On 5 August, Pakistan’s Minister of Power announced that China had accepted Pakistan’s request to shift from imported coal to Thar coal. Earlier, on 22 July, he informed that Pakistan was planning to “encourage” China to use Thar Coal in three Chinese power plants in Sahiwal, Port Qasim and Hub. He had hinted that Pakistan was also looking to negotiate possible re-profiling of the energy sector debt with China. Leghari had highlighted that these negotiations aimed to mull over structural reforms suggested by the IMF under its USD 7 billion bailout programme.

Why does Pakistan want to move to Thar coal?
Thar coal is an indigenous variety from the Thar desert in Sindh. It is estimated that approximately 175 billion tonnes of lignite coal is present in this region “which can be utilized to produce 100,000 MW for over 200 years.”

Pakistan is keen to use Thar coal for the following reasons:
First, it is a partial solution to circular debt. Pakistan believes that Thar coal will provide breathing space from the accumulation of PKR 2.6 trillion in public debt. It will not only help save up to USD 700 million worth of imports annually but ultimately cause a domestic coal price drop. 

Second to reduce electricity prices. It is expected Thar coal will reduce electricity prices, as much as PKR 2.5 per unit of electricity. According to the minister, it would even allow Pakistan to save up on its cost of production and lower its tariff rates as the average household’s monthly revenue is spent on its power bills. This proposal was advanced to lessen Islamabad’s power generation expenditures. For instance, the Gwadar power project listed under the China-Pakistan Economic Project (CPEC) is a “fast track project” but significant delays have been caused by COVID-19, overall CPEC project slowdown and Pakistan’s liquidity difficulties. 

Another factor that may contribute to this shift is a trend of shrinking demand for fossil fuel power and a shift to solar energy in the past year or so. This switch according to the National Electric Power Regulatory Authority will interfere with its agreements with Independent Power Producers (IPPs). It should be noted that expensive electricity bills are also one of the driving forces behind people shifting to solar energy. Leghari, noted that this transition is happening in both urban and rural areas, as the price per unit of power has proven to be less economical.  As a consequence of the high costs of power production both industrialists and bulk consumers have started installing 1.5MW solar power systems. This may continue until and unless the government begins rationalizing the price of electricity. 

What has been China’s response?
The need for heavy investment in transport infrastructure, to deliver coal to plants is why previous proposals for transition were rejected. The Chinese project funders complained not only complained of logistical difficulties but also about the need to change plant technology. The plants were earlier constructed to use imported coal, but will now have to be redesigned to use local coal.

Retrofitting the existing plants to Thar lignite requires additional capital expenditure of around USD 500 million, said a consultant who has worked with power plants. They will also have to go through rounds of regulatory approvals and renegotiate tariff and capacity payments. Further, it lacks productive efficiency. Twice the amount of local coal is required to produce the same amount of energy generated from one part of imported coal. 

Additionally, power companies claim that Pakistan lacks the mining capacity to feed the three Chinese plants. For instance, the 660 MW Lucky power plant was built to use local lignite, however, it currently operates on imported coal due to a prolonged delay in the expansion of mining capacity. Pakistani banks are unable to fund such a project on an annual basis. Hence, the country’s last resort is importing coal. 

In 2021, China pledged not to build any new coal plants overseas at the UN General Assembly. Pakistan's outstanding payments to China which were earlier at USD 20 billion have shot up to USD 1.8 billion. The government has struggled to pay IPP capacity payments since 2018.

Chinese lenders are hesitant to invest in energy projects because of its government's policy shift from coal, Pakistan’s unstable economy, outstanding payments in current CPEC projects as well as the Pakistani government's attempts to renegotiate previously settled purchase agreements with Independent Power Producers of China. 

Like almost every economic venture, even this project has a list of underlying social and environmental. The government hasn’t accounted for them. A researcher from Knowledge Forum, Zeenia Shaukat, notes that the government is “launching” a coal-based energy sector when it has an existing “fossil fuel-based energy sector” “responsible for 76 per cent of carbon dioxide emissions.” Evidence shows that coal mining has contaminated aquifers in Thar as they are used by coal-fired power stations. She said: “Water tests have revealed alarmingly elevated levels of heavy metal toxins such as arsenic, selenium, chromium, lead, and mercury in Thar’s aquifers and drinking water samples taken from dug wells across Thar Coalfield Block II.” Some villages have recorded Mercury levels above the recommended limits at 9400 per cent. 

What does this mean?
As a result, the use of lignite in place of imported coal will not necessarily help lower electricity prices, as the government claims. Production costs will most likely be above the expected estimates. Eventually, the tariff rates will also be raised to compensate for the cost, thereby not causing a significant alteration in the selling price of electric power. Nonetheless, it may allow Pakistan to reduce its import bill and not deplete its foreign exchange reserves.

A fall in the cost of power production might not necessarily lead to a reduction in electricity prices.  Transition to Thar coal may be seen as an indigenization phenomenon. Indigenization refers to taking control of one’s resources and becoming self-reliant. The local lignite cannot escape indexation with foreign exchange, interest and inflation. 

It also entails environmental costs, while international countries aim to reduce carbon consumption, Pakistan is doing the opposite, making room for scrutiny. It makes little to no sense when the country has already installed a power plant which runs on imported coal and later switches to local coal. For this, Pakistan must weigh out its pros and cons through a cost and benefit analysis, considering all possible variables, including, environmental and social costs as the country is highly vulnerable to extreme weather conditions owing to climate change.

References
Dr Khalid Waleed, “Understanding the ‘bad’ economics of Thar coal,” The News International, 7 August 2024
Nasir Jamal “Gwadar Power Plant at an impasse,” Dawn, 26 February, 2024
Khaleeq Kiani “ Government seeks 25 per cent hike in electricity tariff,” Dawn, 16 May 2024
“Pakistan has 1-year debt rollover commitments from key lenders: Bloomberg report,” Dawn, 6 August 2024
Israr Khan, “Pakistan’s energy system strained by surge in solarization, battery tech , "The News International, 1 August 2024
“To ease burden on consumers, government to ask Chinese IPPs to use cheaper Thar coal," The News International, 21 July 2024
Israr Khan, “Pakistan, China agree to shift coal plants to local fuel amid energy crisis ," The News International, 6 August 2024
Nasir Jamal “Analysis: The bumpy road to Thar coal,” Dawn, 8 August, 2024