What Drives Pakistan's Coal-fired Power Plant Construction Boom?
By Rishikesh Ram Bhandary
In September 2021, at the United Nations General Assembly, China’s President Xi announced that China would no longer support overseas coal-fired power plants. One of the primary beneficiaries of Chinese public finance in coal has been Pakistan’s energy sector. According to the IEA, between 2015 and 2018, Pakistan’s coal-based generation capacity increased from 148 GWh to 15,930 GWh. Such a ramp up in energy generation capacity was sorely needed. Pakistan faced crippling blackouts, which undermined the investment climate and suppressed industrial output, not to mention energy access concerns.
China’s efforts to support infrastructure development around the world through the Belt and Road Initiative (BRI) was a major shot in the arm for Pakistan. President Xi visited Pakistan and launched the China-Pakistan Economic Corridor with Prime Minister Nawaz Sharif. The first phase of this partnership put a heavy emphasis on the energy sector. The Pakistani government had been waiting for the right opportunity to start exploiting the large coal reserves discovered in the Thar desert in southeastern Pakistan. Initially, China’s BRI gave Pakistan the opportunity to switch away from oil and natural gas and utilize a local resource. But, now with Beijing moving away from supporting coal power overseas, Pakistan faces major headwinds in making its planned coal-heavy energy goals operational.
In a newly published article, we identify the major factors that encouraged the inflow of Chinese investments into the coal. We interviewed government officials and stakeholders to understand how the Pakistani government created the grounds for such a massive scale up of coal-based power generation.
Financial incentives – The government’s desire to promote locally-mined coal-power is clearly apparent from the significant financial incentives it awarded to such power plants. Solar and wind projects received only half of the guaranteed return on equity compared to locally-mined power.
Local availability – While coal was discovered and prospected in the Thar region decades ago, Pakistan’s energy mix mostly consisted of natural gas and oil. With natural gas fast running out and the high cost of generating electricity from oil, Pakistan had been seeking alternatives. Between 2007-2017, natural gas production declined from 1,263,360 TJ to 881,021TJ while demand continued to rise. Pakistan’s economic growth rate climbed steadily in the 2010s, reaching 5.84% in 2018. These drivers made the need for a readily available, accessible resource all the more important. The presence of coal in the Thar region was too powerful for officials to ignore. This sentiment was also bolstered by a compelling economic rationale – the Pakistani Rupee is volatile and was steadily depreciating in the mid-2010s, making local coal sources relatively cheap compared to imported energy.
Scale – Given the extent of its domestic energy crisis, Pakistani officials wanted options that would allow them to scale up generation capacity as quickly as possible. Coal-based generation fit this bill. For example, three of the coal power projects under CPEC are 1320 MW each with the fourth one being 660 MW. Policymakers were unsure how easily renewables could be deployed at similar scales in an expeditious manner, interviews revealed.
Inexperience with renewables – Officials were keen to keep the size of renewable energy projects to around 50 MW. There was wide skepticism about the ability of the grid to handle larger projects. Furthermore, as some of the best suited areas for solar and wind are remote and do not have existing grid networks, getting renewable projects online meant investing in major grid extension projects.
Going forward, the Pakistani government and stakeholders of the power sector have three opportunities to lay the groundwork to further integrate renewables into the power system.
1. Investment in the electric grid will be required so that a higher share of renewables can be integrated. Grid improvement and extension will be needed so that the electricity can support productive, revenue-generating sectors, thereby helping with economic growth and generating revenue for the utilities.
2. With its shift to a competitive price regime for renewables, the Pakistani government will be better poised to take the advantage of steeply declining renewable energy costs. With public international financing for coal drying up, officials will also have to choose between seeking financing from more expensive international bondholders or lower cost renewables.
3. The second phase of the Belt and Road Initiative focuses on industrial parks, among others. Chinese actors have an important opportunity in their hands to directly support the growth of industry in Pakistan while helping to generate revenue for the energy sector to help improve its financial solvency. ∎
Rishikesh Ram Bhandary is the Assistant Director, Global Economic Governance Initiative at the Boston University Global Development Policy Center and is a faculty affiliate of the Climate Policy Lab.