Local but complicated

International fuel prices have been increasing consistently for the last few months. The prices of imported coal have increased three times their original prices – from $80 to over $240 per ton.

Pakistan has three coal-based power plants which run on imported coal – the Sahiwal, Hubco and Port Qasim plants, each having the capacity to produce 1320MW. The combined coal import bill at present is more than $3 billion. If we convert these plants to Thar coal, we can save billions of dollars that are otherwise being spent to cover cost and foreign exchange expenses.

If coal prices in the international market remain high, it will not be possible to run the existing power plants for long. It is quite strange how these plants are currently managing their operations amid price hikes; their production, however, is going down. Thar coal’s variable/fuel cost is only Rs3.9/kWh while the cost of imported coal-based power plants, Sahiwal and China Power Hub, is around Rs30/kWh; the additional cost of Rs10 per kWh is added to this under the fixed cost head, leading the total to Rs40/kWh.

Although in Pakistan the price of Thar coal is around $50-60 per ton which is twice the typical per-ton price of $25-30 partly due to low utilization, we will not touch this controversy at this time. Despite all the pricing and costing issues, imported fuel cost is seven times higher than that of Thar coal. In normal circumstances, Thar coal-based electricity and imported coal-based electricity might have cost the same. This is probably why our decision-makers initially decided to go for three imported coal-based power plants.

Imported power plants cause two problems; one relates to fuel cost and the other is about foreign exchange. Pakistan currently faces the highest current account deficit, leading to shockingly high levels of currency depreciation which is further destabilizing the economy.

People in the country ask why we cannot use Thar coal. Transitioning to Thar coal is ‘easier said than done’, but it can be done. There are three issues with Thar coal; it is technically called lignite and its energy content (calorific value or CV) is half of that of imported coal(sub-bituminous); its water content is almost 40-50 per cent – dry coal is required to be burnt in power plants; its sulphur content is higher than imported coal.

Despite these facts, lignite was once used in Europe for almost half a century; it has also been used in India as well. It is a separate matter that the world is now moving away from all kinds of coal for power generation.

The current issue is about the conversion of the existing imported coal-based power plants to Thar lignite and regarding the handling of issues like lignite moisture, low CV and high sulphur? It is easier to design power plants based on Thar coal instead of converting the existing power plants whose design is based on a different type of coal.

There are a number of proposals to deal with the issue. Initially, we can start with a 10-20 per cent mix of Thar coal and imported coal. This may be done in six months although there will be some logistics issues. The other proposal is the almost-total conversion to Thar coal, which may require significant technical changes, costing time and money.

Traditionally, CFB boilers have been used in the case of Thar lignite. Also, in the case of normal sub-bituminous (imported) coal, the mineral is pulverized to a talcum powder-like state, which is later fired from the sideways. Such boilers are called pulverized coal or PC boilers. Coal burns like an oil stream in them. They do not require pre-drying as the coal used in it is usually dry. All the three imported coal-based power plants are based on PC boilers.

There have been some technological developments which have let the lignite coal pulverized and dried in one package. If sub-bituminous coal is to be substituted by Thar coal, processes involving coal handling, storage and pulverization will require adjustments. The coal’s pre-drying process can be done through solar energy as Thar is full of sunshine. It can be dried at both mines and power plants. Exhaust steam is generally used in a reverse cycle for extra drying. This has already been done in Germany. Lucky Power reportedly uses almost the same approach in burning imported lignite and plans to use the local lignite eventually.

There are several logistics issues. Coal is transported through rails, but unfortunately there is no rail link connecting the Thar coal site to the Pakistan Railways network. Even though a rail-link project has been prepared, it is unlikely to be implemented due to a variety of financial reasons. Even if it is approved, it may take two to three years for construction. However, transportation by truck is possible.

There is great demand for cheap Thar coal by industries, especially cement, ceramics, glass and steel industries. Some amounts of this coal are reportedly being sold to third parties belonging to industries, although in a legal vacuum. Both Engro-Thar and Sino-SSRL are under the cost-plus pricing strategy, where fixed cost is paid for and absorbed in electrical tariffs. Mine owners have to be paid variable cost and incentives; a third-party sales pricing mechanism should have been developed by now. Also, Thar coal should be converted into a ready-energy product by drying and grinding, and possibly briquetting, if we want to promote the industry-wide use of this coal and save foreign exchange in other sectors as well.

The technical changes of the existing power plants have many risks; there may be loss in efficiency and increase in costs – both variable and capex; there may be mistakes and accidents – Thar coal is prone to spontaneous combustion; the shutdown of power plants will be required, which may result in a loss of revenue for the operator and owner companies; all of these costs are not provided in the agreement and have to be absorbed by the government.

These plants consume five million tons of coal each per year. If Thar coal substitution saves $175 per ton, $875 million per plant will be saved annually. If one assumes the project additional capex for the conversion to the tune of $250 million, the payback period would be around 3.42 months. And the total savings for the three imported coal-based power plants would be $2,625 million per year. This saving can also absorb the funding requirements of the rail tracks of a capex of $200 million. There is unutilized mine capacity for which capacity cost is being paid that would be extra saving.

The issues are more financial than technical. Our Chinese partners have great technical prowess in the field of coal-based power plants. Rising coal prices in the international market and foreign exchange issues are great motivators for Pakistan to go with this shift. Assistance from China’s government under CPEC may be helpful in this regard. We should be more proactive and flexible in developing a financial solution.

The writer is a former member of the Energy Planning

Commission. He can be reached at: akhtarali1949@gmail.com