At a time when the Shehbaz Sharif government is struggling to make a strategic shift from imported coal for electricity generation to Thar coal, the recent National Electric Power Regulatory Authority (Nepra) decision to revise upwards the total project cost and tariff of the proposed 300 megawatt Gwadar power project based on imported coal is quite surprising.

The proposed shift from imported to local coal is part of the wider reforms being supported by the International Monetary Fund (IMF) to reduce the country’s power sector debt, known as “circular debt”, which represents the build-up of unpaid energy bills in the power sector.

Pakistan formally requested the Chinese authorities’ support for this transition during a visit of Finance Minister Mohammad Aurangzeb and Energy Minister Awais Khan Leghari to Beijing last month.

This transition to Thar coal is also seen by Mr Leghari as a solution to facilitate the repatriation of dividends for Chinese power plants. It comes as Pakistan seeks to re-profile its energy debt from China to meet the demands of the IMF as part of a $7 billion bailout package.

Nepra revises the cost of the Gwadar power plant for the third time amid delays while the government urges for a Thar coal transition

The Gwadar power project, established by the CIHC Pak Power Company (CPPCL), has failed to make any headway despite it being listed as a “fast track project” under the China-Pakistan Economic Corridor (CPEC) initiative since 2015.

The reasons for the delay include the Covid pandemic, the overall slowdown in work on the CPEC schemes, Pakistan’s liquidity crunch and, more importantly, Islamabad’s desire to shift the power plant to local coal or replace it with a solar plant of equal capacity due to fuel price considerations, as well as environmental and social grounds.

The previous Shehbaz Sharif government had eventually surrendered to the company’s demand to adhere to the original plan of running the plant on imported coal in early 2023 as the project sponsor demurred, rejecting the proposal to amend the agreement to shift it to Thar lignite or replace it with a renewable energy scheme.

In the meanwhile, the National Transmission & Despatch Company has declared the Gwadar power plant as a “committed” or “strategic” project in its last iteration of the Indicative Generation Capacity Expansion Plan (IGCEP) 2022-31.

Interestingly, Nepra’s State of the Industry Report 2023 says, “The IGCEP-2022 envisions a progressive shift from an energy mix heavily reliant on imported fossil fuels like coal, furnace oil, and RLNG to indigenous energy sources, including hydel, Thar coal, wind, and solar.” According to the plan, “There will be no further induction of power plants based on imported fossil fuels.”

In its latest tariff review — the third revision in the original cost and tariff determination from 2018 — published in May, Nepra has allowed the Chinese investor more than 51 per cent increase in the total project cost of the plant to $444.49 million when compared to its original determination of $292.77m. The new project cost is also 24pc greater than the $358.3m determined in last year’s review.

The increase is primarily driven by a significant spike in engineering, procurement and construction (EPC) costs from $236.16m to $321.41m, a surge in the Sinosure fee from just $2.10m to $32.56m and a rise in the interest rate costs from $17.14m to $45.55m.

The insurance fee is raised because Sinosure is reluctant to insure further power plants in Pakistan due to increased investment risks, such as overdue payments to existing CPEC projects insured by it. The current unpaid bills owed to the Chinese power producers are reported to have shot up to $1.8bn.

Another important aspect of the new determination is that the exchange rate reference of Rs105 a dollar and subsequent indexation has also been reset at Rs278.5 a dollar. The company had pleaded in its review petition that the entire investment was denominated in American dollars, and project expenditures were estimated in that currency as per the power policy of 2015.

“The reference exchange rate of Rs105 mentioned in the 2017 petition, and subsequent indexation is no longer relevant due to economic instability depreciation in Pakistan amid erratic and volatile inflation. Besides, the risks associated with ongoing, unpredictable economic situations must also be factored in the revised tariff and cost,” it said.

Nepra acknowledged the impact of a prolonged delay in implementing the project on the costs, allowing a one-time exchange rate variation on onshore EPC cost based on the exchange rate of Rs278.5 a dollar, besides allowing the sponsor exchange rate variation on expenses incurred in dollars outside Pakistan on all project cost items.

Likewise, Nepra has nearly quadrupled the 30-year tariff for the project from Rs6.96 per kilowatt-hour (kWh), originally granted, to Rs25.29 per kWh, consisting of an energy purchase price of Rs15.84 per kWh and a capacity purchase price, which also includes a 14pc guaranteed return, of Rs9.45 per kWh.

The energy sector experts argue that the inclusion of the Gwadar power plant based on imported coal among the strategic projects and higher tariff determination defeats the two major objectives of power price reforms and movement to renewable energy sources.

The prime minister had sent the finance and energy ministers to China to formally request Beijing to re-profile its outstanding energy loans of $15bn and reschedule payments over an extended period.

They also went to China to encourage sponsors of the three power projects in Sahiwal, Hub and Port Qasim, set up under the CPEC initiative with a combined capacity of 3,960 megawatts, to shift to local coal from the Thar region to help Islamabad slash its power generation costs and energy import bill.

The government expects the shift to local coal for these projects to reduce the basket price of electricity by Rs2.50 per unit and save nearly $700m in energy imports. Experts insist that establishing the Gwadar project on imported coal will prove to be an incentive for the other three CPEC coal projects to refuse the government’s request to make significant investments to switch to Thar coal.

Published in Dawn, The Business and Finance Weekly, August 5th, 2024