At the last meeting of the Joint Cooperation Committee (JCC), the highest decision-making body of the China-Pakistan Economic Corridor (CPEC), in May, Pakistan requested Beijing to begin construction work on electricity generation projects and propose infrastructure schemes, like the Mainline-I railway project, for Chinese financing.

The generation projects, according to Planning Minister Ahsan Iqbal, include two hydropower schemes — Azad Pattan and Kohala — and an imported coal-based project at Gwadar. The projects are estimated to cost $4.5 billion and produce 2,100 megawatts of electricity.

“We have agreed to perform the ground-breaking ceremony of these energy projects this year,” Mr Iqbal told a press conference after attending the JCC meeting. He noted that the 300MW Gwadar coal-fired power project was essential to meet the needs of Gwadar and its surrounding areas.

The Gwadar power project has failed to make any headway despite it being listed as a “fast track project” under the CPEC initiative since 2015 for several reasons, including, but not limited to, the pandemic, Pakistan’s economic problems and overall slowdown in work on the CPEC schemes.

If the project is based on imported coal rather than local coal, it may expose Pakistan to international market supply shocks and foreign exchange requirements

Meanwhile, the Pakistan government has discussed various concepts and shelved them, including the proposals to shift the project to LNG or Thar coal or replace non-renewables with a solar plant of equal capacity due to fuel price considerations, as well as environmental and social grounds.

However, the Chinese project sponsor, CIHC Pak Power Company Limited (CPPCL), refused to entertain these requests. Eventually, the first Shehbaz Sharif government agreed to adhere to the original plan of running the plant on imported coal early last year, as China didn’t approve of the proposal to amend the project to shift it to the local lignite or replace it with a renewable energy scheme.

The agreement was followed by a revision by the National Electric Power Regulatory Authority (Nepra), the country’s power-sector regulator, in the projected tariff on the request of the CPPCL in July last year, as well as an extension by the Private Power and Infrastructure Board (PPIB) in the Financial Closing (FC) date of the scheme till December 31. This is the third extension in the FC date, the last of which expired on January 31, 2022.

Likewise, the CPPCL has again requested Nepra to revise the latest tariff determined for the project by the power-sector regulator. If approved, it would be the third revision of the original tariff, which was determined back in December 2018. However, it is still not clear whether the CPPCL will start construction at the site even after the third review of the tariff.

Furthermore, the CPPCL’s request in its latest letter is reported by the Business Recorder to have asked for an additional three-year extension in the already extended FC, that is, until January 2027 with a commercial operation date of 33 months — anticipated to be in 2030 — from the FC date.

Meanwhile, the National Transmission & Despatch Company (NTDC) has mentioned the Gwadar power plant as a “committed” project in its latest iteration of the Indicative Generation Capacity Expansion Plan (IGCEP) 2022-31 to be completed in August 2025 at an estimated cost of $435bn.

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.”

That is not all. Energy sector experts say it is also not clear if the NTDC followed the process defined in the country’s first National Electricity Plan (NEP) 2023-27 to declare a power project “committed” or “strategic.”

The proposed strategic projects, according to the NEP, can be declared as committed projects in the IGCEP if they are fulfilling any one or more of the four purposes: energy security, regional integration, water-energy-food nexus, or municipal waste management.

The process requires the submission of a project proposal along with a feasibility study (technical, commercial, socio-economic, and other relevant considerations) by a respective federal entity or provincial government for evaluation by the Power Division of the Ministry of Energy against the NEP qualification criteria of strategic projects.

The evaluation process of the proposed project qualified as strategic must determine the cost of the Least Cost Violation (LCV), or the incremental cost of the project over and above the project construction cost.

If a project is categorised as strategic, as per the NEP, and is included in the IGCEP as a committed project, then the difference between the costs at which it would have been selected based on least cost and the actual proposed cost is basically the LCV cost, which will be borne by the sponsoring agency.

For the declaration of the project as strategic, the government, in consultation with all the provincial governments, will decide on a case-to-case basis, based on the qualification criteria and the cost of LCV. The mechanism for payment of LCV, or incremental cost, has to be agreed upon in advance, as all strategic projects are solicited under the cost-plus mechanism.

Shaheera Tahir, a researcher at the Policy Research Institute for Equitable Development, says the IGCEP enters the Gwadar coal power project as “a committed or strategic project on imported coal because it is a CPEC project”. “But we don’t know if the evaluation has been done based on the defined criteria in the NEP.” She says the main reason why people are concerned about the NTDC decision is that the project is based on imported coal.

According to her, an enormous amount of committed capacity (99.5 per cent of the total proposed capacity additions from 2024 to 2034) has not been tested on least cost criteria, and “the strategic projects like Gwadar get benefits as there are no discussions of their environmental and social impacts and associated costs either”.

She further explains, “The project is a joint commitment with the Chinese government, and as a result, we will see that it will be implemented sooner or later. However, the issue lies with the technology it will run on and how it exposes Pakistan to international market supply shocks and foreign exchange requirements for not just fuel purchases but also dollar-denominated costs.

“If such strategic projects have to be implemented, then their costs also have to be disclosed transparently — costs that will be passed on to the end-consumers and costs that will be borne by the sponsors [not passed on to the consumers] based on the LCV evaluation set out in the NEP,” she concluded.

At his post-JCC press conference, the planning minister claimed that China had agreed to study a proposal to shift the projects based on imported coal to local coal.

If that is the case and if the government intends to convert existing imported coal projects to local coal, taking the Chinese government on board, it makes little sense to first install a power plant on the imported coal technology and then convert it into local coal. “This will open a plethora of issues related to transportation of local coal to the plant site.”

Published in Dawn, The Business and Finance Weekly, June 24th, 2024