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Cost of generation: Energy Policy – II

Reducing the cost of generation along with boosting sustainable energy supplies is to be the cornerstone of the new energy policies and initiative. The nemesis of Prime Minister Nawaz Sharif, General Pervez Musharraf (Retd) gave us the gift of oil-fired expensive electricity. Almost all IC engine-based power plants consuming oil with a vengeance have been installed during his reign. PM Nawaz Sharif has visited Gadani and announced an Energy Park to be installed with several power plants (4000-5000 MW) based on imported coal.

He also announced that the first plant would be installed by the government itself. This is mixed news for Pakistan’s energy scene. We will examine the pros and cons of this announcement in this article along with a discussion on reducing cost of generation options.

It is good news as it indicates the thrust of the new government towards launching cheap energy projects having a large generation potential. Despite the rumblings of the environmental lobby, Coal is still the most widely used energy resource. It is widely available in the world in quantities that are expected to last for two centuries.

Allah Almighty has not excluded us from this bounty and has given us Thar coal. These are sad days for Thar coal. Sindh government should ponder over as to why, the foreign investors and as well as a government which is hard pressed to solve electricity and energy problem, are thinking in other directions? Sindh had to even belabor the point of inclusion of Thar coal in the new energy policy that has been recently approved by the CCI (Council of Common Interest).

Sindh government wrested full control of the Thar coal in a rather long and wasteful process, when the World Bank was apparently willing to finance the project and extended its technical assistance and grant which financed some major studies and the planning effort.

It could not deliver in one of the ideal circumstance and opportunity they had of having the same PPP in saddle in Sindh and as well as the centre. There has been and there is a black box around Thar coal as administered by Sindh government and its highly politicised bureaucracy. Why doesn’t it move at all?

There may be several reasons. Skeptics cite that the largest one is the intermediating interest that puts off every potential investor. Sindh government put all its eggs in one basket of Engro and provided all kind of impossible concessions like a return on equity rate (ROE) of 20.5%, something unheard of in the utilities sector anywhere in the world.

The result is an asking tariff of almost 12 cents, twice as much as Sehua (Chinese) offer a decade back and also twice as much as generally and widely recognised and prevalent tariff of 5-7 cents. Naturally with all kinds of interests provided for, the asking tariff would be so high.

Who would be interested in that expensive electricity, Thar or no Thar. They wouldn’t want to be caught in from pan to fire syndrome? Those who have cooked this bad dish of Thar coal possibly accommodating all interests are now have joined a political party that is struggling for Insaf. It is this kind of tariff demands that put off the federal policy makers, along with more than necessary proclamations of provincial autonomy.

Even the federal bureaucracy has a lot to be desired in expertise and acumen, what to talk of provincial bureaucracy which is usually less well-endowed and trained. One would suspect that the mutual disdain and mistrust of the two parties PML (N) and the PPP has something to do with the announcement for going to Gadani than to Thar. Federal ministers hardly visit Sindh. Should national interest suffer due to ego and petty political issues? PML (N) has co-operated with PPP government in the past in national interest, why shrug them now?

The idea of installing coal power plant on the coast like Keti Bandar and Gadani is not new. There is an appeal of imported coal due to simpler ocean transportation of coal from a wide variety of competitive sources. AES, a major actor in the international power scene, did a feasibility study on a 1000-1200 MW project and got its tariff approved by Nepra at around 7-8 cents in 2008-09. Mitsui, the Japanese giant also submitted a similar proposal.

The common jetty facilities could also be utilised by Hub Power which is to be converted to coal as well. I have the honour of being associated with the project as a consultant. I am not sure if AES or MITSUI would still be interested. However, PM is talking of Chinese investment. Nothing would be better than that. They are cheap and efficient and willing to take initiatives and risk. They are number one in coal power from almost all perspectives.

Knowing of Engro’s failure, the PM has announced installing the first plant by the government. Power sector is too much for the local companies. It is beyond their financial and management prowess. Engro is recovering from a billion USD investments in fertiliser sector where it has the expertise.

Government has the resources and wherewithal to go into new and virgin sectors and areas. Once ice is broken, many unknowns discovered and risk becomes measurable and is reduced, local and foreign investors come in. The question is why not invest in Thar as well as a government investment? The answer may be the same inter-governmental disdain, possibly? Why has Thar coal been made such a taboo, one wonders.

Sindh government would be well advised to come up with proposals for attracting federal interest and investment and shun its go-it-alone policies. It is in every body’s interest to develop Thar coal, more so for Sindh and its people than anybody else. In Sindh, one has to ponder over, an unfair attitude to federalism.

The demand that resources should meet the demand for producer province puts the other provinces off. Why should then the other provinces and the Federal government take interest in resource development of other provinces, one wonders. A reasonable allocation formula than the broad undefined demand has to be worked out.

Federal government should also analyse the impact of imported coal on the balance of payment. The PKR has been going down due to huge trade deficit. It is not easy to boost exports. It is easier to reduce imports and produce locally. A 1000 MW plant would impose a foreign exchange drain of about 500 million USD per year. The employment and income generation and boosting of businesses are some of the potential impacts of local coal production.

Germany in the heart of Europe is burning Lignite, although it could import better coal. Greece, Turkey, Poland, and other European countries are consuming dirty coals and avoiding imports to the extent possible. As a short-term one-time measure, it may be tolerated, if local obstacles in Sindh prove to be paramount. Alternatively, the plants should utilise versatile technologies to be able to utilise locally-produced coal, as and when, it is available.

The shortest and equally cheaper other option is wind power. Brazil has installed 1000 MW of wind power in one year at an unbelievable price of 6-7 cents per unit. A Chinese company has reportedly offered 1000 MW of wind power installation in one year. In Pakistan, wind power projects have been approved at the exorbitant and impossible and unaffordable tariff of 15-16 cents. No wonder we have not heard the views of the new government on the subject. They must be in a fix, as to how to correct and rectify the situation.

A good price can be negotiated with Chinese. There are several reference prices which could assist in price settlement. In India, the prevailing wind power tariff is 8 cents. There is a recent deal between a Chinese company and Reliance Industries of India, which provides for a tariff of 6 cents. There is Brazilian auction, which GE won and supplied at the prices mentioned earlier.

If success is not achieved in 1000 MW wind power proposal with the Chinese, government of Pakistan should go for an auction. We have discussed and explained the modalities of such auctions in these pages earlier. I would not blame the Sindh government for the lack of a breakthrough in wind power, as the subject is under purview of the federal government. It is a systemic failure.

Wind and Coal are two cheap and affordable options to-date. It would take a few more years that solar becomes competitive as grid power. In specialised applications limited to day-time use and displacing Diesel, it is competitive even now. Hydro is cheap but takes almost a decade to implement.

There are possible sites where run-of-the-river hydro plants can be installed in 2-3 years which should be identified and pursued. KPK government can play a major role in such projects with some assistance from the federal government.

Akhter Ali, "Cost of generation: Energy Policy – II," Business recorder. 2013-08-09.
Keywords: Social sciences , Social needs , Energy policy , Energy crisis , Energy production , National issues , Bureaucracy , Pakistan , CCI , PPP