The National Electric Power Regulatory Authority (Nepra) has announced recently an indicative levelised tariff for domestic coal-based power generation on a directive of the Economic Coordination Committee (ECC) of the Cabinet.

The benchmark tariff has been fixed by the NEPRA at US cents 7.8055 per kWh for long-term energy supplies utilising Sindh coal resources of Thar, Lakhra, Sonda-Jherruk and Badin coalfields. This, however, will be applicable subject to appropriate modifications and adjustments in accordance with the feasibility study for the respective projects that would determine fuel cost and other parameters. The official decision may prove to be flawed and short-sighted and has been taken on mounting pressure of prospective investors. The issue of up-front tariff, basically for Thar captive power plant, has placed the government in a compromising situation.

While the government has rejected demand of the project sponsors of up-front tariff---suggested as high as US Ccnts 11.1 per kWh--- the investors are exploiting the issue politically, whereas it requires adopting a professional approach.

Tariff for purchase of bulk electricity is based on power generation under various categories of fuel, taking into consideration a variety of conditions and parameters determined for the specific project and taking numerous assumptions. Competitive tariff comprise of (i) energy purchase price and (ii) capacity purchase price. The two components of tariff are (a) fixed charges (such as interest, depreciation, return on equity, operation and maintenance charges etc) and (b) variable charges (like type of fuel). Again, there are many components (fixed O&M cost, insurance, administrative expenses and return on equity and debt servicing, including interest and other fees) of the tariff. Average tariff is worked out for the life period of the project on the basis of constant prices and constant exchange rate, while levelised tariff is arrived at by applying discount rate on average tariff. For the purpose, a techno-economic feasibility study is required indicating technology to be employed, plant efficiency and availability, plant load factor, tentative financial package etc.

Thar coal, or lignite, is being developed primarily as a fuel for power generation. The Private Power and Infrastructure Board (PPIB) has allowed Hasan Associates of Karachi to establish a 1,000 MW capacity integrated mining-cum-power generation project at Coal Block-one of the Thar coalfields. The Sindh government has also granted an exploration license to Associated Group of Lahore to undertake feasibility activities related to coal mining at Block-two of the Thar coalfields on lease basis to be followed by seeking a letter of interest (LoI) from the PPIB for a similar capacity project. The other three integrated coal mining and power generation projects, of cumulative capacity of 550 MW based on coal from other coalfields of Sindh, are being developed by other domestic investors for which the government issued LOI in recent past and preparation of feasibility studies are in progress. Other investors, domestic and foreign, interested to undertake power projects based on Thar coal are in the queue, keenly watching the developments.

Tariff for coal power generation is to be determined by the NEPRA for each project, based on independent feasibility study to be undertaken by the sponsors. This has to be a bankable document of international standard, as per applicable power policy and procedures to which the sponsors, in the first instance, agree to abide by. In this case, investigations are required for exploration, assessment evaluation and appraisal of coal in the leased area to identify and verify its quantity and quality, topographical, geo-technical and hydro-geological studies, conceptual mining plan, mining technology to be adopted, project cost, environmental aspects etc. Thus the study will conclude an estimated extraction cost of coal per ton at mine mouth, which has to be viable and economical.

In the second phase, a comprehensive feasibility report is to be prepared by the sponsor for the power plant reflecting on plant design and engineering, technology, capital cost, load flow and interconnection study, environmental impact study and financial analysis. In fact, the prescribed feasibility study equally meets the requirements of the power regulator, the power purchaser, the lender and the environmental control agency, besides that of the government and investor himself, which would principally allow the sponsor to negotiate a tariff with the power purchaser and, subsequently, to submit a tariff petition to the power regulator. A high level committee has been set up by the government to recommend up-front tariff for coal-based projects in violation of exiting policy, rules and procedures.

None of these conditions and parameters of the project that essentially form the basis of tariff calculation are currently available and Pakistan has practically no experience of operating a coal-based power project to suggest an up-front tariff at this stage.

