OCCASIONAL PAPER 105

Towards a sustainable coal

power
Syed Akhtar Ali

v.1.20
1/5/2014




Research on Economy & Politics of Pakistan
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Towards a sustainable coal power
NEPRA has announced a new coal tariff, revising the earlier tariff within less than a year .There is
confusion among people regarding the quantum nature and motivation of change .We will try in this
space to understand and elaborate upon a number of issues to the market, economics and technology
of coal power and venture to make some submissions and recommendations. Fortunately, only a press
release has been issued containing some key data and details and a formal gazette announcement has
still to be made.
The new tariff has been announced on the request of the GoP in the context of Gadani Coal Power Park
on which GoP is moving on a fast track basis and is trying to attract investors. GoP in a letter to NEPRA
requested NEPRA to study and make the appropriate changes in tariff and its structure. Following points
were raised;
Reconsideration of per MW cost of the project
Realistic adjustment of Thermal efficiency(downwards)
Reconsideration of Fixed and variable O&M costs
Change in the plant factor(capacity factor)
NEPRA incorporated those points and presented the new tariff, of which we provide a comparison in
table 1.Similarly, we have provided a comparison of basic assumptions of the two tariffs in Table2.
Table 1: Coal Power Tariff Compared: Old vs New
____________________________________________________________

Old Tariff New Tariff % increase
Imported Coal, FC Debt

200 MW , 8.2753 8.6417 4.43
600 MW 7.77 8.3601 7.59
1000 MW 7.4922 8.0189 7.03
200 MW,Imp Coal,LC Debt 9.6042 9.6774 0.76
200 MW ,Loc. Coal,LC debt 9.6488 9.2978 -3.64
_______________________________________________________________
Source: Compiled by the Author, NEPRA Documents

NEPRA has devised 12 tariffs or its variants and one separate tariff for Thar coal; there are 3 plant sizes
200,600 and 1000 MW;2 coal types, local and imported and; two modes of financing local and foreign. In
our view, all these categories are not necessary and create difficulties in studying and understanding the
tariff and its basis. For example, it is highly unlikely that plants as big as 600-1000 MW would be based
on local coal; there is not enough local coal(excluding Thar; here and in NEPRA tariff Local coal means
coal found elsewhere in Pakistan other than Thar).Also keeping in view the investment size, it is highly
unlikely that local banks would be able to provide all the debt finance required, especially when most of
the investment is in foreign currency .Thus we are left with only 5 practical tariff variants or categories
plus one for Thar which we have provided in Table 1.In fact Thar coal would require more than one
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variant. The present one caters to the project proposal of Engro .One would note that there is an
apparent increase of only 7-7.5 % and not more. Although in reality, the change is larger(10-13%) due to
the changes in capacity (utilization) factor; older tariff assumed a CF of 60% while the new one takes a
CF of 85%, from one extreme to another .This factor alone is responsible for understatement of the old
tariff by about 1 cent. In that sense, the quantum of change is larger. I have been on record to have
proposed to PPIB and NEPRA to adopt a more realistic CF. However, free advice is never respected and
now the muscle of the GoP has managed to bring about the same change.
NEPRA maintains that capacity factor is notional and that is what our understanding was as well.
However, in a recent TV discussion Economic Advisor to GoP Dr. Miftah Ismail opined that due to CF
effect , IPPs were already earning a RoE of 30% or so. It is incumbent on NEPRA to clarify this to the
public. This also raises an issue on the black box of Capacity Payments to IPPs. NEPRA should either
include such statements in its valuable SOI Report or ask NTDC/CPPA to issue a separate report in this
respect. Audits do not replace the role of public information and oversight, especially, when doubts
have been expressed by some quarters in this respect.
Also in the new tariff, higher coal prices have been taken (129 USD/ton, an increase of about 10 USD
per ton; amusingly coal prices have come down since the last tariff); CAPEX has also been enhanced to
around 1.5 Mn USD per MW. With escalation provided, this may further go up by another 20%.The
bomb shell is unbelievably high RoEs up to 30% after tax (no tax).The professionals at NEPRA had an
impossible job of coming up with the desired or dictated coal power tariff. And still more difficult stage
remains of writing down the tariff determination report for the gazette notification.
This seems to be a residual calculated RoE for reaching the required tariff level and does not seem to be
a result of a well thought out or articulated policy rate, unless the Gazette notification offers some
wisdom in this respect. The good and bad thing about NEPRAs upfront tariff system is that it is only a
Reference Tariff and all kind of indexation is provided to eliminate the investors risk. In India for
example, a skeleton indexation mechanism has created a major issue in a 5000 MW coal power project
of Tata Power who quoted a prices as low as IRs 2.24 per kWh basing its price on a long term contract
with mine owners in Indonesia. Government of Indonesia subsequently changed the rules of the game
and made retrospective changes applicable to contracts finalized prior to the new law. Tata contracts
with power purchasers in India did not provide indexation to include such eventuality and based its
calculations on the historical trend and the currency factor. As a result, Tata Power had to go to the
Supreme Court of India to get a raise of 25% in the agreed tariff. So, for a change, our system appears to
be better than that in India. However, NEPRA system is too detailed and exposes the dirty linen of
excessive RoE.







