Thursday October 28, 2021

Too little, too late, too expensive

January 08, 2021

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

Prime Minister Imran Khan has recently announced that there will be no more coal power plants in Pakistan. International climate lobbies have welcomed the statement but local energy circles or at least parts of it are not happy.

Many people believe that Pakistan’s carbon footprint is too little and that we have vast coal reserves at Thar which we have only begun to exploit and that a lot needs to be done in this respect. The statement may be corrected or adjusted in the coming days under technical advice by other parts of government. There is a background to this matter as well – the mounting circular debt of Rs2.3 trillion and high cost of generation of which coal, including Thar coal, is a major part.

Coal is, admittedly, a dirty fuel and contributes to the carbon footprint. On the other hand, even to date, coal is generating more than 33 percent electricity in the world. Both our friend China and foe India are the two largest producers and consumers of coal. But both have announced a reduction in their reliance on coal. China plans to reduce it from 70 percent to 50 percent in 2025. Similar statements have emanated from India’s side.

The UN secretary-general has recently said that there must be no new coal and all existing coal in the EU should be phased out by 2030 and elsewhere in 2040. He has also urged that all coal financing must end. It appears that in most coal-committed countries, coal will be phased out by 2050. Indeed, we have started late on coal; India started with its Lignite in the 1950s and its Thar Lignite in 1970. Pakistan ignored and delayed Thar coal and finally agreed on an expensive proposal after rejecting a cheaper offer from China on which we will elaborate later in this space. Ironically, the same company has agreed recently to cooperate in building a coal-to-diesel plant under the CPEC framework.

The current production cost of Thar coal is $61 per ton, more than twice the international cost of similar coal under comparable geological and mining conditions like stripping ratio, water and chemical composition. Similarly, Thar coal-based electricity is 40 percent more expensive than elsewhere and equals in cost with imported coal power plants which produce at 8.5 USc per kWh; the latter itself is 40 percent more expensive than its counterparts elsewhere.

The problems are not in Thar coal itself. It is as good as its counterparts elsewhere in the world in terms of properties. The problem has been in management and policy. High CAPEX, zero equity syndrome, high interest rates and unseen RoE of 20 percent have led to excessive cost. Unless these are corrected, Thar coal can never become competitive. All recent studies have demanded this. A Chinese team has recently submitted its report recommending reducing Thar coal cost by 50 percent if coal-to-diesel production has to be made viable. Locally, Hub Power has made similar demands for conversion of its oil-based power plant to Thar coal. And, finally, the new SAPM for power has echoed the same.

The infant industry support argument does not apply. Indians are producing electricity from the same coal at half the cost and similar volumes, across the border just a few hundred kms away. Nothing extraordinary has been done. Mining projects are implemented away in far-off places like Thar and not in urban neighborhoods. Thus, all the arguments defending high cost do not pass the test of scientific enquiry. Had Thar coal been produced at a reasonable cost, it would have been received with much more enthusiasm and optimism.

And now solar power has come with 2 USc per kWh and storage cost falling by the day. In medium terms, solar would not cost more than 4 USc, including storage cost. This would further dilute the attractiveness of Thar coal. Already, there are people heavily in favour of solar as opposed to any other form of energy including Thar coal. Solar may even push hydropower behind, if the distributed generation catches on and storage issues are resolved.

Thus, Thar coal is late in the day. The tragedy is that we started late due to no fault of anyone else but ourselves. We over-cost it. We started with too little as well. We have 3300 MW imported coal capacity installed recently and more imported capacity in the pipeline. The Sindh government initially wasted time in a power tussle and then maneuvered to get an unreasonable return on equity (IRR) of 20 percent.

The world order is committed to reducing the carbon footprint. Pakistan itself is going to be among the seven countries with the worst consequences of climate change, although our contribution to greenhouse gases is minimal due to a very low degree of development; besides, we have social issues of hunger and poverty. The world may be giving us some consideration but not a lot and not too far in time. We are too dependent on the international order and support. We have insurmountable political security difficulties with our several times bigger and stronger neighbouring country. The recent tilt of Middle-East countries is only an indicator.

We have a highly dependent and unsustainable economy. Despite remittances of $20 billion (based on poor labourers’ toil), we are perpetually in a current account deficit and have to frequently knock at the door of the IMF. This makes it very difficult to defy world order and policies. The least that can be expected is trade restrictions, taxation and incentives.

There are other issues and difficulties such as Thar coal transport, water requirements and transmission of electricity to far-off areas where there is demand. Pakistan is destined to become a water-stressed country which is the last category in water resource classification. Pakistan would have to be careful in its choice of water consuming technologies and even crops like sugarcane and rice. Thus, there are multi-dimensional aspects of the issue which should be kept in mind.

The bureaucracy should be working on the correct elaboration of the PM’s statement. It can be suitably explained. So as not to apply on the planned (20,000 MW) or/and under-implementation projects (8,000 MW. Another possible adjustment may be that the statement wouldn’t apply to coal gasification which is partially clean. It appears that coal (Thar) based capacity may not be able to go beyond the 8-20,000 MW level. There does not appear to be a future of Thar coal in the long run. The PM’s statement may be interpreted in this context.

To those who like coal and love Thar coal and are associated with it in some way, my suggestion would be to correct the inadequacies that have been indicated in the foregoing and bring in competition, transparency and efficiency into it. For some reason, Pakistan’s energy sector has been shy of competition. The last and only two competition that have been held (RLNG Power Plants and Jamshoro ADB coal power plants), gave startling results in reducing the costs.

The tragedy is that Thar coal is 185 billion tons, estimated to last for centuries – and too little of it will be exploited. The world has been using coal for the last two centuries. But this is going to be the fate in most countries which have more coal resources than we have – the US, China, India, Australia and of better quality than our lignite. Allah has given us abundant alternative energy resources as well – solar, wind and other bio-resources. The skies will not cry if Thar coal is not utilized to the full.