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Key Findings

A move into coal-to-liquids and coal-to-gas are likely to prove to be highly expensive burdens on Pakistan’s economy.

It is expected that total circular debt across the power system will reach Rs2.8 trillion (US$17.6 billion) by the end of June 2021. A switch of focus from coal-fired power using imported coal to plants using domestic coal will make little or no difference to the cost burden given that tariffs for domestic coal-fired power are similar to those of plants consuming coal imports.

The unaffordable nature of surplus coal-fired power built under CPEC has also led the Pakistan government to seek debt relief from China. The request is likely to take the form of longer loan repayment terms in order to reduce capacity payments to the coal power generators.

Executive Summary

The global experience of coal-to-liquids (CTL) and coal-to-gas (CTG) processes ought be a warning that there is no bright future for such projects in Pakistan.

At the Climate Ambition Summit in December 2020, Pakistan’s Prime Minister Imran Khan stated that Pakistan “will not have any more power based on coal.” However, he also announced the intention to use Pakistan’s domestic coal reserves to produce energy via coal-to-liquids and coal-to-gas processes. Coal-to-liquids is a process of turning coal into liquid fuels such as petrol and diesel. Coal-to-gas processes convert coal into gas for use in power generation, to supply gas consumers or as a feedstock for products such as fertilisers.

With the writing increasingly on the wall for coal-fired power amidst the continuing decline in the cost of wind and solar, it’s also no surprise that the coal lobby in Pakistan is pushing for alternative uses for domestic coal. As a result, there is already a coal-to-liquids proposal in Pakistan for the production of diesel from domestic coal and a coal-to-gas proposal to produce fertilisers. Both are proposed to use Chinese technology and finance.

Such plans are immediately challenged by the relatively high cost of coal production in Pakistan, and the heavy reliance on yet-more debt dependence on China.

The heavy burden of coal on Pakistan

In addition to the environmental impacts of coal power that are of increasing international concern, the technology – along with other thermal power sources – is placing an unsustainable financial burden on Pakistan’s economy.

Coal technology is placing an unsustainable financial burden on Pakistan’s economy.

The addition of coal-fired power plants to date has contributed to Pakistan’s increasing overcapacity problem. Power cuts in Pakistan are caused by a fragile transmission and distribution system rather than a lack of generation capacity. In fiscal year 2019-20, the overall utilisation of Pakistan’s thermal power generation fleet dropped to an entirely unsustainable low of just 37% according to National Electric Power Regulatory Authority (NEPRA) data.

Overcapacity is an expensive burden on Pakistan power consumers as power plants receive capacity payments even when they are not being utilised, pushing up the average cost of electricity. Capacity payments to power generators are on course to reach Rs1.5 trillion (US$9.4 billion) per annum by 2023. The expense of overcapacity is making the build-up of debt within Pakistan’s power system (known as circular debt) even worse.

The build-up of debt is to a large degree caused by subsidised power tariffs. It is expected that total circular debt across the power system will reach Rs2.8 trillion (US$17.6 billion) by the end of June 2021. The inevitable consequence of expensive power generation and unsustainable debt is a rise in consumer power tariffs. In March 2021 it was announced that power tariffs would have to rise Rs5.36 (34%) over the next two years, at the IMF’s insistence, in order to help tackle the circular debt crisis. This followed a Rs1.95 (15%) increase in base tariff that was approved in February 2021.

Meanwhile, the IMF is working with the World Bank on plans to factor in climate change into negotiations over reducing nations’ debt burdens via reduced fossil fuel emissions and investment in renewable energy. The unaffordable nature of surplus coal-fired power built under the China–Pakistan Economic Corridor (CPEC) has also led the Pakistan government to seek debt relief from China.

The request is likely to take the form of longer loan repayment terms in order to reduce capacity payments to the coal power generators.

Global coal-to-liquids and -gas experience: Implications for Pakistan

The Kemper coal-to-gas power project in the U.S. was meant to be the poster child for new, lower-carbon coal power technology. Instead, it became the classic case study highlighting the unviability of coal-to-gas for power with carbon capture.

The Kemper project attempted to gasify lignite coal that is similar to that found at Thar. It proved to be a highly expensive failure despite the significant federal government subsidy it received. Power consumers now have to pick up a US$1 billion bill via increased tariffs.

Another key lesson from the Kemper debacle is the much-higher-than-anticipated water usage during the coal gasification process. Such very high water use makes the technology unviable in water-stressed places like Thar.

In Indonesia, PT Bukit Asam’s (PTBA’s) proposed coal-to-dimethyl ether (DME) project looks set to lose hundreds of millions of dollars on an annual basis according to a November 2020 IEEFA analysis, despite a much lower cost of coal production than Pakistan and being eligible for a subsidy in the form of a coal royalty exemption. These loses will be greater than the value of the LPG imports that the DME is supposed to replace. An equivalent plant in Pakistan would be further challenged with a higher cost of coal feedstock.