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Table 2: NEPRA Coal Tariffs 2013 & 2014 compared
__________________________________________________________

New-2014 Old-2013
Efficiency % 39 42
Capacity Factor % 85 60
Coal Price -Imported USD/ton 129.06 119.6
Coal Price Local USD/ton 103.17 103.17
Coal Price-Thar USD/ton 46.1 NA
Project Cost-200 MW Mn USD/MW 1.51 1.2744
Project Cost-600 MW Mn USD/MW 1.45 1.17
Project Cost-1000 MW Mn USD/MW 1.35 1.062
Exchange Rate PkRs/USD 97.1 97.1
RoE Imported Coal % 27.2 17
RoE Thar Coal % 30.65 20
_____________________________________________________________
Source: Compiled by the Author, NEPRA Documents
Let us now see and compare how the new NEPRA tariff fares with similar Tariffs elsewhere. Let us take
the case of India. In India local coal is much cheaper than elsewhere of the order of 30-40 USD per ton
and Lignite transfer price even cheaper i.e. under 20 USD per ton. An important factor behind cheaper
Indian coal ,apart from low labour costs ,is a low stripping ratio (Cubic meter of overburden earth
material to be removed for extracting 1 ton of coal) of 2.5 and even lower somewhere as opposed to 6.5
of Thar Coal and elsewhere. Lower coal prices in India are partly neutralized by older coal power plants
having thermal efficiency as low as 25% as opposed to a normal of 38-40%.With this preface, we are
better equipped to evaluate the coal power tariffs in India. In India, Coal power Tariff of Pithead power
plants is about 4 cents and that of non-pithead around 6 cents, indicating high transport cost; in India
,on the average, every ton of coal travels a distance of 600-700 kms. Coal Power Tariff for imported coal
ala-Gadani (in fact, it is other way round) is 5-6 cents at-least 25 % lower than NEPRAs new coal power
tariff. This much coal power tariff should be able to attract the most unwilling and averse of investors.
Let me also clarify the confusion that prevails among many in this country over the high coal power
tariffs prevailing in the West. Let us take a published example of EIA (US) projections for coal power
plants coming into operation in 1round 2017-18; a CAPEX of 2000 USD per kW and a Tariff of 10 cents
has been projected. Similarly in Europe (Germany) 6-7 Euro cents per kWh for lignite based power plants
and 8 Euro-cents for hard coal.; similarly CAPEX of 1300-1400 Euro/kW. There are many reasons for
that; the foremost being the higher prices vis--vis China. But even more, it is the environmental control
costs. In this part of the world, India and even China, not much investment and expenditure is done on
installing and operating pollution control equipment. One comes across only particulate control
equipment such as ESPs. In the West including the U.S., SOx, NOx and Mercury controls are routinely
applied. The aforementioned CAPEX and tariff includes such costs.25-30 %of the Tariff goes towards
paying for the environmental costs. Thus out of a 10 cents, a U.S. investor would be left with 7.5 cents
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for installing and operating the plants comparable to ours in environmental terms. Sooner or later, we
may have to also pay attention to these aspects, especially when a large number of power plants are
installed around one location. Separate tariff components may have to be provided for environmental
controls. Alternatively controls may have to be applied on upper limit of Sulphur (say 1%)in the
imported coals.
A little backgrounder seems to be in order to understand the RoE issue. India offers a RoE of 15-16%
taxable and in local currency. If one examines, the annual reports of the companies in energy sector, the
usual profitability rates are 10-12 % after tax. This is despite there are all kinds of risks. In our case, there
are all kinds of price and purchasing commitments and indexations, single buyer PPA and sovereign
guarantees. There is literally no project risk except country risk. Standard rates of 17% are quite
reasonable and for Thar 20.5 % given as a special rate. There is hardly a case for further enhancing it. In
an interview published recently in this very newspaper, a very suave and major player in the energy and
banking sector, indicated his nervousness over a RoE of 17% in foreign currency and without tax and
that people may criticize him of excessive profits. How would he react to profit rates of up to 30%.Some
trimming of the proposed tariff rates seem to be in order. A reduction in RoE, coupled with a more
realistic and usual CF of 80% and retaining the coal price (which in any case is a variable and a pass-
through) at the previous level, should enable the calculators to bring down the proposed tariff
significantly. The bosses should feel contented and relieved when all the four requirements as
mentioned in the beginning of this essay have been complied with; the most important being increase in
per MW capital costs. An attempt to increase the tariff with impossible RoEs would be
counterproductive and would invite criticism and controversy. Calculated tariffs, however, do suffer
from problems and may be out of sync with the market sentiments. A much better approach is of
competitive bidding which discovers the real market numbers.
In the early days of Gadani idea, PM Nawaz Sharif spoke of competitive bidding. One does not hear
much of it now. However, competitive bidding occurs when there is competition. Presently there does
not appear to be much of a diversity or competition. Only Chinese and some Arab parties are visible.
This may be mostly due to the poor law and order situation. Western companies normally abstain from
a market where Chinese are active, as they have no chance to match Chinese prices. Also multilateral
institutions generally oppose coal power. However, there may be other countries like Russia, Czeck-Slav,
South Korea and Poland who may take interest, if approached. Russians have money, technology and
manpower resources to be able to compete with Chinese technology and capital.
A high tariff alone may not be enough. Projects may have to be structured catering to a variety of
investors; some may not be interested to get involved with the operations; some may be loathe to
private sector; some may not be interested in coal procurement risks. Some may require government to
government deals .In the upfront tariff as it is there, all coal price risks are loaded against the power
purchaser. There is no incentive for bringing in savings and efficiency in coal procurement. Some
creative thinking should be put in this direction and also the possibilities of pooling coal imports under
TCP mechanism. However, time is short to be wasted in ideas, how good these may appear to be. There
is no harm in checking with the stake-holders or considering such conditional provisions into the PPA
frameworks. Providing for Coal storages and warehouses for third party coal traders may also be looked
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into. A lot can be done to create diversity, openness and flexibility for promoting competition and
efficiency.
Before concluding, a word is in order on technological choices. Engro has chosen CFC boilers which are
best suited for low quality coals like Lignite of Thar. It also solves Sox pollution problem within the boiler
itself obviating the need of treatment of flue gases. NOx are produced comparatively in lesser quantities
in CFC boilers where lower temperatures are involved .There is a few percentage points sacrifice for
thermal efficiency. Although in Germany RWe is using PC Boilers for firing Lignite and achieves thermal
efficiency of 43 % by drying-preheating Lignite by exhaust gases before firing into the furnace, it may be
advisable to standardize on CFC boilers for a variety of reasons. Imported coal projects would most likely
prefer the Pulverized Coal technology which is more in vogue for hard coals. Some provision has to be
there to mix a percentage (say 10-20%) of Thar coal into the hard coal of imported coal projects.
Concluding coal and hydro power are the only two cheap and large energy options; all others are too
expensive or lack capacity and other constraints. If by hasty decisions, we make these expensive, there
would be no way to bring down the retail tariff which to-date is unaffordable and has given rise to many
problems. A balance must be struck between the desire to attract maximum investment and the ability
to pay. RoE decisions are very fundamental decisions which set a precedence and benchmark against
which all other sector projects base their expectations. A lot more thinking ought to have gone into it
than what appears to be the case.akhtarali1949@gmail.com

























