PD identifies coal discount gaps causing Rs380mn annual losses to Pakistan

In a major step to reduce electricity costs for consumers, the Power Division has identified significant inefficiencies in power plants’ procurement of imported coal and issued policy guidelines for corrective action that could save the national exchequer up to Rs380 million annually.

The revelation came across during a series of high-level meetings chaired by Federal Minister for Power Sardar Awais Ahmed Khan Leghari, where officials reviewed actual data, contractual arrangements and market practices rather than relying on reports or external inquiries, read a statement on Tuesday.

As per the PD, Pakistan has a significant fleet of coal-fired power plants with a combined capacity of approximately 5,280 megawatts that rely wholly or partly on imported coal.

These include three major 1,320 MW plants at Port Qasim, Hub Power and Sahiwal, as well as the Lucky and Jamshoro plants, which also have the capability to use imported coal.

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To keep these plants running, they must enter into coal supply agreements with international suppliers, said PD.

It informed that the price of imported coal is generally linked to internationally recognised benchmarks such as the API-4 index, which reflects the market price of coal traded in global markets. However, the price that a power plant ultimately pays depends not only on this benchmark but also on the discount it is able to negotiate with the supplier, it said.

The PD analysis revealed a significant discrepancy.

“Different power plants were purchasing coal from the same suppliers, using the same international pricing benchmark, yet receiving materially different discounts ranging from $0.25 to $7.12 per metric ton.

“The review also found that the same supplier had offered substantially different discounts to different power plants. In some cases, backup supply arrangements were negotiated at lower discounts than the main supply agreements. There were also instances where coal was being received from a supplier offering a lower discount even though another supplier offering a higher discount remained under contract,” PD revealed.

The division was of the view that the discrepancy matters because the cost of fuel is ultimately passed on to electricity consumers through the tariff. “Any avoidable difference in fuel procurement cost directly increases the burden on households and businesses across Pakistan,” it said.

As an immediate measure, policy guidelines are being formally issued to the National Electric Power Regulatory Authority to enforce greater transparency, consistency and competition in coal procurement.

“As a first phase of reform, the Power Division is introducing a simple but important principle of ‘best available discount’ in coal procurement, under which power plants will be required to purchase coal from their contracted suppliers offering the highest discount against the applicable international benchmark and will not be permitted to purchase from a supplier offering a lower discount.

“Based on this reform, an estimated saving of approximately 380 million annually is expected. This saving will be achieved without any additional investment, but simply by ensuring that power plants purchase coal at the best available discount,” it said.

Energy Minister Awais Ahmed Khan Leghari noted that this is not about interfering in commercial operations but about ensuring that where fuel costs are ultimately passed through to consumers, procurement is conducted efficiently and transparently.