The future of coal plants in Pakistan

30 Jul, 2021

Written by Noreen Shams

Blackouts have always been a common part of life in Pakistan’s Gwadar region, on the shores of the Arabian Sea.  But back in 2016, then Prime Minister of Pakistan Nawaz Sharif foresaw Gwadar as the most prosperous city that would have the potential to change Pakistan and inspire the residents to believe in a brighter future.

Mr. Nawaz pointed out that a “300MW coal-fired power plant was being built which would provide electricity to Gwadar and other parts of Balochistan, while a desalination plant would provide clean drinking water to the city and adjoining areas”.

Supposedly, under the Chinese Pakistan Economic Corridor (CPEC), the $360 million coal plant was scheduled to be completed by late 2023. However, a spate of delays has put the entire project on hold, with some now wondering if Pakistan even has any real future in coal at all. 

Pakistan is still heavily reliant on the fossilised black stuff – for now. With crippling energy shortages and a lack of interest from most international funders, this resource reliance is currently being financed largely by major Chinese financial institutions and banks. It is led by the Industrial and Commercial Bank of China (ICBC) along with the Export-Import Bank of China (China EXIM Bank) and the China Development Bank (CDB).

In Pakistan, China is investing in 21 energy projects under CPEC. The majority of this investment has gone into coal. 70% of their planned power projects are set to be coal-fired.

But recent reports from leading sources inside the ICBC indicate that they are becoming increasingly reluctant to back new fossil fuel power plants due to their devastating impact on the world’s climate.

Earlier this year, a senior economist from ICBC highlighted that the bank would phase out coal financing. Further analysis from The Centre for Research on Energy and Clean Air (CREA) highlights that more Chinese-backed coal-fired projects were cancelled over the last three years than successfully commissioned. This is due to the combination of the weakening economic competitiveness of coal, public opposition and concerns about the negative environmental and social impacts of coal projects in developing countries.

When asked if ICBC could consider walking away from its coal-fired investments in Pakistan, Lauri Myllyvirta, lead analyst at CREA, says, “It’s clear that financiers, including Chinese banks, are increasingly taking note of the major financial and reputational risks associated with coal projects and less and less keen to be involved. This will raise the cost of capital and risk of failure if Pakistan continues to base its electricity sector development on coal.”

Myllyvirta attributed project cancellations to public opposition to coal power, with air pollution and other negative environmental impacts, as well as the weakening economics of coal playing a key role.

“The reason that cancellations of coal power projects have affected China-backed projects most heavily is probably that Chinese actors have gotten engaged in riskier and more questionable projects from both economic and regulatory perspectives, not that countries are specifically pulling the plug on projects with Chinese involvement, ” he added.

Inordinate delays or ‘coal policy’ transition

In a surprising turn of events, Prime Minister Imran Khan, the former cricketer-turned-politician, announced at the 2020 Climate Summit that there would be no new coal plants in Pakistan’s future.

At the time, international NGOs welcomed the announcement, but many local experts remain sceptical and are concerned that the statement may be adjusted in the future. 

Arif Pervaiz, an expert in the design and implementation of environmental initiatives, said, “We have a history of making tall claims, and just making an announcement is easy. I ask where the plan is?  Is there any documentation because this is a big step? Pakistan relies on coal for a reasonable amount of energy, and there is a great deal of investment going on in Thar coal development, so what will happen to that? Are they just going to shut down? I think it’s non-serious, and it will change, like so many other claims.”

Besides Khan’s statement and its implications, there are other reasons why the power plants’ construction was halted in Pakistan.

The Special Assistant to the Prime Minister on Energy, Tabish Gohar, told The Express Tribune earlier in the year that the Gwadar coal-fired power project is facing significant delays, partly due to the precarious financial situation Pakistan is now in. 

“The delay in the construction work on the plant was due to the guarantees issued by China Export and Credit Insurance Corporation (Sinosure),” said Gohar.

