2010

Power Generation from Sugar Mills

Evolving the Business Model
Pakistan entered the summer of 2010 with a power deficit of 5000 MW. Experts estimate that the countrys over 80 sugar mills hold a latent power generation potential of 3000 MW. Presently these are operating at less than 700 MW mostly during the 4 month crushing season by burning bagasse. This roadmap investigates the possibility of releasing over 2000 MW latent potential by upgrading the power plants at sugar mills with pressure boilers and cogeneration. Apart from the large investment required, the initiative will characteristically skew the traditional sugar crushing business and competency model in favor of becoming energy companies, and this represents both a challenge and an area requiring urgent facilitation assistance, capability building and motivation.

Punjab Board of Investment & Trade 8/12/2010

Copyright 2010 - Punjab Board of Investment & Trade

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ACKNOWLEDGEMENTS PBIT would like to acknowledge the invaluable contributions of the following, without whose help this roadmap development would not have been possible. o o o o o o o o Mr. Jahangir Tareen, Chairman, JDW Sugar Mills Mr. Shahid Khaqan Abbasi, MNA Mr. Nadeem Babar, CEO, Orient Power Mr. Tajammal Hussain, Sector Specialist, Planning Commission, Government of Pakistan Mr. Rehman Aziz, Member BoD, PBIT Mr. Muhamad Husnain Tariq, Director, Al Shafi Group of Industries Mr. Ahsan ul Haq, Group GM, Al Shafi Group of Industries Dr. W M Butt, Technology Management International, Chemical Engineering Consultant

Moazzam Husain Director General Projects Development Punjab Board of Investment & Trade 23 Aikman Road, GOR I- Lahore moazzam.husain@pbit.gop.pk

Power Generation from Sugar Mills

RATIONALE

lectricity supplies about 15% of Pakistans total energy needs with gas as and petroleum accounting for 40% and 30% respectively. As of 2008, 57 % of the population was covered by grid electricity electricity. The future demand is expected to grow as per the graph 1 under : Significant icant new capacity of 2 Electricity (MW) to 2 times current capacity is needed by 2022. 2022 This would 43000 require an investment of US $ 3 billion every year for the 35500 next ten years. Even if this 28000 materializes, one o study depicts the demand supply 20500 position as under2, indicating that despite these hectic 13000 efforts to build power supply capacity, the energy gap is likely to persist well into the foreseeable future. If on the Existing Generation Demand (Summer Peak) other hand these efforts and investments are not made, then the demand supply gap of up to 50% in summer months mont may persist over the decade ahead, meaning electricity availability only half the time. This would severely constrain the economy to perform and could result in a sharp rise in poverty. SUPPLY SIDE CONSTRAINT: FINANCE3 On the supply side the biggest hu hurdle is likely to be availability of finance. LOCAL FUNDING 1. Owing to circular debt, ,b banks have accumulated high gh exposure to the power sector, mostly working capital also term finance and most of this is concentrated amongst the

1 2

Private Power & Infrastructure Board Supply & Demand Position 2020 Integrated Energy Plan, 2009-2022, 2022, Report of The Energy Expert Group Group, Economic Advisory Council, Islamabad, March 2009, page 43. See also MTDF Energy Security Report 3 Summary of Findings: Asian Development Bank, Energy Sector Task Force, Friends of Democratic Pakistan, Pakistan Presentation to Energy Summit, Diagnostic Analysis of Energy Sector, Pakistan Energy Summit, , April 20, 2010

Power Generation from Sugar Mills

top 5 banks. Future funding for the sector from banking institutions is difficult if not impossible 2. Lack of depth of the corporate debt market: The listed corporate bond (or TFC) market is presently only a miniscule Rs. 123 billion. The non-bank market of privately placed TFCs and Sukuks amounts to an even smaller Rs. 63 billion. This is less than 1% of the total domestic debt market. 3. Public sector financing is severely squeezed by PSDP cuts on the one side and the IMF conditionality to cap the growing domestic debt burden and fiscal deficit on the other. INTERNATIONAL FUNDING: New projects are facing higher financing costs with more stringent conditions, lower debt/equity ratios, shorter tenors and more conservative structures. Investors now prefer larger projects.

