Mapping the economics of imported coal-fired power plants

Nepra (National Electric Power Regulatory Authority) has rejected the power generation tariff petition of Jamshoro Power Company Limited (JPCL), terming it too high and unaffordable by the consumers.

Is NEPRA playing to the gallery or it has some recipe to offer some solution for tariff reduction? The plant (imported coal-based power unit) is cheaper than the other similar plants approved by Nepra. Are there really some solutions?

Coal power plants’ economics has been under topsy-turvy and continues to be so. Oil prices have come down to 75 USD/bbl but coal still is at 163 USD/t as opposed to 80-100 USD/t of a normal rate. Local coal-based electricity in India has been trading at under 5 USc per kWh.

It went as high as 12-15 USc for imported coal-based electricity. Imported coal IPPs (independent power producers) in India stopped operating their plants or reduced their production. The Indian government has imposed emergency provision to force them to operate their power plants.

It is any body’s guess as to when will the normalcy return in the international market. As anywhere, local energy is the best solution, which we will discuss as well in the following.

Briefly speaking, higher exchange and interest rates and coal cost are the reasons for high petitioned tariff which is about 45 percent higher than the existing imported coal-based power plants. The petitioned tariff is Rs 32 revised from six months earlier figure of Rs 27.

The main and obvious reason is the depreciation of Rupee which the petition assumed to be Rs 218 in Oct 2022 as opposed to the current exchange rate of ‘Rs 284’.

Most new IPP tariffs have been at a reference exchange rate of 105. Another major reason is rise in Libor interest rates which earlier used to be 0.5 percent and now stays at 5.5 percent, but the petitioned value is 4.45 percent in Oct 2022. Also, higher imported coal cost is the third reason for high tariff.

How does JPCL tariff differ from the other coal power plant, Thar and imported? JPCL life-cycle unit power tariff is 12.42 USc (Rs 32). The corresponding LCoE (levelised cost of energy) in 2016 of other imported coal power plants was 8.5 USc. So why the generation tariff of JPCL is is higher despite a lower CAPEX cost. It is the higher fuel cost which makes the difference.

International coal prices were 80-100 USD/ton in 2016-18 and the same is 163 USD/t now. The fuel cost component of imported coal power plant China Hub is Rs 35 per kWh. Add fixed cost component CPP of Rs 14.0, the total adds up to Rs 49.0 per kWh. Thar coal (Engro) fuel cost per kWh is Rs 8.86; Rs 14 per kWh of fixed cost (CPP), it adds up to Rs.22.86 per kWh.

JPCL is of 660MW which is to produce 4.668 GWh/yr units electricity at a capacity factor of 85 percent. JPCL unit CAPEX is 1247 USD/MW as opposed to that of other imported coal power plant at 1448 USD/MW.

Despite implementation delays and high interest cost during construction, CAPEX of JPCL is 14 percent lower than other similar plants. Its unit CAPEX could have been lower, had its designed capacity been permitted to be at 1320MW. The project was supposed to have two parts of 660MW each.

Currently, overhead capex has been built into one part only raising its CAPEX. This was the only power plant which was put into competition and came with the lowest bids as compared to any other similar coal power plant.

One is not sure if the option of implementing the part-II would still be there? ADB (Asian Development Bank) is already being criticized to have funded a coal power plant. It may not be ready to extend support.

Also, contractors may not be ready. One of the solutions to reduce cost is to implement its second part. It may be noted that there is a provision of 20 percent share of Thar coal usage and of 80 percent imported coal share in the plant design.

However, as per petition data, there is practically no difference in the calculated tariff of 12.42 USc. It is the same with and without Thar coal? One could not understand the reason. Perhaps, overhead cost of transportation of Thar coal has nullified the difference. The petitioner has not disclosed coal prices, which have been used in calculating tariff. Here, we would draw the attention of the regulator to standardize the formats and not allow such omissions.

There are two types of solution: 1. Financial; 2. Technical. Financial solutions are reduction of interest rates, extension of repayment period. We have discussed these in detail in our last article on the subject in this space. ADB has already implemented this in its loan terms for JPCL project by offering loan repayment period to 20-25 years; otherwise, the asking tariff would have been much higher.

Nepra and IPPs can try this to reduce the payment rate and burden. Second solution is to reduce interest rates by decreasing the loan spread on Libor. It was unnecessarily increased by Nepra from 3 percent to 4.5 percent in the days of low interest/LIBOR rates of 0.5 percent. Now the Libor is at 5.5 percent effectively doubling the borrowing rates from 5 to 10 percent.

ADB concessional loans are subject to a mark-up by the ministry of finance. This mark-up increases the interest rates to 15 percent. This loan type has been used in JPCL. Consideration may be given to bring this down. This will help postpone the problem by reducing upfront interest costs.

The technical solution is to convert the plant to Thar coal. The issue has been under discussion for the three existing imported coal-based power plants. It is kind of difficult to do that for existing operating plants where various kinds of risks and cost are involved, complicating a reasonable approach and agreements with the coal IPP. In the case of JPCL, it is different.

The plant is owned by the GoP. Technical changes for conversion can be done before commissioning the power plant. Active, serious and immediate consideration may be given by the relevant authorities on this option. Railway track project for Thar coal transportation to north and south is already under consideration. It should be expedited without losing further time.

It is not a question of reducing the high generation and consumer tariff alone. We do not have foreign exchange. Pakistan’s economy is suffering from Current Account Deficit. The solution to our economic woes lies in reducing imports and increasing exports.

What is needed is conversion of coal power plants to local Thar coal and even many industrial sectors like cement, tiles, ceramics, glass and others.

Finally, such currency depreciation and interest rate rise can never lead to reasonable and affordable energy tariff. Although we are not alone in this, our case is extraordinarily difficult. Energy prices and sector are a part of the economy; one cannot be improved neglecting the other. Let us work on both of them simultaneously.

Copyright Business Recorder, 2023