Pakistan's pivot to coal: Plan to spend $35bn loan from China on new power stations looks set to continue under Khan

Pakistan’s pivot to coal to boost energy gets critics fired up. Kiran Stacey in Lahore July 31, 2018. Financial Times.
https://www.ft.com/content/5cd07544-7960-11e8-af48-190d103e32a4
Plan to spend $35bn loan from China on new power stations looks set to continue under Khan

Pakistan believes it may have found a way out of its long-term energy supply crisis, thanks largely to more than $35bn worth of loans provided by China under the $60bn China-Pakistan Economic Corridor (CPEC).

The country has experienced years of rolling blackouts that have left residents in the dark and stifled the country’s manufacturing industries.

But now it is investing in an energy technology that is fast going out of fashion in other parts of the region — coal.

Under the CPEC, Beijing is planning to spend at least $35bn building new power stations, which will be mainly coal-fired, using resources from coalfields at Thar, about 400km east of Karachi. The plans will mean building 9.5 gigawatts of new coal-fired capacity — a third of the total capacity the country has already built.

This is in stark contrast with India, which recently said it would not approve any more new coal power plants — not least because the unit price of solar power has dropped below that of coal.

The previous government has defended its energy policies. Shehbaz Sharif, head of the Pakistan Muslim League-Nawaz party, which lost power in last week’s election, told the Financial Times before the vote: “We have built 11,000 megawatts of additional capacity in the space of five years, compared with 18,000 over the previous 66 years.”

And the strategy looks set to continue under the new prime minister Imran Khan, head of the Pakistan Tehreek-e-Insaf party. Again speaking before the election, Mr Khan told the FT he backed using Thar coal to boost the country’s electricity supplies. “Thar coal is in a desert, it’s near the coast, and there are new technologies which now make it possible that you don’t damage the environment,” he said.

Defenders of Pakistan’s build-up of coal point out that the fuel currently accounts for a very small fraction of the country’s installed electricity capacity. In India, that figure is around 75 per cent.

They also say that with tariffs higher in Pakistan than in neighbouring countries, encouraging cheap electricity supply is essential to help develop exporting manufacturers. The average electricity tariff for industry is around $0.13 per kilowatt-hour, compared with $0.12 in India and $0.09 in Bangladesh.

Pakistan exported goods worth 8.2 per cent of its gross domestic product last year, according to the World Bank, compared with 15 per cent by Bangladesh and nearly 19 per cent by India.

“Manufacturers in India and Bangladesh get cheaper electricity than those in Pakistan do,” says Ehsan Malik, chief executive of the Pakistan Business Council. “This is particularly problematic for the garment industry, especially since all three countries make clothes at the lower end of the sector, where energy prices account for a higher proportion of costs.”

Others, however, warn that while solar prices are falling, Pakistan is building a series of large power stations that will not only pollute the environment but could also saddle the country with high debts and could even become stranded assets in the long run.

Fiza Farhan, an independent development consultant and a former director of Buksh Energy, a solar power company, says: “I have banged my head against walls for years trying to get the government to launch solar projects on mega scales.

“But it was impossible to get projects into the final stage — every time we would get to the financing stage, the government would revise the tariffs.”

Economists warn, meanwhile, that the stress in the electricity sector is likely to become worse in the near term.

With the country’s stocks of foreign currency reserves rapidly declining, experts expect the new government to approach the International Monetary Fund for a bailout within months. The terms of that bailout, they warn, could include renegotiating or cancelling some of the projects backed by China and raising electricity tariffs.

Mohammed Sohail, chief executive of Topline Securities, a Karachi-based investment advisory company, says: “This government will also have to reduce expenditure in a major way through unpopular measures.”