The push for energy diversification and increased power generation will present foreign investors with opportunities over the five-year outlook.
IHS Global Insight perspective | |
Significance | The USD900-million loan for the 1,200W Jamshoro coal-powered project is indicative of the government's desire to reduce the reliance on furnace oil to generate energy. |
Implications | Further coal-based power projects are likely, as well as conversions of older oil-based plants to rely on coal. The government's push for energy diversification and increased power generation will present foreign investors with opportunities over the five-year outlook. |
Outlook | However, while the immediate need for more energy will reduce the political risk associated with power projects, corruption and contract frustration risks remain. It is also unlikely that the current government will be able to fully overcome the energy deficit during its term to 2018. |
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Pakistan's prime minister Nawaz Sharif at a ground-breaking ceremony |
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The Asian Development Bank (ADB) yesterday (12 February) signed off on a USD900-million loan to the Pakistani government for the construction of the Jamshoro Power project in Sindh. As the first of its kind in the country to use supercritical boiler technology, it will be built at an existing power plant in the town of Jamshoro in Sindh province, about 150 km east of the provincial capital, Karachi. The project's total cost is estimated to be around USD1.5 billion, with USD150 million from the Saudi-based Islamic Development Bank and counterpart funds of USD450 million from the government. The project is scheduled to be completed by December 2018 and will add at least 1,200 MW to the national grid.
Encouraging coal-based power
Crucially, the power plants will be coal based, something that the Pakistan Muslim League-Nawaz (PML-N) government is eager to encourage to reduce the country's expensive reliance on oil-based power generation. According to the government's 2013 economic survey, gas and oil contribute to 65% of the country's energy mix, compared to only 0.1% for coal.
An abundance of unexploited domestic coal also adds to the attractiveness of the coal-based power plants. The National Electric Power Regulatory Authority (NEPRA) estimates there are coal reserves of 184 billion tonnes, mostly located in Thar, Sindh. However, the Thar reserves are largely untapped, and any coal-based power plants will have to initially rely on coal imports, mostly from Indonesia and South Africa. Imports totalled 3.31 million tonnes (mt) in 2013, down from 3.86 mt in 2012, according to local shipping sources. The ADB's loan seemingly also confirms that both sides have ended their dispute as to the use of Thar coal due to the ADB's environmental concerns, which had initially impeded negotiations. As IHS forecasted a year ago, Pakistan's government was likely to back down on its insistence on 100% use of domestic coal to secure the project's financing (see Pakistan: 14 February 2013: Pakistan backs down on coal imports to secure ADB funding).
In January 2014, Prime Minister Nawaz Sharif inaugurated block II of the Thar project. However, it is yet unclear if the necessary development of the Thar coal site will be completed in time for the newly-converted plants to take advantage of the domestic resource. Nevertheless, the Thar coal site's location in a relatively secure area of Sindh untouched by the militancy is an advantage, as is its proximity to the economic hub and port city of Karachi.
Moreover, the existing 850 MW plant in Jamshoro will also be converted to use coal. This is likely to be an increasing trend over the next few years as the government encourages existing power plants to use cheaper sources of energy, rather than constructing new plants. This will present opportunities for foreign investors with the required expertise with state-owned and private energy producers. For example, in July 2013 Hub Power, a private power producer, said it would spend nearly USD1 billion to convert its oil-based plants to rely on coal. Although a bias towards Chinese investors is probable, given the countries' close relationship in infrastructure development, the government is unlikely to overtly ward off any investors that would significantly help in overcoming the energy deficit.
Outlook and implications
The energy deficit is the biggest risk for foreign investors in Pakistan. According to government estimates, the energy shortfall reduces the annual GDP growth rate by two percentage points. The short fall also results in regular blackouts, often triggering unrest among the population and also detrimentally affecting the popularity of the government. As such, the resolution, or at least the reduction of the energy deficit, will be a priority for the PML-N government. Therefore, power projects, especially those involving new coal based power plants or conversions of oil-based plants, are less likely to face government interference or delays. However, disputes between provincial and federal governments pose a risk to projects, as well as demands for bribes in tenders. Nevertheless, it is unlikely that the government will be able to achieve its target of completely overcoming the deficit during its five-year tenure (to 2018), given the long lead times associated with major energy construction projects. Rather, a more feasible target would be for a demonstrable reduction in the energy shortage – enough for the PML-N to make a case for another five-year term.