Pakistan’s energy crisis – II

29 Jan, 2021

The next phase of expansion in the power generation capacity started in 2015 under the China Pakistan Economic Corridor (CPEC) programme. Power sector projects are a large component of the CPEC. Generation and transmission projects account for 7 of the 11 CPEC projects completed and 6 of the 11 CPEC projects under construction at the end of 2018. In addition, the 15 power sector projects that comprise the CPEC energy priority projects—those initially scheduled for completion by 2020 represent 55 percent of the value of all the projects on the government of Pakistan’s CPEC website with an estimated cost listed ($20.9 billion out of $38.6 billion).

Three-quarters of the new generation capacity to be added to the national grid by the CPEC power sector projects is from coal-fired power plants (see Table). Indeed, the government of Pakistan expects the CPEC power plants to contribute to an expansion of coal’s share in Pakistan’s power generation mix from 3 percent on June 30, 2017, to 20 percent on June 30, 2025.

Between 2016 and 2020, nine CPEC power plants with a total installed capacity of 5,218 Mega Watts (MW) were completed at a total cost of $7.8 billion. 75% of this additional capacity came from the power plants using imported coal as fuel. Another nine power plants are under construction with a planned addition of 6,991 MW to the power generation capacity at an estimated total cost of $12.7bn.

Over the past 20 years Pakistan did not take interest in hydro power generation, pushing instead for thermal power plants which caused the share of hydro power to decline in national electricity generation. Therefore, hydro contribution in total electricity generation has reduced from 45 percent in 1990 to 25 percent in 2020, with much of the remaining 75 percent being thermal power. This has increased the overall cost of power generation in Pakistan because of relying more on non-renewable resources.

Three things were noticeable about Pakistan’s energy policy about the independent power plants since the 1990s. First, though it offered highly generous returns, it provided no incentives to make the plant design efficient. For example, Huaneng Shandong Ruyi Company that built the imported coal power plant of 1,320 MW capacity located at Qadirabad, Sahiwal, was guaranteed a return of equity of 27.2% per the company’s agreement of March 31, 2015 signed with National Electric Power Regulatory Authority. In fact, since the government paid for all operational costs, many thermal IPPs understated their efficiency. Second, the policy was fuel blind, which meant investors were free to set up furnace oil or imported coal based thermal IPPs with the government still covering the cost of the fuel. Finally, with the government guaranteeing returns to investors, there was effectively no competition in the market.

Recently, the government has signed memoranda of understanding (MoUs) with some IPPs. The MoUs provide for changes in the terms of the existing power purchase agreements that will reduce the size of the guaranteed capacity payments or fixed costs paid to the IPPs, a major source of accumulation of the circular debt. The government is expecting savings of Rs850bn over a period of 10 years, following the modifications in PPAs. However, this scheme covers the old IPPs which were set up in the 1990s and 2000s and had consented to the alterations proposed in their power purchase deals with the government. In recent years, the major build-up in the circular debt has been caused by capacity payments to large power projects (mainly under CPEC) set up since 2015. So far, no progress has been made to get the generous terms granted to these companies under the power agreements (PPAs).

Pakistan’s flawed energy policy lies at the core of its recurring crises. The policy attracted investments only in the thermal power as it offered a quick and almost riskless way to make money due to the generous terms offered to the investors. The most difficult and challenging part, that is, managing the distribution was not privatised. As Dr Kamal Munir of Cambridge University wrote in a paper, “the most difficult tasks in the power value chain are more or less all in the public sector’s domain at the moment, i.e., bill collection, and transmission and distribution (T&D), while the IPPs have conveniently kept the “easy” bit, i.e., generation.”

As per the figures available, since 2007 Pakistan has been haemorrhaging 2-4% of its GDP to the prevalent energy crisis “. Energy crisis, as discussed in this two-part of articles, not corruption of a few political leaders, lies at the core of our recent economic crises. Pakistan’s energy crisis must be tackled at both operating and strategic level as it has imposed unjustifiable burden on the poor and the middle class, is a source of international competitive disadvantage for our industry, is a significant contributor to the debt burden and has, in fact, become a national security issue. Unfortunately, all governments have failed to understand the core issues. It is time, we consult professional energy and public finance economists and form a commission to study the energy crisis and sector in a comprehensive manner and come up with policy recommendations aimed at providing a long term and sustainable solution because clearly both the bureaucrats and the conventional wisdom offered by the World Bank and the IMF have failed to provide a sustainable solution.

