Gwadar Coal Power Plant: One Step Forward, Two Steps Back

In a revolutionary event last month, the Pakistani government took a political decision to go ahead with the Gwadar Power Project, which, despite being declared a “fast track project” under the China-Pakistan Economic Corridor (CPEC) in 2016, has not made any substantial progress since its inception . The decision, taken at a high-level forum hosting China-Pakistan bilateral talks, points to a deeper problem that has been prevalent in the country’s energy sector for a long time: the decoupling between evidence-based research and policy decisions. .

Decision making happens mostly at the highest echelons of power, without any public disclosure of the analysis or work (if any) behind it. In this case, it does not matter whether the poor economic state of the country will be able to sustain another source of energy generation dependent on imports, which may be subject to price shocks in the future. What matters is that Pakistan can appease its powerful allies in the hope that they can provide some support to keep the country afloat.

The revival of the 300-megawatt (MW) Gwadar power station based on imported coal comes after years of ambivalence by the Pakistani government to go ahead with the project in its original form. The project was first proposed to switch to liquefied natural gas (LNG) on environmental grounds during the Pakistan Muslim League-Nawaz (PML-N)-led government in 2016.

Apparently no progress was made on this front, and the future of the project remained uncertain until the Pakistan Tehreek-e-Insaf (PTI) government announced a moratorium on coal-fired power generation in December 2020. Many in political circles speculated that the project would be shelved as it had failed to achieve financial close. However, there were no official statements about it.

In July 2022, the Gwadar power plant made national news again when the current government, pressured by its economic problems and a rising import bill, decided to convert it into solar power instead, with imports from Iran as backing. They were also considering the possibility of changing it to thar coal as a cheaper alternative. Nothing was concrete, however, as any changes to the project plans first had to be approved by the CPEC Joint Cooperation Committee (with members from China and Pakistan). Therefore, any modification of the project could not have been made unilaterally.

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While the Pakistani government was contemplating switching the project to an alternative fuel, their Chinese counterparts remained committed to the idea of ‚Äč‚Äčimported coal. Ultimately, the Pakistani side was “forced” to reverse its political goals and get the plant running again on imported coal.

Running the Gwadar power station on imported coal may add to Pakistan’s current economic stress. The past year turned out to be a tumultuous one for imported fuels like LNG and coal. The free on board price of South African coal, which accounts for about 70 percent of Pakistan’s coal imports, hit an all-time high of $457 per ton in March 2022.

Pakistani coal power plants were not insulated from these price shocks and faced delivery costs of up to $419 per ton. Since fuel costs are pass-through, this directly affected the cost of power generation from imported coal, which reached 19.3 US cents/KWh (Pakistani rupees 51/KWh). Although international coal prices are now down (South African coal is currently trading at $140 per tonne), it is still higher than the coal price in 2017 ($109 per tonne), when the feasibility of the project was first considered.

Pakistan’s ongoing currency (forex) crisis has also severely affected the ability of coal-fired power plants to source fuel from their coal suppliers. The State Bank of Pakistan has been unable to meet foreign exchange requests for some coal-fired power plants due to the country’s severely depleted foreign exchange reserves. Recently, Port Qasim Electric Power Company (Pvt.) Limited had to close its 660 MW units due to the plant’s inability to pay its coal supplier. It may not be wise to bring in another imported coal power plant in such circumstances when the existing ones are having such a hard time continuing operations.

Using indigenous Thar coal, which currently costs $47 a ton, would make the most sense, but Pakistan is caught between a rock and a hard place when it comes to Gwadar. The Thar coal mines are located almost 1,000 kilometers from the port of Gwadar, with no rail network connecting the two regions. Therefore, transporting coal from Thar to Gwadar would require significant investments in rail and road infrastructure, which would reduce the feasibility of using domestic coal as an alternative.

The currency crisis has not spared domestic Thar coal production either, as Sindh Engro Coal Mining Company says. you struggle to pay its Chinese O&M contractor, which is threatening to suspend mining operations if the current situation prevails.

On the other hand, Gwadar is of immense geostrategic importance and is the lynchpin for China to gain access to warmer waters. Without access to a reliable electricity supply, the region will not reach the level of industrialization necessary to make the port city a successful commercial hub. Even with this, the push for imported coal seems inappropriate, given that other viable alternatives may be present.

The port city currently runs on electricity imported from Iran, which is so far in limited volume, putting the region at risk of prolonged outages. However, a new scheme was launched on 1 March whereby Gwadar receive 100 MW of energy imported from Iran. These increased volumes should be enough to meet current needs in the region, and any incremental demand that arises with further development in the region could be met by solar or wind power along with more imports.

What is perhaps missing from the picture is the complete lack of research on the applicability of these alternatives, not only from an economic point of view, but also from a social and environmental point of view. The decision to go ahead with imported coal should have been made after carefully considering all other available options rather than being politically motivated.

For now, Gwadar may have taken one step forward in the short term, but another two steps back in his long-term prospects.

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