POLITICAL ECONOMY OF COAL RESOURCES IN PAKISTAN

NEED TO BE UNTAPPED

SYED FAZLE HAIDER
Jan 21 - 27, 2008

Pakistan needs to take concrete steps to exploit its untapped indigenous coal resources at a faster pace in order to meet the growing energy needs of the country. But the development and exploitation of indigenous resource has ever raised political stakes. The former government had made an ambitious plan to utilize the coal deposit of 175 billion tons in Thar area of Sindh province and generate 20,000MW coal electricity by the year 2016. Unfortunately, the plan could not be materialized due to the bureaucratic snags and non-serious approach of the federal government.

It is actually the political economy of coal resources that has led the country to face a serious power shortage at a time when its economy is growing at a rate of over 7 percent. In Pakistan, the provincial governments do not have the authority to decide the tariff rate on power generation from coal-fired power plants and they can only facilitate the investor companies and provide them the essential logistics. National Electric Power Regulatory Authority (NEPRA) decides tariff rate while Water and Power Development Authority (WAPDA) is responsible for distribution of electricity in Pakistan.

Private firms have mainly been reluctant to start power generation due to unfair pricing formula for coal fired power generation. The finalization of tariff rate at which power would be supplied has been the major issue between the government and private sector resulting in delay in functioning of power projects in Thar coal field. There is an urgent need to evolve a uniformed pricing formula for electricity purchase to guarantee foreign investors for setting up coal-fired power plants in Pakistan. Without any decisive policy on tariff rates, it is very difficult for Islamabad to attract investment in power projects.

Shenhua Group of China abandoned the US$1.5 billion Thar coal project due to disagreement on power. Islamabad's non-serious approach had forced the Chinese Shenhua Group to quit the project of setting up two plants in Thar coal field. The government had backed out of already decided tariff rates of 5.67 cent per unit with the group saying power would be bought at rate of 5.39 cent per unit. The project would not only provide much needed 700 MW power to the electricity-deficient areas, but would also save a huge amount of money already spent on feasibility and other works. With185 billion tons of lignite reserves of Thar coalfield, Pakistan can achieve its objectives in energy sector. Extending over 9,000 square kilometers, Thar coalfield is the largest untapped coal resource in Pakistan. Pakistan needs to increase share of coal in country's energy mix to at least 19 percent by 2030 and 50 percent by 2050.

Shenhua Group started work on Thar coalfield in 2002 and spent over $100 million to conduct two investigation studies about the viability of the project. After concluding its investigation and preparation of a feasibility report, the group was all set to construct the proposed power plants, but the crucial issue of tariff rate on power generation halted the project. Chinese had stopped work in 2004 prior to the official announcement, which was made in the 2007. The group officials had left the project, but negotiations on tariff rates continued and finally Shenhua announced to quit the project.

Sindh holds federal government responsible for the withdrawal of the Chinese group from coal-based power projects in Thar coal field and delay in completion of other power projects. Some critics say that government has deliberately created the power shortage by not taking serious initiative for the development of Thar coal resources for power generation. They contend that federal agencies have been trying hard to build a consensus on building Kala Bagh dam for the past three decades. But the idea is strongly opposed by all three provinces except Punjab, which would be its primary beneficiary. Sindh has been opposing the Kala Bagh dam tooth and nail for its potential devastating effects on agriculture in the province.

The federal agencies believe international competitive bidding is the only way forward contending that short-term thermal projects and their costly tariff could not be accepted as a benchmark for long-term energy supplies from domestic sources. The competitive bidding envisaged under the 2002 power policy did not yield any results and not a single project could be lined up for development.

Last month, in a meeting of Economic Co-ordination Committee (ECC), the caretaker prime minister Mohammad Mian Soomro considered the request of a committee headed by secretary water and power that suggested "separate indicative upfront tariff" for different coal fields in Sindh and fixed coal price of imported Indonesian coal at Karachi minus freight charges as a benchmark coal price for determination of upfront tariff. The ECC, however, directed Nepra to come up with upfront tariff in 10-15 days. Even when the present caretaker Prime Minister tried to develop a mechanism to reach an expeditious decision on upfront tariff for the Thar coal-based power projects last month, he was reportedly opposed by his adviser on energy who called the mechanism as impracticable.

President Pervez Musharraf also tried to evolve an accord, acceptable to both the government and private sector firms working or would start work on the power projects for the completion of projects in stipulated time to ensure smooth supply of power and to meet the growing demand of the country's industrial units. President Musharraf recently asked all federal and provincial officials to accelerate the work on coal related projects including the exploration of coal deposits in all Sindh coal fields. The President issued directives for the setting up of a three-member high-level committee to finalize the tariff rates on electricity that would be generated through coal-based power plants in Thar and other provincial coal fields. The committee, which comprised Sindh Mines & Mineral Development Minister and representatives of federal government and NEPRA, was to decide tariff rates. Shenhua Group is expected to re-start work on the project when the committee would finalize the recommendations of tariff rate on coal-based power projects.

Last week, the NEPRA offered a 30-year indicative tariff of 7.8 cents per unit for a 1000MW coal-based power project in Thar. The Sindh government has however rejected the offer as it had proposed an upfront tariff of 11 cents per unit. Sindh also accused the federal agencies of sabotaging investment prospects in the province.