The future of the long-stalled Gwadar power plant remains uncertain as it appears to have reached yet another impasse a year after the previous Shehbaz Sharif administration had given the go-ahead to execute the project on imported coal as originally planned.

The 300-megawatt power project has failed to make any headway despite it being listed as a “fast track project” under the multi-billion dollar China Pakistan Economic Corridor (CPEC) back in 2015 on account of many reasons, including but not limited to the Covid pandemic, Pakistan’s economic and dollar liquidity problems, and overall slowdown in work on CPEC schemes.

Various concepts have been discussed and shelved since its conception, including proposals to shift it on LNG and Thar coal as alternative cheaper fuels and to replace it with a solar plant of equal capacity because of fuel price considerations, as well as on social and environmental grounds.

Reports suggest that Islamabad agreed to the project sponsor’s argument to adhere to the original project plan of running the plant on imported coal as the Joint Cooperation Committee (JCC) on CPEC, whose approval is essential for making a change in the original plans, didn’t approve of the suggestion to amend the project to shift it to local lignite or replace it with renewable energy.

There are speculations that the project will be shelved since it has not achieved financial close as yet

The use of Thar coal was rejected on the grounds of the logistical difficulty of transporting it to nearly 1,000km away from the mines, which would require heavy investments in infrastructure as well as changes in plant technology. Besides, shifting the plant to Thar coal would mean treating this as a new coal project and China has taken a stand not to support new coal projects.

The port city of Gwadar currently operates on electricity imported from Iran, which until now is limited in volume and cannot support industrial investments in the region. The Chinese authorities say they had “scrutinised the plant from every angle, including the environmental one, and tried to look at alternatives and found (imported) coal as the only feasible fuel”. They say the coal-fired power plant will cater to the port city’s base load, which is central to the CPEC initiative.

Ever since the decision to revive the project was made at a high-level forum of JCC hosting talks on CPEC-related cooperation between Pakistan and China, the power-sector regulator, National Electric Power Regulatory Authority (Nepra), in July last year, has revised the overall cost of the project as well as tariff in response to the tariff modification petition by Chinese firm, CIHC Pak Power Company (Pvt) Limited (CPPCL).

The project cost was raised by 145 per cent in rupee terms from Rs42 billion to Rs103bn, according to Nepra. But it came down to $358.3 million from the previous $399.5m in dollar terms. The 30-year levelised tariff was increased by 182pc to Rs22.34 per kWh from Rs8.92 on account of the huge depreciation in the reference exchange rate from Rs105 to a dollar to Rs287 since May 2019 when CPPCL had filed the first tariff modification petition.

The per unit tariff also saw a downward revision in dollar terms from 8.49 cents to 7.78 cents. The Nepra decision seems to have not been received well by the company, which had sought a $82m increase in engineering procurement and construction (EPC) cost alone from $321m to $403m, besides enhanced project development and sponsor’s cost by more than $37m to $47.9m.

It may be pointed out here that Nepra, which had announced the original tariff in December 2018, has twice redetermined it for the project in 2019 and 2023 on review petitions by the sponsors. The firm is obviously not happy with the latest Nepra determined tariff and wants it to be “increased to make the project viable”.

It is still not clear if the company will accept the Nepra determined tariff and start construction even after the third tariff determination, a Business Recorder report on January 19 quoted anonymous Pakistani officials as saying.

The report further claimed that the company had filed a fresh tariff modification petition in December 2023 for an upward revision in Nepra’s last determination of the overall project cost and tariff on the lines of the previous one.

In its latest request, CPPCL has also requested an additional three-year extension in the already extended Financial Close (FC) date from January 2024 to January 2027, with a commercial operations date of 33 months from the FC date, anticipated to be in 2030.

Apparently sensing that CPPCL isn’t ready for early implementation of the project to complete it by December 2025, as decided jointly by the Pakistani and Chinese authorities at the time of reviving the project on imported coal, the caretaker government was reported on January 19 to have “constituted an inter-ministerial committee to review the progress of the Gwadar power project and suggest a way forward to expedite it or suggest an alternative source of power supply to Gwadar area” if the Chinese company fails to deliver within the agreed timeframe.

This has triggered speculations that the project would be shelved since it has not achieved financial close as yet.

Most energy sector experts like Dr Khalid Waleed, who works for an Islamabad-based advisory firm, Sustainable Development Policy Institute, argue that imported coal is a bad recipe for Pakistan, given its current account deficit and the recent experience of a huge price rise for imported coal going up to $460 per tonne or even more in 2022. The imported coal was available at $109 per tonne when the project feasibility was first conducted in 2017.

“In this case, the country’s poor external account state could be subject in future to global coalition price shocks due to another import-dependent source of power generation,” he maintains.

However, if viewed from the sponsor’s point of view, the imported coal project is much simpler to implement. Besides, it can earn more income from buying coal from South Africa or Indonesia under long-term contracts or even booking the whole mines over the project life at a discounted price.

In the case of local coal, it will have to face challenges like lignite transportation from Thar to Gwadar and changing technology owing to the much lower efficiency of local lignite than the imported coal.

Other energy sector experts like Hanea Issad argue that the Gwadar power project points to the dissociation between evidence-based research and policy decisions in the power industry.

She believes the renewable option for meeting Gwadar’s electricity needs would have been the best choice. “However, it has to be in a hybrid form — solar-wind-storage. This would have been the cheapest, most secure, and most reliable option. But again, we need to conduct a study on its feasibility for research- and evidence-based decisions.”

Published in Dawn, The Business and Finance Weekly, February 26th, 2024