Jan 28 - Feb 03, 2008

The Economic Coordination Committee (ECC) of the Cabinet is likely to approve this week an indicative up-front tariff for domestic coal-based power generation. It is expected that the benchmark initiative will be for long-term energy supplies utilizing Sindh coal resources, separately for Thar, Lakhra, Sonda-Jherruk and Badin coalfields.

The hasty decision on the part of the government, which may prove to be yet another flawed and shor-sighted measure, is being taken due to the mounting pressure of prospective investors under the garb of encouraging investment in domestic coal-fired power plants. The issue of up-front tariff, basically for Thar captive power plant, is in reality a non-issue and has placed the government in a compromising situation. On the other hand, the credibility of the private sector sponsors is being eroded as the energy crisis deepens in Pakistan, year-on-year and month-on-month basis.

While the government has been hesitant to accept undue demand of the project sponsors of up-front tariff---suggested as high as US Cents 11.1 per kWh--- the investors have recently indulged in a campaign against the concerned government agencies distorting the facts and creating a favorable lobby in the print media. Indeed, the vested interests are exploiting the issue politically, whereas in real earnest it requires adopting a professional approach and understanding.


Tariff for purchase of bulk electricity is based on power generation under various categories of fuel, taking into consideration a variety of conditions and parameters determined for the specific project and taking numerous assumptions. Competitive tariff comprise of (i) energy purchase price and (ii) capacity purchase price. The two components of tariff are (a) fixed charges (such as interest, depreciation, Return on Equity, Operation & Maintenance charges etc) and (b) variable charges (like type of fuel). Again, there are scalable components (fixed O&M cost, insurance, administrative expenses and return on equity) and non-scalable components (debt servicing, including interest and other fees) of the tariff.

Average tariff is worked out for the life period of the project on the basis of constant prices and constant exchange rate, while levelized tariff is arrived at by applying discount rate on average tariff. For the purpose, a techno-economic feasibility study is essentially required indicating technology to be employed, plant efficiency and availability, plant load factor, tentative financial package etc.

Thar coal, or lignite, is being developed primarily as a fuel for power generation. The Private Power and Infrastructure Board (PPIB) has allowed Hasan Associates of Karachi to establish a 1,000 MW capacity integrated mining-cum-power generation project at Coal Block-one of the Thar coalfields. The government of Sindh has also granted an exploration license to Associated Group of Lahore to undertake feasibility activities related to coal mining at Block-two on lease basis to be followed by seeking a Letter of Interest (LOI) from the PPIB for a similar capacity project. Other investors, domestic and foreign, interested to undertake power projects based on Thar coal are in the queue, keenly watching the developments on a high and unrealistic up-front tariff.


Tariff for coal power generation is to be determined by the National Electric Power Regulatory Authority (NEPRA) for each project, based on independent feasibility study to be undertaken by the sponsors. This has to be a bankable document of international standard, as per applicable power policy, procedures, rules and regulations to which the sponsors, in the first instance, agree to abide by. In this case, investigations are required for exploration, assessment, evaluation and appraisal of coal in the leased area to identify and verify its quantity and quality, topographical, geo-technical and hydro-geological studies, conceptual mining plan, mining technology to be adopted, mining project cost, environmental aspects etc. Thus the study will conclude an estimated extraction cost of coal per ton at mine mouth, which has to be viable and economical.

In the second phase, a comprehensive feasibility report is to be prepared by the sponsor for the power plant reflecting on plant design and engineering, technology to be adopted, capital cost, load flow and interconnection study, environmental impact study and financial analysis. In fact, the prescribed feasibility study meets the requirements of the power regulator, the power purchaser, the lender and the environmental control agency, besides that of the government and investor himself, which would principally allow the sponsor to negotiate a tariff with the power purchaser and, subsequently, to submit a tariff petition to the power regulator.

None of these conditions and parameters of the project that essentially form the basis of tariff calculation are currently available and Pakistan has practically no experience of operating a coal-based power project to suggest an up-front tariff at this stage. Under pressure from the investors however the government had nominated a high-level committee to consider and recommend up-front tariff for coal-based projects to please the sponsors, in violation of prevalent policy, rules and procedures, thus not meeting aspirations of the nation.


The world over similar mechanism is adopted or, in case of having relevant experience and expertise, alternatively the tariff-based international competitive bidding (ICB) takes place for granting such projects, as the bidders are required to quote a discount on benchmark. It is in Pakistan only that for socio-economic reasons the sponsors have been allowed to develop projects aiming at promoting utilization of domestic coal for power generation without competitive bidding, international or domestic.

In such case, preparation of a detailed feasibility is a pre-requisite for determining tariff in other countries too. Surprisingly, the sponsors are insisting on an up-front tariff after having obtained sanction of respective projects and committing to abide by the Power Policy 2002 rules and regulations. The sponsors had initially proposed a levelized tariff in the range of US Cents 7 to 9 but have now revised to between Cents 9 to11 per kWh.