Power Generation from Sugar Mills

THE SUGAR INDUSTRY

A
C

s against this, the listed sugar companies have relatively robust businesses and strong cash flows and balance sheets. In addition, and as per global best practice, the sugar industry worldwide serves as a prime candidate for TRADITIONAL MODEL supplying low cost, non conventional power via The present industry norm in cogeneration. This is mainly on account of Pakistan is for sugar mills to burn availability of the biomass residue from cane sugar their own bagasse to fire low (bagasse) as a low cost fuel. Pakistan is the worlds pressure (and thermally 5th largest producer of sugar cane and total sugar inefficient) primitive boilers and cane production in 2008 was 50 m tons, yielding back pressure. All mills produce in over 10 m tons of Bagasse (crushed residue). house bagasse from crushing COGENERATION operations and there is no meaningful secondary market for onventional power plants emit the heat bagasse. The low pressure boiler created as a by-product of electricity based power plants cannot be generation into the natural environment efficiently fired on any other fuel through cooling towers, flue gas, or by other and so remain out of action during means. Cogeneration, on the other hand is a the 8 non crushing months in a thermally efficient use of the fuel whereby this year. waste heat is captured and used to generate heat which can be used to directly produce steam for the manufacturing process or to drive a secondary power generation turbine. Because co generation can obtain almost three times the energy from the fuel as compared to traditional burning, the initiative can also be positioned to achieve a reduction in carbon emissions and earn carbon credits as an additional revenue stream and this is where the government can assist PSMA design an effective programme in liaison with the CDM Cell of the Ministry of Environment, Islamabad.

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HISTORY

n January 2007, PSMA had written a letter to the government seeking government attention for power generation4.

On 12th November, 2007, a summary on the National Policy for Power-Cogeneration by the Sugar Industry was submitted by the Ministry of Industries, Production & Special Initiatives and considered by the ECC of the cabinet vide Case No: ECC-169/13/2007 on 13th November, 2007 wherein the following decision was taken: ECC of the Cabinet approves the proposals contained in paras 5 and 6 of the summary (except for the words "upfront appearing therein) subject to the following: "Pakistan Sugar Mills Association (PSMA) will apply to National Electric Power Authority (NEPRA) for determination of tariff which NEPRA will decide within 45 days".

On Jan 23rd 2008, PSMA filed the tariff petition with NEPRA seeking a tariff of 11.115 cents per kWh In the same month, the Private Power & Infrastructure Board (PPIB) of the Ministry of Water and Power published the National Policy for Power-Cogeneration by the Sugar Industry and Guidelines for Investors5 as a standalone policy. Under this, Sponsors were required to achieve financial close within 9 months of issuance of LoS and commence commercial operations within 36 months after issuance of LoS. On June 12th, 2008, NEPRA announced indicative tariff of 8.28 cents which was immediately rejected by the PSMA members on grounds of wide differential with IPPs pricing. In April 2010, NEPRA notified new tarrif of 9.28 cents with the proviso that the electricity produced by the sugar mill should be online by 20146. This too was rejected by the PSMA who demanded 11.115 cents citing 14 cents being given to IPPs and 17-20 cents to RPPs. At present, PSMA and NEPRA appear to have arrived at a stalemate.

5
6

Dawn, April 15, 2010 www.ppib.gov.pk/reports/Co-Generation Policy 2008.pdf Ibid

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A DUAL OBJECTIVE INVESTMENT AND NATIONAL SELF RELIANCE he sugar industry represents Pakistans second largest agro based industrial activity. Dual fuel creates an option for mills to release bagasse for production of paper7 and pulp or other import substitutive initiatives provided the right pricing and policy incentives are put in place. NEPRA has acknowledged that up to $980 million can be saved in generating 3,000 MW from bagasse and coal instead of imported furnace oil for 188 days. Similarly, if the plants are converted to 100% coal, and the bagasse is released for other purposes, an optimal business model can be created. If this is found to be economically viable then this should be the targeted objective of a proposed new investment policy initiative. SUGGESTED ACTION: DEVELOP A MULTIPLE PAYOFF MODEL

n a calorific basis, one ton of Bagasse (2300 kcal/kg) is equal to about 2 barrels of oil which even at present rates of crude oil does not exceed $ 170 ( approx Rs 15,000) in value.

