Reducing energy costs: Govt to facilitate transition to coal-based power

Water and power ministry to seek ECC approval.

ISLAMABAD:

Nearly two decades after discovering some of the world’s largest reserves of coal in Thar, the government has finally decided to create a policy that would help independent power producers to convert their oil-based power generation units to coal-fired plants, in a bid to reduce the average cost of electricity supplied to the national grid.

The draft of the policy drawn up by the water and power ministry, a copy of which was seen by The Express Tribune, said that the cost of the switch from oil-based to coal-based power generation would be split evenly between the independent power producers (IPPs) and the power distribution companies (eight out of nine of which are state-owned).

The water and power ministry created the proposal after a study it conducted concluded that the economy would save around $26 billion in fuel costs over the next 15 years. The ministry will move the economic coordination committee (ECC) of the cabinet for approval of the policy.

The policy has acquired some urgency after the recent acute phase of the ongoing energy crisis, sparked largely by a debilitating financial crunch in the power sector.

About 68% of the country’s power generation comes from oil and gas. While gas is the cheaper fuel, it is also increasingly scarce, meaning that many plants that have the capacity to run on both oil and gas often are forced to run on furnace oil. This, however, has a tendency to more than double the cost of the electricity produced.

In an effort to encourage more IPPs to take up the offer, the ministry has decided that it will reduce the customs duty on the equipment and spare parts needed for the transition down to just 5%.

IPPs will be given a maximum of one year to carry out the conversion from oil/gas to coal, during which period the companies will be paid in two components: one that is subject to escalation (to cover their returns) and one that is not (to cover their interest payments for the financing they raise for the conversion).

The IPPs regulated under the power policy of 1994 will be allowed to sell the coal-based power to the national grid without requiring any modifications to their contracts or additional approvals from regulators. Those regulated under the policy of 2002 will require regulatory approval.

While gas turbine engines cannot be readily converted to coal, conventional steam engines can. However, there are several technical, commercial and policy related issues with the transition, which the new policy is being designed to address.

The Private Power and Infrastructure Board (PPIB) had consulted various stakeholders before crafting the policy. The move is being welcomed by many in the power sector.

“In this scenario, the proposal to convert furnace oil plants into coal plants will help reduce power generation cost,” said Rasul Khan, the managing director of the Pakistan Electric Power Company (Pepco).

Published in The Express Tribune, October 7^th, 2011.