One step forward, two steps back – Diplomat

In a breakthrough event last month, the Government of Pakistan took political decision continue with the Gwadar energy project, which, despite being declared an “accelerated development project” under the China-Pakistan Economic Corridor (CPEC) in 2016, has not made significant progress since its inception. The decision, made at a high-level forum in which bilateral talks are taking place between China and Pakistan, points to a deeper problem that has long dominated the country’s energy sector: dissociation between evidence-based research and policy decisions.

Decision-making mostly takes place in the highest echelons of government, without any public disclosure of the analysis or work (if any). In this case, it does not matter whether the poor economic situation of the country can support another import-dependent source of electricity generation, which may be subject to price shocks in the future. The important thing is that Pakistan will be able to appease its powerful allies in the hope that they will give the country some support to keep it afloat.

The revival of the 300 megawatt (MW) Gwadar power plant using imported coal comes after years of ambivalence from the government of Pakistan regarding moving the project forward in its original form. The project was first proposed to switch to liquefied natural gas (LNG) for environmental reasons during the Nawaz-led Pakistan Muslim League (PML-N) government in 2016.

Apparently no progress was made on this front and the future of the project remained uncertain until the Tehreek-e-Insaf (PTI) government of Pakistan announced a moratorium on coal-based electricity production in Pakistan. December 2020. Many in political circles speculated that the project would be shelved as it had not been closed financially. However, no official statements have been made in this regard.

In July 2022, the Gwadar power plant made national news again when the current government, under pressure from economic problems and a rising import bill, decided to convert it to solar power instead, with imports from Iran as a reserve. Consideration has also been given to transferring it to Tara coal as a cheaper alternative. However, there was nothing concrete, as any change in the project plans would first have to be approved by the CPEC Joint Cooperation Committee (with members from China and Pakistan). Therefore, any amendments to the draft could not be made unilaterally.

Do you like this article? Click here to sign up for full access. Only $5 per month.

While the Pakistani government was considering converting the project to alternative fuels, their Chinese counterparts remained committed to the idea of ​​imported coal. Ultimately, the Pakistani side was “forced” to change its political goals and switch the power plant back to running on imported coal.

The operation of the Gwadar power plant on imported coal could exacerbate the current economic stress in Pakistan. The past year has been turbulent for imported fuels such as LNG and coal. Free-board price of South African coal, which accounts for about 70 percent of Pakistan’s coal imports, hits historic highs $457 per ton in March 2022.

Pakistani coal-fired power plants have not been isolated from these price shocks and have faced shipping costs of up to $419 per tonne. As fuel costs are a pass-through item, this directly affected the cost of generating electricity from imported coal, which reached 19.3 US cents per kWh (51 Pakistani rupees per kWh). While global coal prices have now declined (South African coal currently sells for $140/t), this is still higher than the price of coal in 2017 ($109/t) when the project was first considered.

The ongoing currency (currency) crisis in Pakistan has also seriously affected the ability of coal-fired power plants to purchase fuel from their coal suppliers. The State Bank of Pakistan was unable to meet foreign exchange requests for some coal-fired power plants due to a sharp decline in the country’s foreign exchange reserves. Most recently, Port Qasim Electric Power Company (Pvt.) Limited had to malfunction its units with a capacity of 660 MW due to the station’s inability to pay off the coal supplier. It may not be practical to bring in yet another imported coal-fired power plant under the circumstances where the existing ones are having such difficulty in continuing to operate.

Using local Thar coal, which currently costs $47 a ton, would make more 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 km from the port of Gwadar, and there is no rail network connecting the two regions. Thus, transporting Tar coal to Gwadar would require significant investment in rail and road infrastructure, reducing the possibility of using domestic coal as an alternative.

The currency crisis has also taken its toll on domestic Thar coal mining, the Sindh Engro Coal Mining Company said. do your best to pay its Chinese O&M contractor, which is threatening to suspend mining operations if the current situation continues.

On the other hand, Gwadar is of great geostrategic importance and is a link in China’s access to warmer waters. Without access to a reliable power supply, the region will not achieve the level of industrialization needed to turn a port city into a successful trading center. Even so, pushing for imported coal seems counter-intuitive given that there may be other viable alternatives.

The port city is currently powered by electricity imported from Iran, which is still limited, putting the region at risk of extended power outages. However, on March 1, a new scheme was launched, according to which Gwadar get 100 MW imported electricity from Iran. These increased volumes should be sufficient to meet the current needs of the region, and any additional demand that arises from the further development of the region can be met by solar or wind energy combined with an increase in imports.

What is perhaps missing from this picture is the complete lack of research on the applicability of these alternatives, not only from an economic standpoint, but also from a social and environmental standpoint. The decision to switch to imported coal should have been taken after careful consideration of all other available options, and not for political reasons.

For now, Gwadar may have taken a step forward in the short term, but two more steps back in regards to his long-term prospects.