“Sinosure had charged a 7% fee on the insurance of the loans given to the Chinese companies that set up CPEC power projects. Against an investment of $300 million in the project, Pakistan would return $1 billion in the next 20 years,” said the Special Assistant.

He also maintained that the other planned coal-fired powered plants would not be installed, as the government has banned coal power projects based on imported coal. 

Pakistan’s reliance on coal for energy

This policy is, at least partly, possible due to the discovery of 185 billion tons of coal in the Tharparkar area of Sindh back in 1992, and has dramatically shifted Pakistan’s coal power potential ever since. However, the combination of conflict, political instability, an absence of international finance and a lack of modern coal mining expertise in the country has left these coal deposits languishing.

Since the ICBC and other Chinese-linked investors have come onboard, Pakistan has seen its energy situation transform. Between 2019-2020, 19% of the power generation in the country came from just four CPEC coal-fired power plants.

Renewable energy potential in Pakistan

Many countries have announced plans to phase out coal investments to protect the world from climate catastrophe. Still, for some developing countries without a lot of interest from international financiers, like Pakistan, the cost of this energy transition remains the biggest hurdle. 

According to Myllyvirta, Chinese firms such as the ICBC could play a vital role in supporting Pakistan to overcome this challenge.

“Chinese power companies are already the world’s largest developers of zero-carbon energy, and Chinese banks are the world’s largest financiers…and the world’s largest producers of zero-carbon power generating equipment. This makes it clear that Chinese actors have the capacity to supply clean energy technology to the rest of the world at a massive scale.”

However, he adds that Pakistani officials also have a crucial role to play in kick-starting this shift. “What seems to be needed is a signal from countries such as Pakistan that are working with China to develop the energy sector, that they want to prioritize clean energy.”

Sohaib Malik remains sceptical that ICBC will indeed pull out of their planned Gwadar coal investments. “They cannot do that also because most of the money is coming from state-owned banks.”

However, as an analyst specializing in energy policy, he also supported the idea that Pakistan’s leadership has a lot of homework to do to get the energy transition moving. “There are investors willing to develop renewable energy projects, but the government has not laid out clearly how much capacity (is needed), and when new plants will be required”.

Future of coal-fired power generation in Pakistan

According to the Global Coal Finance Tracker data, more than 70% of all coal plants built today are reliant on Chinese funding. Over the last few years, the biggest coal financing recipients have all been part of China’s Belt and Road Initiative (BRI), including Pakistan, alongside Indonesia, Vietnam, and Bangladesh.

In February 2021, China’s embassy in Bangladesh wrote to the Ministry of Finance that “the Chinese side shall no longer consider projects with high pollution and high energy consumption, such as coal mining [and] coal-fired power stations”. This broad-sweeping letter came as a surprise and included potential ICBC projects. 

This is a sign of things to come in Pakistan. A similar surprise could happen to the people of Gwadar, who were promised so much. In 2016, former Prime Minister, Nawaz Sharif, argued that this coal plant would be a life-changer for the region as he inaugurated the Gwadar development project

“We will have electricity of about 10,000 MW by the end of next year. We hope to eliminate load-shedding by 2018 in the country; some 50,000 jobs are to be created in Gwadar, according to the premier. But the priority will be given to local residents.”

Few jobs were offered almost five years later, and no electricity was supplied to the region. Without a clear decision from ICBC and other financiers, or Pakistan’s leadership, Gwadar residents remain languishing in unfulfilled promises.

However, as the falling price of solar, wind and battery projects continue to break records worldwide, the question remains open as to whether these technologies will play a key role in repairing the trust for Gwadar’s residents. 

To do so could help Pakistan’s leadership and financiers such as ICBC not only save face but make a significant step toward repairing social harmony in the poverty-stricken region.

*ICBC did not respond when asked for a comment in relation to this story.

About the author:

Noreen Shams, Pakistan

Noreen is a Karachi-based multimedia journalist, contributing to different outlets worldwide, covering global politics, social issues and environmental stories. 

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This story was made possible through the support of Climate Tracker.