Meanwhile, Sasol’s world-leading position in coal-to-liquids is also based on subsidies – both historic and current. Thanks to these subsidies locking in its technology for the long term, Sasol has enjoyed a viable business model until recently. However, it is increasingly clear to Sasol that its current business model using coal as a feedstock is not fit for purpose going forward. Increasing global investor and stakeholder expectations on climate action, along with a declining outlook for oil demand are challenging Sasol’s business model and this is being recognised by company management. The company is now targeting a replacement of coal feedstock with gas in the medium term and is strongly hinting at green hydrogen’s role in its long term future.

Given the level of fossil fuel subsidies in Pakistan (which are currently contributing to the build-up of unsustainable debt within the power and gas systems), it’s likely that any coal-to-liquids or -gas projects in Pakistan will be reliant on further subsidies. It’s also likely – given experience in these technologies overseas – that these subsidies won’t be enough to make such projects economically viable.

Now is not the time for Pakistan to be increasing fossil fuel dependence along with the subsidies needed to support their consumption.

Now is not the time for Pakistan to be increasing fossil fuel dependence.

Furthermore, the coal-to-liquids and -gas projects currently on the table for Pakistan involve Chinese companies/technology. As such they will also involve Chinese finance as well if they are to be funded at all. At a time when the Pakistan government is seeking debt relief from China on its CPEC coal projects to date, it is unadvisable to seek to increase that debt burden for technologies that are yet to be proven in the country, or globally.

Further reliance on coal would also come as the European Union is preparing to implement a carbon border adjustment mechanism to protect its industries from being undercut by cheaper imports from nations that produce and manufacture using energy from coal and other fossil fuels. The UK and the U.S. are also considering similar mechanisms.

A 21st century alternative is available

Sasol’s recognition that green hydrogen will play a part in the company’s long term future is a key lesson for Pakistan. The production cost of green hydrogen is currently expected to drop 60% by 2030 and global investment in the technology accelerated sharply in 2020, and looks like doing so even more as 2021 unfolds.

The plunging cost of wind and solar power means that green hydrogen cost projections are falling faster than anyone expected. Likewise the capital cost of electrolysers that use renewable electricity to split water to generate the green hydrogen are seeing an unprecedented acceleration in scale that will almost inevitably see dramatic capital cost reductions.

Going forward, green hydrogen will play a growing role in a wide range of applications including power generation, steel production, fertiliser production and marine transport fuel amongst others.

Global investment in new hydrogen technology accelerated during 2020, unincumbered by the COVID-19 pandemic. Saudi Arabia is planning a US$5 billion investment in green hydrogen for export. By the beginning of 2021 over 200 industrial hydrogen projects had been announced, more than 30 countries had released hydrogen roadmaps, and governments have committed more than US$70 billion in public funding. The total investment of all announced projects will be US$300 billion through to 2030, should they all proceed. This sudden increase in global hydrogen investment will see the cost of green hydrogen production fall even faster than recently predicted.

Transportation of hydrogen over long distances is likely to take place in the form of ammonia – a key fertiliser feedstock. Pakistan is planning a coal-to-gas plant with the aim of producing fertiliser but in the future Pakistan could substitute ammonia as a feedstock for fertiliser production without the added expense of cracking it back into hydrogen. For fertilizer production, green ammonia produced with renewable energy will likely be cost competitive with fossil fuel-based ammonia produced in Europe by 2030 where the cost of carbon is no more than US$50/tonne.

Pakistan would also have the option of co-firing ammonia in existing thermal power plants as a way of progressively reducing the carbon emissions of its electricity sector.

With global action on emissions reduction now accelerating, investment in zero emissions industries of the future is likely to better unlock global capital access for Pakistan in order to diversify from over-reliance on China.

Given energy security concerns, Pakistan could produce its own green hydrogen in the future using its abundant renewable energy resources. Hydrogen produced domestically could be used as a feedstock for fertiliser production, used for power generation, or blended into the gas grid to decarbonise the system and alleviate the gas shortages that Pakistan experiences on a regular basis.

Although green hydrogen is not cost competitive yet, the world now appears to be on the brink of a rapid cost deflation for new hydrogen technology of the type that has already been witnessed for wind and solar power, which are now the cheapest sources of new power generation in Pakistan.

If Pakistan continues with plans to build coal-to-gas and -liquids projects, it will be locking in 20th century technology whilst the rest of the world develops the energy and chemicals technology of the 21st century.

Press release: Pakistan’s dependence on imported LNG exacerbates energy insecurity and financial instability

Please view full report PDF for references and sources.

Simon Nicholas

Simon Nicholas is IEEFA’s Lead Energy Finance Analyst for Bangladesh, Pakistan and the global steel sector as well as Asian seaborne thermal and coking coal markets.

Simon’s focus is on the energy transition, the long-term outlooks for coal and steel as well as the need for emerging nations to establish financially sustainable power systems to support their development.

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