PAKISTAN is trying to encourage three Chinese power plants in Sahiwal, Port Qasim and Hub, with a combined generation capacity of 3,960 megawatts, to switch from imported coal to Thar coal. Energy sector experts say the move makes sense, though there’s many a slip ’twixt cup and lip.

This initiative is understood to be a part of the wider power sector reforms supported by the IMF to help reduce the so-called circular debt, or the massive public liabilities that have built up to over Rs2.6 trillion over time, and fast growing despite raising the electricity tariffs, according to former finance minister Miftah Ismail, by 350 per cent since 2015.

Energy Minister Awais Khan Leghari has claimed in interviews that the transition would slash the basket price of electricity by Rs2.5 per unit (kilowatt-hour) and save the country $700 million in annual energy imports at the current international coal rates.

Besides, it would save the country and consumers from the spot market bloodbath as seen in the wake of post-Covid economic recovery and the Russian invasion of Ukraine.

While energy experts agree on potential benefits of using local lignite in power plants, the transition is fraught with challenges

Since these plants have been established under the CPEC project, Islamabad has formally requested the Chinese authorities for their support for this transition during a visit of Finance Minister Muhammad Aurangzeb and Energy Minister Leghari to Beijing last month.

Mr Leghari had told Reuters before leaving for China that this transition to Thar coal should also facilitate the repatriation of dividends for Chinese power plants. The current unpaid bills owed to the Chinese power producers, who have invested nearly $20 billion in energy projects, are reported to have shot up to $1.8bn.

Coal plants

There are at least five major imported coal-fired power plants in the country with a total capacity of 5,940 MW. These include three Chinese-owned plants in Sahiwal, Port Qasim and Hub with a total capacity of 3,960 MW. (One new Chinese plant of 300 MW, planned for Gwadar under the CPEC initiative, has been in the pipeline since 2015.)

Another 660 MW plant set up by Lucky Cement is already designed on local lignite but is using imported coal due to delays in Thar mining capacity expansion. The government plans to convert yet another 1,320 MW coal power plant in Jamshoro, funded by the Asian Development Bank, on local coal in collaboration with a private investment firm with operational assets in Pakistan and Hong Kong.

‘Makes sense’

Though the transition from imported coal to Thar lignite “makes sense”, energy sector experts argue that it isn’t a straightforward proposition.

“It is very much possible but would be quite challenging,” a source in the Sindh Engro Coal Mining Company (SECMC) said, requesting anonymity because of the “sensitivity” of the matter due to noise created by the textile lobby against large “idle” capacity payments to Chinese and other power producers.

“A lot of investment is needed to retrofit the plants to switch them to lignite, besides dealing with other issues, including regulatory approvals and renegotiations of tariffs and capacity payments,” the source said.

Convincing Chinese investors to change their power plant technology and fuel source may take years. The CIHC Pak Power Company, for instance, rejected a proposal to shift its 300 MW Gwadar project to Thar coal, citing policy shifts away from coal, transportation issues, and financing problems. It also did not agree to replace the project with a solar plant of equal capacity.

Thar mining capacity

“Even if the Chinese power firms agree to the request, we don’t have enough mining capacity to feed any of the three plants,” said a senior executive from a coal power company. Take the example of the 660 MW Lucky power plant, which is designed to use local lignite but is operating on imported coal due to a long delay in mining capacity expansion.

It is using 10-15pc Thar coal, when and if available, to blend with imported coal to produce electricity.

“The mining company was supposed to start supplying lignite to Lucky in 2020, but there is still no sign. Now they have committed to starting the supply in another year or so,” the executive said, who also requested anonymity due to the sensitivity of the issue.

Thar is estimated to have enough lignite resources to produce 100,000MW of electricity for the next 30 years. At present, only three power projects with a combined capacity of 2,640MW on mine mouths are generating cheap power from Thar coal.

“Securing financing for coal projects is the biggest challenge. Pakistani banks don’t have the capacity to provide the kind of financing needed for such projects and for longer periods,” the SECMC source said.

Besides, Chinese lenders “are now reluctant to invest in energy projects here due to various reasons, including China’s policy shift away from coal, risks associated with Pakistan’s ongoing, unpredictable economic situation, overdue payments to existing CPEC power projects, and attempts to renegotiate power purchase agreements with the Chinese IPPs”, the official said. “These factors have led to difficulties in debt financing and causing delays in mining capacity expansion.”

However, he said, the “approvals for Chinese investment are work in progress and if pursued aggressively, we will be able to expand the mining capacity by 2028 to supply lignite to all coal-based power plants if they change their technology”.

Media reports suggest an investment of about $480m is needed to expand the Thar coal mine to produce enough coal for these power plants.

Technology investment

Experts estimate nearly half a billion dollars is needed to retrofit each plant for Thar lignite. Existing plants can blend imported and domestic coal, but full conversion requires significant capital and downtime.

“The existing plants can accommodate a blend of imported and domestic coal in an 85:15 ratio without undertaking major capital expenditure to retrofit their plants. However, to convert completely to domestic coal would require the companies to incur capital expenditure of up to $500m for altering the configuration of the plant to utilise their entire capacity,” said a consultant who has worked with more than one coal power plant.

“At half of this investment, you can get up to 15pc reduced capacity though. Additionally, a plant undergoing technology replacement will have to shut down for six months. Who will bear the cost for that period?” he questioned.

Transportation

Another major challenge would be to transport lignite to hundreds of miles away from Thar to the plants, especially Sahiwal. “The logistics of transporting coal from the Thar coal fields in Sindh to these plants, especially in Sahiwal and Hub, would be extremely complex, requiring the presence of dedicated railway tracks and the construction of additional offloading and handling facilities and a jetty at these plants,” said an expert working in the renewable energy space.

“For that, you need a huge investment in a dedicated rail network from the mining fields to these plants as transportation of lignite coal is not feasible in trucks due to the quantity of moisture and highly combustible nature,” he added.

Benefits

The power company executive argues that the use of lignite in place of imported coal will not reduce electricity prices as much as is being claimed by the government.

“At current rates, imported coal costs almost twice the local lignite. But since you need to burn twice the amount of local coal to obtain the same energy as from imported coal, your fuel costs remain almost the same,” he says. However, the SECMC source insists that the domestic coal price would drop significantly with the expansion in mining capacity, as has previously been the case.

The power firm executive added: “Besides, the additional investment on retrofitting the plants and increased transportation and storage costs may also not help reduce the capacity charges of these plants even if it somewhat reduces fuel expense.”

Nonetheless, the shift to local fuel resources will lighten the energy import bill, ease pressure on the external account and insulate coal power generation from the spot market bloodbath as witnessed in recent years during the post-Covid global economic recovery and the Russian invasion of Ukraine,“ he added.

The consultant argues that “even if we ignore all ifs and buts, the shift isn’t possible before 2030. By then, most of these plants would have paid back a big chunk of their loans. The imported coal power isn’t the villain in our power economy; the elephants in the room are the RFO- and LNG-based plants. Just see the NTDC merit order, and you’ll know this.”

Published in Dawn, August 8th, 2024