was immediately discarded by various stakeholders. Later NEPRA announced another coal upfront tariff and conducted a public hearing in May 2012, and is declaring upfront tariff on coal any time this year. It would be better if NEPRA declares upfront tariff without fuel (coal) component but fixes the efficiency and later issues project specific fuel cost component separately based on the coal price and calorific value of the sourced coal. This will help in minimizing any undue benefit under coal cost component. Unlike oil, it will be very difficult for the regulator to monitor price mechanism of coal.

Despite all criticism on lengthy process of negotiation, companies prefer to negotiate instead of accepting upfront tariff. So far, NEPRA has issued various upfront tariffs for different technologies e.g. furnace oil, wind and coal and none has given positive results. At the end of the day, entire blame of non-performance of other stakeholders including private sector is put on NEPRA, overall whose performance is satisfactory despite the fact that they are short of staff and most of the staff is over burdened.

Coal fired generation also faces a number of challenges. Coal-fired power plants require more capital investment, take longer to build than natural gas-fired generation, and enjoy economies of scale that make it advantageous to build the largest coal plant consistent with the size of the electrical system. Though construction time of coal based power plants are higher than gas and oil based power plants, even then it is better to invest in the coal projects.

For sustained economic growth, the country needs an adequate supply of power for its industrial, agricultural and residential sectors. Hydro and indigenous coal for power generation should be Pakistan’s only choice but the biggest irony is that country has made its best hydro projects controversial. This leaves coal, which Pakistan has in abundance, as a safe, cheap and reliable source to meet the power needs of the country for the foreseeable future. With the installation and operation of coal-fired power stations, the generation gap between supply and demand would be reduced to a reasonable extent. It is therefore suggested that all the stakeholders must burn the midnight coal (oil) and covert this huge challenge into an opportunity.

The writer works in the IPP sector for the last 15 years and is also a commentator on economy.

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