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Coal Power Cost and Tariff India (2013)
_______________________________________________________________________

Capacity CPP EPP TPP

MW USc/kWh USc/kWh USc/kWh

Non-Pithead

NCP Dadri-II 980 2.5806 3.6484 6.2294
Simhadri_II 1000 2.6397 3.5921 6.2150
Non-Pit-head

Vindhyachal 500 2.4516 1.6113 4.0637
Sipat-II 1000 2.0194 1.7710 3.7903
Rihand-III 500 2.8065 1.4887 4.2952
Korba-iii 500 2.5534 1.2903 3.8453
Imported Coal

Mundra 6X800

5.0000
Essar 1200

5.3300
Essar-Tori-I BSEB-2010

5.6200
Essar-Tori-II BSEB-2015

6.2000
Lignite

NLC TamilNadu 420

5.9600
NLC TamilNadu-II 1410

4.6500
NLC SuratGarh 250

4.9600
RajWest Barmer 1080 3.6710 2.5550 6.2260
Exchange rate-Irs/USD 62

LignitePrice-USD/tincl taxes 20.419
_________________________________________________________________________
Source: Compiled by the Author from data of CERC, RERC, TNERC, NLC








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APPENDIX :

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Brief Profile: Syed Akhtar Ali

Akhtar Ali is an eminent energy expert and consultant, advising public and private sector clients on
energy policy, investments and tariff issues and has authored a number of books on the subject. He is a
visiting Professor of Energy at IoBM and teaches energy management to MBA students. He has held
top management appointments in Pakistans public and private sector. He was Research Fellow
Energy at Harvard Universitys Kennedy School of Government. He is an author of eight books on
various subjects such as energy, governance, political economy and resources. He heads Proplan
Associates, a consulting company having a current focus on Energy. He is also Chairman (REAP)
Research on Economy and Politics of Pakistan, a think tank that brings out research publications on
national issues. akhtarali1949@gmail.com/proplanassociates@gmail.com





Books by Syed Akhtar Ali

1. The Political Economy of Pakistan: an Agenda for Reforms. (1994).
1. Pakistans Development Challenges :Federalism, Security and Governance 2010
2. Pakistans development; economy, resources and technology, 2012.
3. Pakistan Nuclear Dilemma: Energy & Security Dimensions. (1984).
4. Pakistan Energy Development: the Road Ahead.(2010).
5. Pakistan I ssues in Energy Policy, 2012-2014
6. Nuclear Politics and Challenges of Governance. (1998)
7. South Asia: Nuclear Stalemate or Conflagration. (1987).