Seen another way, the present landed cost of high-sulphur furnace oil is around Rs 51,360 per ton8. Thermally 1 ton of imported furnace oil is equivalent to 5.5 tons of bagasse. This puts bagasse at an even lower notional value of Rs 9,300 if used as a fuel to offset furnace oil. Functionally, the same 1 ton of furnace oil or the 5.5 tons of bagasse deliver the same fuel capacity as 2.2 tons of medium grade coal, which would cost Rs 10,000 including transportation, handling and treatment with indigenous slaked lime to make it smokeless. This assigns 1 ton of bagasse a shadow fuel price of Rs 1,800 per ton. In fact other uses of Bagasse include the pulp and paper industry, and as a wood substitute in the manufacture of particle board for which it is considered a good raw material9. In this way it takes 5.46 tons of Bagasse to produce 1 ton of writing paper with 15 20 % blended eucalyptus wood pulp. In 2008, Pakistan imported over US $ 400 million worth of paper and paper products. The present international market price for white paper is USD 1,000 per ton and even the low value newsprint is US $ 600 per ton.

7 8

In 2008 total paper imports were US $ 439 m. FBR rd Dawn, May 3 2010 9 Conversation with Mr Mujib Rashid, Formerly MD of Packages Ltd

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Indicative international pulp prices are presently around US $ 800 per ton. Even so, Eucalyptus is a local plant and local Eucalyptus plantations and pulp making are areas that can be developed in the vicinity of sugar mills and investments and investors mobilized with little effort. Similarly other indigenous raw materials to produce paper include caustic soda and mineral additives for smoothening. Packages and Century paper already use limited quantities of bagasse in conjuction with wheat straw and other agricultural wastes to process into paper. In Brazil and Argentina bagasse is used to manufacture newsprint under a well developed process. In fact Sugar paper as it is known is a premium end product in developed markets on account of it being eco friendly, recyclable and sustainable. It is recommended by organizations like WWF for its feature to save rainforests. As the worlds 5th largest sugarcane producer, this is a niche the PSMA could jointly develop into a potentially US $ 3 billion dollar business opportunity, with the government offering to play the role of facilitator and help win market access and fair trade access in presently sympathetic western markets. FACILITATION ROADMAP

f the 80 operational sugar mills in the country, around 40 mills qualify for conversion to new boilers as they have a minimum crushing capacity of 6,000 tons per day.

1. A draft policy with incentives for cogeneration from coal fired power plants and paper making for these sugar mills be formulated in consultation with PSMA. On its side, the PSMA is clamouring for imposition of regulatory duty on sugar import and the government and the FBR ought to have a clear position on this.

2. Using its panel of pre qualified technical consultants; PBIT will develop TORs and have feasibility studies conducted for: a. Cogeneration at sugar mills using coal as fuel for 12 months b. Bagasse to paper projects c. Eucalyptus plantation and pulp making 3. The power plants will be based on the chemical / mineralogical characteristics of local coal (Salt Range/ Makarwal or Chamalang, Balochistan). Even if this is not immediately available in the requisite quantities, the feasibility will suggest using imported coal of
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matching chemical characteristics till such time that mining operations of local coal can catch up with the emerging demand. Bagasse to paper and wood pulping business opportunities can be developed as separate investment parcels. 4. In the present tight credit scenario, turnkey technology, machinery and equipment may be acquired on supplier credit from China with probable involvement of the Chinese EXIM bank or alternately from US, EU or Australia. This can be facilitated by PBIT with a view that power and paper plants are set up adjacent to each sugar mill. 5. The policy announcement should also aim to create a positive sentiment for the energy ventures to raise equity capital from stock markets. 6. A tariff review petition may be filed with NEPRA on the basis of coal fuel as a pass through cost. Additionally, the BoDs of individual DISCOs are empowered to purchase power directly from providers and discussions for PSMA with LESCO, MEPCO and FESCO should be facilitated.