The world over similar mechanism is adopted or, in case of having relevant experience and expertise, alternatively the tariff-based international competitive bidding (ICB) takes place for granting such projects, as the bidders are required to quote a discount on benchmark. It is in Pakistan only that for socio-economic reasons the sponsors have been allowed to develop projects aiming at promoting utilisation of domestic coal for power generation without competitive bidding--international or domestic. In such case, preparation of a feasibility is a pre-requisite for determining tariff in other countries too. Surprisingly, the sponsors have been insisting on government announcing an up-front tariff only after having obtained sanction of respective projects and committing to abide by the Power Policy 2002.. The sponsors had initially proposed a levelised tariff in the range of US cents 7- 9 but later demanded between cents 9-11 per kWh, without any rationale.

The demanded tariff is considered very high, given the fact that globally coal is recognised as the cheapest resource of energy for power generation, which would result in unaffordable electricity in future. Shenhua Group of the People’s Republic of China had determined cents 5.7 per unit and Rheinbraun Engineering of Germany cents 6.3 per unit, both based on detailed feasibility studies on Thar coal carried out by them, respectively, and taking into consideration local conditions. Analysing the position in neighbouring countries, it is observed that tariff for domestic coal-based power generation varies from country to country, but it is maximum six cents per kWh anywhere in the region.

The latest domestic coal based power project in India has been won under competitive bidding, in August 2007, at levelised tariff of Indian Rs1.19616 (or cents 4.98882) per kWh. India’s largest domestic coal-based Sasan power project of 4,000 MW capacity to be located in Madhya Pradesh is being developed by Reliance Energy Ltd, for which financial close has been achieved. JSW Energy is constructing a 1,080 MW power project in Rajasthan—the Thar belt in India--scheduled for commissioning by end 2008.

The 30-year levelised tariff for this project is Indian Rs1.91 (or cents 4.85759) per unit. Tata Power Co Ltd-- India’s largest private sector producer--are setting up a power plant of 4,000 MW based on imported coal in the state of Gujrat based on the most modern supercritical technology. The sponsors have been allowed Mundra ultra mega project by the government accepting levelised tariff of Indian Rs2.26 (or cents 5.74772) per unit. A 500-MW domestic coal-based power project located in Baran district of Rajasthan (India) is nearing completion that would sell bulk electricity at Indian Rs2.14 (or cents 5.44253) per unit.

The first coal-fired power plant in Bangladesh, of capacity 250 MW, commenced commercial power generation in January 2006. Known as Barapukuria power plant, it has been established in Parbotipur as an integrated mining-cum-power project and levelised tariff determined is around six cents. Asia Energy Corp of the UK and Vulcan Energy of the USA are developing 500 MW and 900 MW domestic coal based power projects, respectively, in the Phulbari coal region of Bangladesh, for which about six cents per kWh is the benchmark.

Pricing of domestic coal is another important and sensitive factor impacting the tariff calculation. The projects approved so far in Sindh are integrated coal mining-cum-power generation projects, meaning the investor himself will be the fuel (coal) supplier to the plant to be established at mine-mouth. Coal mining cost in India is in the range of $13-20 per ton, while it is extracted in Turkey at a price around $ 23.

Transportation of coal from mine to the port of shipment is very expensive, due to a variety of reasons, and also the sea transportation. Therefore the FOB (on barge or vessel) and C&F prices are very high relative to mine-mouth cost. Indonesia, leading exporter of thermal coal, markets at $60-90 per ton C&F/CIF to be delivered in the year 2009, depending on the quality of coal, which translates into $20 per ton cost at mine mouth. Pakistani investors demand the mine-mouth coal price of their choice—in the range of $40-50 per ton---even more than the international FOB prices. Coal in Sindh is mined at less than $10 per ton.

Other significant factors unfavourable to announcing of an up-front tariff at this stage are, first, that realising various risks involved in coal mining the government has recently established a Coal Mining Company, unbundling Thar coal integrated projects into mining and power generation and, second, a national coal policy is under formulation that would govern investment in the sector. The approved integrated coal mining-cum-power generation projects fall in power sector as well as in coal sector.