New Thar coal tariff and allied issues - I

Thar coal tariff is due for renewal of tariff for which a public hearing was organized yesterday. Ministry of Water and Power has untypically asked for a downwards revision of the tariff by 20%. Lately, they have started talking quite some sense, as they issued a similar concern regarding high renewable energy tariffs issued by Nepra. Earlier, they more often than not used to ask for higher tariffs. Had this not been the case, there would not have been a move for requesting a reduction in the Thar tariff. I have been raising the issues of balancing the incentives vs loss of market due to high prices, while in government and outside government. My book, Issues in Energy Policy, is replete with the undesirability of high tariffs. In this article, we will take a stock of the situation with respect to Thar coal Tariff in particular and coal tariff in general.
The major issue in case of Thar coal Tariff is the Rate of Return allowed at an IRR of 20% on equity which is translated into 35.4% RoE in operational years. Perhaps in the history of utility sector, nowhere in the world, has such a high return ever been allowed. The normal Nepra rates for imported coal power plant tariff are 15% IRR on Equity translated into 24% ROE. A 15% IRR on Equity compares well with others, say India which offers the same return. However, that is in local currency and includes tax. Our currency on the average depreciates at 5% per year. In local currency terms, Nepra ROE rates translate into 20% IRR and 31% RoE. For Thar, it would be horrendously high at 25% IRR and 41% RoE in local currency terms, which actually matters. Nowhere in the world, such high returns have not been offered. An incentive of 1-2 % would have been more than enough, if at all.
Engro manages to get better terms as a starting party. They got a very high tariff of 66 cents per MMBTU in their RLNG terminal, while later parties, two years hence, and are getting 41 cents for the same. The same is happening in Thar coal. Good communication skills and stakeholder management is all that is possibly required to get a good deal.
I am not sure why Nepra helped start a controversy on coal tariff by approving RoE instead of IRR on Equity. I assume they are equivalent. In ROE, returns are provided only in operational years, while IRR includes payments during construction. Only because the junior guys dealing with spreadsheet found it more convenient. I would suggest return to IRR which is more versatile, understandable and comparable and perhaps even more transparent. Secondly, tariff determinations are a bit cryptic, ie, calculations are not easily verifiable. Presentation should improve providing major calculation steps. One has to develop his own model in order to fully comprehend the determination issued by Nepra.
People used to yearn for local coal utilisation expecting that it would be cheaper to do that and would save foreign exchange. In India, local coal is 30% cheaper than the imported one. None has proved to be true. Thanks to the add-on costs awarded by NEPRA to imported coal power tariff such as about 20 USD per ton for port handling, there is some comparability to Thar coal prices vs imported one.
Thar coal price as proposed by Engro and approved by TCEB (Thar Coal Energy Board) in the initial 10 years is 50.69 USD per tonne which boils down to 3.84 USD per MMBTU. Imported coal presently is low priced due to lower oil prices partly at 69 USD per tonne as opposed to 2014 when reference tariff was awarded, international prices were 89-90 USD per tonne FOB. For those who may not being knowing, fuel costs are treated as pass-through. It does not matter what were the prices when tariff was awarded, power producer is paid at current prices which may be high or low, a fair arrangement taking out any gambling element that would have been there otherwise.
For Punjab-based coal power plants such as in Sahiwal, there would be another add-on in the form of rail transportation cost from port to site. Railways maintained that it is the GoP/ECC which determines Railways tariff and have questioned Nepra's jurisdiction in this respect, the latter was inclined to issue or approve transportation component as well. I am not sure if the issue has been settled and at what tariff. Similarly, Thar coal (mineral) part is not under purview of Nepra. TCEB solely determines the coal price. These are tricky issues on which some deliberation is required. TCEB is a producer-linked agency and not a regulator to be independent.
Can there be reverse auction or competitive bidding. I am not sure if reverse auction can be there in coal power plants in Thar or otherwise. Competitive bidding can always take place, if one power plant is brought for tendering at a time allowing sufficient competition. However, in the CPEC context, wherein bidding option is not available, what can be done? I have made some submissions in this respect in my earlier article (The conundrum of single bid?) in this very newspaper exploring the options in this respect.
Is the CAPEX right is always a question? In case of Solar and Wind power tariff, which are simpler and a lot of recent projects are always there to draw upon, CAPEX issue is much simpler. In large plants such as coal and other thermal, the issue is much complicated. If EPC costs are comparable, non-EPC cost is an irritant and varies substantially from site to site and offers ample opportunities for those whose business model thrives on CAPEX padding and no equity. Even in EPC, there are many variants; thermal efficiency and coal quality affect CAPEX; environmental specifications are a major factor; Sox and Particulate matter controls are normally there in almost any power plant being installed these days but there the issue of their performance characteristics and stringency; whether NOx controls are there or not can be a major variant affecting CAPEX. We are reproducing a table from an IEFF report on coal.
Thailand has signed an agreement recently with ALSTOM/Marubeni for installation of a high efficiency (44-45%) coal power plant running on Lignite a la Thar coal. A 600MW plant would have an EPC cost of 950 Euros which translates to 1.742 million USD per MW. The plant would have very high environmental performance including Sox and Particulate control. I am not sure if NOx is included. In Malaysia, the CAPEX rate is 1.2 million USD per MW and in Indonesia 2.0 million USD per MW. In India, Alstom, Doosan, Siemens and Toshiba are supplying High Efficiency Super-critical and Ultra Super-critical coal power plants at rates of 0.9 to 1.1 million USD per MW. For Thar Coal Type Lignite based power plants, the rate is around 0.9 million USD per MW.
One can either be sure under bidding or a feasibility estimate done by experts. Both are unavailable in Pakistan. Nepra thinks that by collecting a motley crowd of semi-experts, is enough for correct determination. Bureaucracy cannot be cured of the know-all syndrome. Or is it a penny-wise pound foolish approach? A small amount of money paid to experts (international) may save hundreds of millions of USD. Overall, it appears that CAPEX of imported coal power is about right. One is not very clear about the specs, especially, on environmental equipment.
(To be continued)

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COMPARATIVE TARIFF: THAR VS IMPORTED COAL
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                     units             Imported     Thar     India  India Sub
                                           Coal     Coal  -lignite    Bitumen
Capacity             MW                    1099      330       500        660
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CAPEX                Million             1483.7    497.7         -          -
CAPEX per MW         Million USD/MW      1.3500   1.5082       0.9        0.9
Thermal Efficiency   %                       40       37        35       35.5
Tariff               Usc/kWh             8.0139   8.5015       6.6        4.5
Energy Cost          Usc/kWh             4.9161   3.5411         -     2.5252
CPP                  Usc/kWh             3.0978   4.9604         -     1.9748
ROE                  %                     24.5    30.65         -       15.5
Coal price           USD/ton                129    50.69     34.68         30
Coal price           USD per MMBtu       5.7633     3.84     2.735     2.6273
CV                   Btu/lb               10253     6000      5780       6800
Capacity factor      %                       82       85        85         85
Exchange Rate                                97       97      66.6      66.66
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