The demanded tariff is considered unrealistic and very high, given the fact that globally coal is recognized as the cheapest resource of energy for power generation, which would result in unaffordable electricity in future in Pakistan. Shenhua Group of the People's Republic of China had determined Cents 5.7 per unit and Rheinbraun Engineering of Germany Cents 6.3 per unit, both based on detailed feasibility studies on Thar coal carried out by them, respectively. Analyzing the position in neighboring countries, it is observed that tariff for domestic coal-based power generation though varies from country to country; it is maximum six Cents per kWh anywhere in the region.


The latest domestic coal based power project in India has been won under competitive bidding, in August 2007, at levelized tariff of Indian Rupees 1.19616 (or Cents 4.98882) per kWh. India's largest domestic coal-based Sasan power project of 4,000 MW capacity located in Madhya Pradesh is being developed by Reliance Energy Ltd, for which financial close has already been achieved. JSW Energy is constructing a 1,080 MW power project in Rajasthan the Thar belt in India--that is scheduled for commissioning by end 2008. The 30-year levelized tariff for this project is Indian Rupees 1.91 (or Cents 4.85759) per unit.

Tata Power Co Ltd, India's largest private sector producer, are setting up a power plant of 4,000 MW based on imported coal in the state of Gujarat based on the most modern supercritical technology. The sponsors have been allowed Mundra ultra mega project by the government accepting levelized tariff of Indian Rupees 2.26 (or Cents 5.74772) per unit. A 500-MW domestic coal-based power project located in Baran district of Rajasthan (India) is nearing completion that would sell bulk electricity at Indian Rupees 2.14 (or Cents 5.44253) per unit.

The first coal-fired power plant in Bangladesh, of capacity 250 MW, commenced commercial power generation in January 2006. Known as Barapukuria power plant, it has been established in Parbotipur as an integrated mining-cum-power project and levelized tariff determined is around six Cents. Asia Energy Corp of the UK and Vulcan Energy of the USA are developing 500 MW and 900 MW domestic coal based power projects, respectively, in the Phulbari coal region of Bangladesh, for which about six Cents per kWh is the benchmark.


Pricing of domestic coal is another important and sensitive factor impacting the tariff calculation. The projects approved so far in Sindh are integrated coal mining-cum-power generation projects, meaning the investor himself will be the fuel (coal) supplier to the plant to be established at mine-mouth. Coal mining cost in India is in the range of $ 13-$ 20 per ton, while it is extracted in Turkey at a price around $ 23.

Transportation of coal from mine to the port of shipment is very expensive, due to a variety of reasons, and also the sea transportation. Therefore the FOB (on barge or vessel) and C&F prices are very high relative to mine-mouth cost. Indonesia, leading exporter of thermal coal, at present markets at $ 60-$ 90 per ton C&F/CIF to be delivered in 2009, depending on the quality of coal, which translates into $ 20 per ton at mine mouth. Pakistani investors demand the mine-mouth coal price of their choice-in the range of $ 40-$ 50 per ton---even more than the international FOB prices. Currently, coal in Sindh is mined at less than $ 10 per ton.

It will thus be unfair and discriminatory to announce a hypothetical up-front tariff on the desire of the investors, which will set the benchmark to the disadvantage of consumer and the government. Such an action on the part of the government will also hamper progress on the projects based on imported coal for which feasibility studies are under advanced stage.

Global players namely AES Corporation of the USA and Mitsui & Co Ltd of Japan have been allowed to set up integrated power projects of 1,200 MW capacity each based on imported coal. Obviously their demand will be for a higher tariff than the benchmark for domestic coal-based project. Likewise, this decision will have a negative impact on other integrated coal mining and power generation projects, of cumulative capacity of 550 MW based on coal from other coalfields of Sindh, for which the government issued LOI in recent past and preparation of feasibility studies are currently in progress.


Other significant factors in favor of restricting announcement of an up-front tariff at this stage are, first, that realizing various risks involved in coal mining the government has established a Coal Mining Company, unbundling Thar coal integrated projects into mining and power generation and, second, a National Coal Policy is currently under formulation that would govern investment in coal sector. The approved integrated coal mining-cum-power generation projects fall in power sector as well as coal sector.

Energy experts also show concern about the seriousness of the sponsors who are causing inordinate delay in taking off the projects on the pretext of asking up-front tariff prior to conducting feasibility studies. Gordon Wu's company namely Consolidated Electric Power Asia Ltd of Hong Kong were allowed by the government, under power policy of 1994, to develop a 1,425 MW integrated power project on Thar coal that never materialized due to non-seriousness of the investor. The nation does wish the recently approved Thar coal projects would not prove to be the Gordon Wu project of Power Policy 2002.

{Engr Hussain Ahmad Siddiqui is currently Director of National Engineering Services Pakistan (Private) Limited (NESPAK) Board}.