===================================================================================================================================================================ENERGY PROJECTS UNDER CPEC===================================================================================================================================================================     Project Name                 Sponsor                                     Fuel Source      Capacity          Start     Completion           Cost        Current                                                                                                                  Date           Date            $mm         Status-------------------------------------------------------------------------------------------------------------------------------------------------------------------1    Sahiwal Coal-fired Power     Huaneng Shandong Rui                           Coal              1320         Dec-15         Oct-18         1912.2    Operational     Plant, Punjab                Group, China                                (imported)2    Coal-fired Power Plants      Port Qasim Electric Power                      Coal              1320         May-15         Apr-18         1912.2    Operational     at Port Qasim Karachi        Company (Private) Limited                   (imported)3    HUBCO Coal                   China Power Hub Generation                     Coal              1320         Mar-17         Oct-19         1912.2    Operational     Power Project                Company (Private) Limited                   (imported)4    Engro Thar Coal              Engro Power Gen Thar LTd./China                Coal               660         Apr-16         Jul-19          995.4    Operational     Power Project                Machinery Engineering                         (local)                                  Corporation (CMEC)5    Quaid-e-Azam Solar           Zonergy                                        Solar              300         May-15         Jul-16            460    Operational     Park (Bahawalpur)6    Hydro China Dawood           Hydrochina Dawood Power                        Wind              49.5         Mar-15         Apr-17         112.65    Operational     Wind Farm (Gharo, Thatta)    Pvt. Limited (HDPPL)7    UEP Wind Farm                UEP Wind Power Pvt.                            Wind                99         Mar-15         Jun-17            250    Operational     (Jhimpir, Thatta)            Limited (UEPL)8    Sachal Wind Farm             Sachal Energy Development                      Wind              49.5         Dec-15         Apr-17            134    Operational     (Jhimpir, Thatta)            Pvt. Limited (SEDPL)9    Three Gorges Second and      Three Gorges Second Wind Farm                  Wind               100         Mar-17         Jul-18            150    Operational     Third Wind Power Project     Pakistan Ltd. (TGSWF) & Three Gorges                                  Third Wind Farm Pakistan Pvt. Ltd. (TGTWF)10   Thar Coal Block & Power      Shanghai Electric Power Company            Coal (local)          1320         Apr-16         Feb-23         1912.2          Under     Plant (Shanghai Electric)    Limited/CCTEG and SSRL                                                                                               Construction11   HUBCO Thar Coal Power        HUBCO                                      Coal (local)           330         Jan-20         Dec-21          497.7          Under     Project (Thar Energy)                                                                                                                             Construction12   ThalNova Thar Coal           IPP                                        Coal (local)           330         Feb-20         Dec-21                   497.7 Under     Power Project                                                                                                                                     Construction13   Karot Hydropower             Karot Power                                    Hydel              720         Feb-17         Jan-21        1698.26          Under     Station                      Company Ltd.                                                                                                         Construction14   Suki Kinari Hydropower       Suki Kinari Hydro (Pvt) Ltd/China              Hydel              870         Dec-16         Dec-22           1707          Under     Station, Naran,Khyber        Gezhouba Group Company Ltd                                                                                           Construction     Pukhtunkhwa15   Power Project At Gwadar      China Communications                           Coal               300         Nov-19                         542.3          Under                                  Construction Company                        (imported)                                                               Construction16   Matiari to Lahore                                                                          2000 MW     Transmission Line Project    China Electric Power Equipment and                           with 10%                                  Technology Co.Ltd. (CET)/State Grid        Transmission    overloaded         May-18         Mar-21        1658.34          Under                                  Corporation of China (SGCC)                    Line        capability                                                Construction17   Thar Mine Mouth Oracle       M/s Oracle Coalfields SEPCO                Coal (local)          1320      LOI stage      LOI stage           1912      LOI stage     Power Plant & surface mine   and Yanzhou Coal                                  Actively Promoted Projects18   Kohala Hydel Project, AJK    CTG/CWEI (China Three Gorges)/(CWE             Hydel             1100         Jun-20           2026        2364.05          Under                                  Investment Crop)                                                                                                     Construction19   Cacho 50MW Wind              Cacho Wind Energy Pvt. Ltd                     Wind                50      LOI stage      LOI stage            TBD      LOI stage     Power Project20   Western Energy (Pvt.) Ltd.   Western Energy (Pvt.) Ltd                      Wind                50      LOI stage      LOI stage            TBD      LOI stage     50MW Wind Power Project     Azad Pattan Hydel            China Gezhouba                                 Hydel              701         Jul-20           2026           1650      Agreement     Project, AJK                 Group/Larab Group                                                                                                          Signed     *LOI = Letter of Intent===================================================================================================================================================================

Copyright Business Recorder, 2021

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