Thar coal is considered a local energy source that could potentially solve Pakistan's energy problems and boost the economy. However, upon exploring financial architecture and environmental externalities behind Thar coal, one realizes it may not truly make Pakistan energy independent as many believe. And it also weakens the case of climate action, finance and indigenization.
Thar coal is considered a local energy source that could potentially solve Pakistan's energy problems and boost the economy. However, upon exploring financial architecture and environmental externalities behind Thar coal, one realizes it may not truly make Pakistan energy independent as many believe. And it also weakens the case of climate action, finance and indigenization.
Indigenization is a process through which a country takes control of its own resources and industries. Instead of relying on foreign companies and experts, it focuses on using local skills, businesses, and supply chains. The goal is to make sure the benefits from using the country’s resources stay at home, helping the local economy and people, rather than going overseas.
The climate smart indigenization process also entails that environmental and social costs associated with the production processes account for the economic valuation of a resource and the well-being of indigenous communities.
The development of Thar coal in Pakistan, despite being hyped as an indigenous energy resource, contradicts several key aspects of this definition. While the coal deposits are geographically located within Pakistan, significant portions of Thar coal projects are being financially managed through indexation with foreign exchange, interest (Kibor and Libor) and inflation (local and USA) rates. This arrangement dilutes the principle of indigenization that emphasizes domestic ownership. The negative externalities in terms of environmental costs are also not being considered in tariff/cost determination, which also creates distortions in the market and adversely impacts the ecosystem, thereby increasing the marginal social cost.
The Power Purchase Agreements (PPAs) signed for Thar coal projects are heavily indexed to global economic indicators. The long-term nature of these PPAs locks Pakistan into agreements with foreign entities for extended periods, often decades, limiting the country's flexibility in managing its energy resources independently.
The distribution of the economic benefits of the Thar coal project also raises questions about its alignment with indigenization principles. While the project does create some local jobs and economic activity, a significant portion of the economic benefits flows to foreign companies through profit repatriation, equipment imports, and service fees creating financial bottlenecks.
Again, this outflow of economic benefits contradicts the indigenization principle of retaining the majority of resource-generated wealth within the country. The disparity between economic gains and environmental costs also creates inequalities for the local population.
The pricing mechanisms in the Thar coal agreements expose Pakistan to global coal market fluctuations and other international economic factors. This vulnerability to external market forces is contrary to the economic insulation that true indigenization aims to provide. Moreover, as global environmental norms evolve, Pakistan's decisions regarding Thar coal may become increasingly subject to international pressure and potential Carbon Border Adjustment Mechanism (CBAM) related costs.
In essence, while Thar coal is physically located within Pakistan, the financial, technological, and operational structures surrounding its development and utilization are deeply intertwined with global macroeconomic indicators and global market dynamics. This reality stands in stark contrast to the true meaning of indigenization, which emphasizes domestic control, self-reliance, and the retention of benefits within the country.
At the core of this issue are the Power Purchase Agreements (PPAs) signed between the government and foreign companies involved in the Thar coal project and the policy mindset which isolates environmental concerns from economic gains. These long-term contracts, while bringing in much-needed investment and expertise, introduce a significant degree of foreign influence and financial exposure that contradicts the claimed indigenization of the resource.
As mentioned earlier, the PPAs are typically indexed to multiple international economic indicators, creating a web of financial dependencies that extend far beyond Pakistan's borders. As the rupee fluctuates, so does the cost of power generation, exposing the project to foreign exchange risks entirely outside of Pakistan's control.
Furthermore, these agreements have incorporated inflation adjustments based on the Consumer Price Index (CPI) of countries where major equipment or expertise originates. This means that price increases in other parts of the world directly impact the cost of electricity generated from Thar Coal, further eroding the concept of it being a purely domestic resource.
The influence of international interest rates adds another layer of complexity to the financial structure. Many of the loans financing the Thar Coal project are pegged to global benchmarks such as LIBOR. Consequently, fluctuations in worldwide interest rates can significantly affect overall project costs and, by extension, electricity prices for Pakistani consumers.
Even the incorporation of local inflation rates into these agreements, while seemingly a domestic factor, introduces variability that can diminish the perceived benefits of an ‘indigenous’ resource. This multifaceted financial structure creates a scenario where the economics of Thar coal utilization are deeply intertwined with global markets and foreign interests, despite the coal itself being extracted from Pakistani soil.
For instance, the capacity payments (CPs) per KWh for the Sahiwal Coal power plant which is an imported coal plant is 10.3445 Rs/KWh. The same CPs are 12.228 Rs/KWh for ThalNova coal power plant which is powered by Thar coal indicating a higher capacity charge for ‘indigenous resource’. The PPAs of both power plants are indexed with exchange rate, inflation and interest rates. Likewise, CPs of the Port Qasim Coal power plant (based on imported coal) have increased by 195 per cent from Rs3.49 per unit to Rs10.68 per unit on account of increase in interest and exchange rates, the CPs of Thar Energy Limited (Coal plant based powered by Thar coal) has increased by 229 per cent from Rs3.7/KWh to Rs12.29/KWh, due to the same indexation with exchange rate, interest rates and inflation.
Environmental concerns add yet another dimension to the indigenization debate. As global pressure mounts to reduce coal dependency in the face of climate change, Pakistan may face increasing international scrutiny and potentially punitive measures for expanding its coal-based power generation. This external influence could further diminish Pakistan's autonomy in managing its energy resources and policy decisions.
The portrayal of Thar coal as a solution for energy independence appears increasingly at odds with the reality of international collaboration, financial interdependence, and exposure to global economic forces that characterize the project. While the development of Thar coal undoubtedly represents a significant step in Pakistan's energy sector, it is crucial to acknowledge the nuanced nature of this achievement.
A more transparent discussion about the true nature of projects like Thar coal and its true social/financial cost is essential for Pakistan's energy economics. By recognizing the complexities and potential vulnerabilities associated with such large-scale energy projects, the country can work towards developing a truly sustainable and resilient energy strategy. This strategy should balance the benefits of utilizing domestic resources with the realities of global economic integration and environmental responsibilities.
Policymakers, industry leaders, and the public must engage in an honest dialogue about the costs, benefits, and long-term implications of projects like Thar coal. Only through such comprehensive understanding and debate can Pakistan hope to steer the complex landscape of energy development and move closer to genuine energy security and economic stability based on environmental and community safeguards.
In this context, a two-pronged approach is required: one to renegotiate the PPAs to make Thar coal more ‘indigenized’ in immediate terms; and two, for the long term, we need to think about the indigenous communities and adverse impacts of coal on the ecosystem. The solution includes an integrated approach on the principles of just transition, indigenization, and a whole-of-society approach.
The writer has a doctorate in energy economics and serves as a research fellow at the Sustainable Development Policy Institute (SDPI) in Islamabad. He tweets/posts @Khalidwaleed_ and can be reached at khalidwaleed@sdpi.org
