Scrapping a coal power avenue

With energy minister Awais Khan Leghari listing the planned 300MW Gwadar coal power plant amongst projects considered unaffordable for the consumers and hinting at scrapping it — along with several other proposed generation schemes of 10,000MW — the future of the long-stalled project appears more uncertain than ever.

The ‘warning’ comes at a time when the imported coal-based plant’s Chinese developer, according to the media reports, has already approached the Private Power and Infrastructure Board (PPIB) to seek its support for negotiating an upward revision in the project cost and tariff with the National Electric Power Regulatory Authority (Nepra).

Announcing a series of actions the government proposes to take to bring down electricity prices, the minister said only the projects with 40 per cent to 50pc physical progress and those that have already achieved financial close would be implemented.

“All future energy contracts would prioritise least-cost electricity, where demand would dictate the technology and power supply lines would dictate the space in which the next plant should be accepted for the power system. Competitive bidding will decide the final selection, with private investors taking on associated risks,” he said.

Fate of the Gwadar power plant is under question as consistent delays and high costs have rendered it unaffordable

The Gwadar project has failed to make any headway since Nepra first determined its tariff in 2018. This is despite it being listed as a “fast track project” under the China-Pakistan Economic Corridor (CPEC) initiative and a strategic or committed project in the National Transmission & Dispatch Company’s long-term Indicative Generation Capacity Expansion Plan (IGCEP) on account of several reasons.

Those reasons include — but are not limited to — the Covid pandemic, Pakistan’s dollar liquidity crunch, the overall slowdown in work on the CPEC-related schemes, and, more importantly, Islamabad’s desire to shift the power plant to Thar coal or replace it with a solar plant of equal capacity due to fuel price considerations, as well as on environmental and social grounds.

The government eventually surrendered to the company’s demand to adhere to the original plan of running the plant on imported coal in early 2023 as the project sponsor demurred, rejecting the proposal to amend the agreement to shift it to Thar lignite or LNG or replace it with solar power.

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 on CPEC, whose consent is essential for making a change in the original plans, didn’t approve of the local lignite suggestions.

Nepra has revised the project cost and tariff twice since the first determination. In its latest tariff review published in May last year, the power sector regulator allowed the Chinese investor a more than 51pc increase in the project cost to $444.49 million compared to its original determination of $292.77m.

The new project cost is also 24pc greater than the $358.3m determined in 2023’s review but is 27pc less than the $607.14m demanded by the developer. The increase is primarily driven by a significant spike in engineering, procurement and construction prices, a surge in the Sinosure fee, and a rise in the interest rate costs.

An important aspect of the latest tariff determination is that the exchange rate reference of Rs105 a dollar and subsequent indexation has also been reset at Rs278.5 a dollar.

Furthermore, Nepra has nearly quadrupled the 30-year levelised tariff for the project from Rs6.96 per kWh originally granted to Rs25.99 (9.3 cents), consisting of an energy purchase price of Rs15.84 and a capacity purchase price of Rs10.04, which also includes a guaranteed return of Rs1.63 and debt servicing charges of Rs5.73 for the first 13 years.

In a recent letter to the PPIB, the project sponsor, CHIC Pak Power Company, complains that the new tariff lacks investment viability as “Nepra has technically reduced the internal rate of return and O&M [operation and maintenance] costs”.

Although the approved capacity tariff is similar to that of the currently operational 1,320MW large-scale imported coal-fired power project, the letter argued, the unit investment and operating costs for smaller coal-fired power projects are significantly higher.

The energy sector experts argue that including the Gwadar power plant based on imported coal among the strategic projects defeats two major objectives of power price reforms: the least-cost principle and the movement to renewable energy sources. 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.”

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” to cater to the port city’s base load, which is central to the CPEC initiative.

According to energy and climate change expert Dr Khalid Waleed, when the license of the plant was being finalised in 2018, Balochistan’s Energy Department had termed the establishment of a coal-fired plant as a deviation from the Paris Agreement for Climate Change, which demands the reduction in the carbon emissions from its member states. It said Gwadar is a new port city which requires sustainable, modern, clean energy resources to meet its energy needs.

Moreover, the provincial environmental protection agency had also communicated various concerns to the project company. In 2023, the Pakistan Cotton Ginners Association opposed using imported coal for the project.

Therefore, energy sector experts say the solar conversion of Gwadar’s power plant to solar will make more economic and environmental sense. Additionally, the absence of grid infrastructure will provide a good opportunity to invest in a Gwadar-specific electric grid based on state-of-the-art grid technologies to evacuate and manage more variable renewable energy.

Energy sector experts argue that the Gwadar power project points to the dissociation between evidence-based research and policy decisions in the power industry. They say the renewable option for meeting Gwadar’s electricity needs would have been the best choice because it is the cheapest, most secure, and most reliable option.

Suppose it is to develop Gwadar and commercialise its port as a recent report suggests. In that case, the government will have to decide sooner rather than later on what kind of technology it wants to use for the supply of electricity to the region that is dependent upon power imported from Iran. Without a sustainable, cheaper power supply, the region will remain cut off from the national economy.

Published in Dawn, The Business and Finance Weekly, January 13th, 2025