Pakistan’s power sector faces a capacity trap because of the excessive capacity contracted during 2013-18. This resulted in power capacity additions for both indigenous and imported fuels. Undoubtedly, the generation capacity added through hydel, nuclear and Thar coal has played a role in stemming the exorbitant rise in energy prices. However, the power plants constructed to utilise imported fuels — imported coal and RLNG — face underutilisation challenges.
During the aforementioned term, Pakistan built about 3,600MW capacity on imported coal and 4,800MW capacity on RLNG. Understanding why the non-utilisation of these projects is a challenge for the entire sector is important.
Consider that you have rented an SUV for a year to use it for your commute to your office; however, after three months of renting the car, you realise you can’t afford the expensive fuel to drive it. Hence, you end up parking it in your garage and start using other inexpensive means of travel. However, the rent for the car will need to be paid, regardless of its use.
This issue of underutilisation of imported fuel capacities can be traced primarily to two factors — one being that the expected power demand growth of the country did not materialise, especially during the last two years.
It can be argued that the decision makers of that time should keep this consideration in mind that Pakistan’s economy is prone to constant boom and bust cycles. Unfortunately, this was never factored into their workings while deciding to add this capacity.
If imported coal projects had been built on Thar coal, their combined utilisation in the first nine months of FY23 could have saved the country roughly Rs129bn
The other factor is that Pakistan faces a severe foreign exchange crunch. Owing to the unavailability of required dollars, Pakistan has not been able to procure the imported fuels needed to run these facilities.
A comparison of the quarterly indexation carried out by the National Electric Power Regulatory Authority for ex-Wapda distribution companies shows that the combined utilisation of the imported coal fleet of Pakistan has reduced from 65.41 per cent during the first nine months of FY22 to 24.67pc in the same period of FY23, indicating a steep decline in the use of installed imported coal capacity.
This statistic can be compared with the local coal facility of Engro Power Thar Limited (EPTL). Since the rest of the Thar coal-based projects have started commercial operations recently, their data is not available for this entire period.
EPTL’s utilisation increased from 62.67pc in 9MFY-22 to 67.78pc in 9MFY23, whereas imported coal’s combined fleet average utilisation was 66.41pc in 9MFY22 and it decreased to 24.67pc. Referring back to the earlier example of the parked SUV, the rents for the contracted capacity must be paid. Thus, the government actually paid Rs203.59 billion to imported coal projects in capacity payments during the period.
The power regulator, while awarding the tariffs to these generators, calculated the capacity component, assuming that these facilities will be running at 85pc of their available annual capacities. Thus, the massive underutilisation of these assets has contributed towards excessive capacity payments that are required to be borne by the common electricity consumers.
Working out a hypothetical scenario, had these imported coal projects been built on Thar coal, their combined utilisation would have been equal to the one achieved by EPTL in 9MY23, saving the country roughly Rs129bn. This amount could have been directed to finance the capital requirements needed to convert imported coal facilities to Thar coal.
Not only would capacity payments be reduced, but Thar coal mines could be expanded, enabling them to achieve the required economies of scale to attain further cost reductions.
While the counterargument is that this option is not technically viable, the conversion can be achieved by drying Thar coal. This would reduce its total moisture content and make its utilisation possible in the existing boilers installed in these projects.
With recent chatter of contract renegotiations expected to be conducted with independent power producers, it is high time that the policy and decision makers start working towards such initiatives that can be amicably agreed upon by all the parties involved. The option to convert the imported coal assets to Thar coal seems achievable, with a little intent and out-of-the-box decision-making.
The writer is an energy expert. X (formerly Twitter): @deHAMMAD
Published in Dawn, The Business and Finance Weekly, September 18th, 2023