Of revised upfront tariffs for coal-fired power plants

Moving to coal to meet power shortfall in Pakistan has been on a roller coaster, and it is hard to tell whether it’s good or bad right now. National Electric Power Regulatory Authority (NEPRA) has just recently revised the upfront tariffs for coal-fired power plants. And in view of what was announced last year, these tariffs are higher, where the regulatory body has fixed efficiency level at par for 30 years to be financed by local and foreign funds for both imported and local plants.
There is no denying that this revision makes sense when looked at from the investment perspective; no investment came into coal generation since the tariffs were first announced, and revision seemed the right way to attract investors. But, here are a few thought-provoking arguments that might just keep coal-based power generation on the roller coaster ride.
First, it should be clear that these revised tariffs are for new projects on imported coal and Thar coal, which do not include coal conversion of IPPs. As of right now, there are four IPPS that can be converted from oil to coal, which requires a policy guideline to be submitted to NEPRA so that would then determine tariffs. Though coal conversion has stalled, common sense and expert opinion suggests that it is definitely cheaper than setting up an entirely new plant.
This brings us to the second bone of contention: the cost of electricity. By NEPRA’s own admission, the revised tariffs are probably one of the most expensive coal tariffs in the world and provide the most amount of incentive to the investor. What about the cost of high cost of electricity that it will bring with itself? About 16-17 cents per KWh will be the cost of electricity produced from the coal-fired power plants, which is expensive and doesn’t really help address one of the lasting issues of very expensive energy in the country.
However, the regulator is not to blame for setting up these tariffs; unluckily the fundamentals are skewed in that direction. One reason that these tariffs are so expensive is because Pakistan does not have indigenous usable coal, and any new coal-fired power plant would entail the cost of import, transportation, shipping, freight and handling charges. All of this increases the cost. Coupled with that, Pakistan has a high risk premium in the international market making cost of capital even higher.
While the local investors seem chirpy about the revised coal tariffs, what must also be of some concern is that the position of the sector is not very encouraging for the foreign inventor. Beside the circular debt raising red flags for all sorts of investments in energy sector, multi-lateral agencies are not supportive of this particular mode of generation due to environmental concerns, which is a great inhibitor in keeping investors away. Also, China is reportedly the only country ready to invest in the coal sector of Pakistan, maybe, because it has a huge coal industry. So until the projects actually kick off and start producing electricity, the coal sector might have to keep enjoying the roller coaster ride.