THAR COAL FIELD
The potential for coal power generation
As the price of imported coal increases the use of domestic coal becomes more attractive

Thar coal was discovered in 1991 by a joint team of US Geological Survey (USGS) and Geological Survey of Pakistan (GSP). Thar coal is lignite which is young coal, is in between peat and bituminous coal. In formation of coal deposits the gaseous products such as methane are typically expelled from the deposit, and the deposit becomes more and more carbon-rich as the other elements disperse. The stages of this trend proceeds from plant debris through peat, lignite, sub-bituminous coal, bituminous coal, anthracite coal to graphite (a pure carbon mineral).

By Husain A. Babur

In 1993, the area considered favourable was only 15 per cent of the known coal deposit. The study gave preliminary pit slope capital expenditure and mining design. At that time, the federal and provincial governments were offering 6.5 cents per kilowatt-hour for power produced regardless of fuel type. The study estimated the coal cost as 54.3 per cent of the per kwh of 6.5 cents in case the annual production was 7.0 tonnes. That is the coal cost at annual production of 7 tonnes was about 3.5 cents for each kwh sent out.

The stumbling block was the pricing for Thar coal. Information asymmetry in terms of known prices or substantive data limit the accuracy of pricing. The ADB study has suggested the digging of a test pit, that would take more than a year and involve an expenditure of approx $20 million. In view of this information asymmetry one of the following three methods could be adopted as the pricing mechanism:

Proxy costs: The mining cost of similar lignite field using a similar technology can be used as a proxy. Similarly the cost of plant may be based on similar plant. The risk mitigation factors may be the same as adopted for other generation plans in Pakistan.

Benchmarking: Some other technology such as a thermal (RFO) plant may be used as benchmark. A strategy similar to privatisation transaction may be adopted whereby this benchmark becomes the reference price or the ceiling.

Test pit results: dig the test pit and then formulate the mining cost and add it to the capital cost of a lignite coal generation plant. The ADB report on the development of the Thar lignite field, has identified a “major gap in knowledge that was required to prove beyond reasonable doubt (i.e. providing bankable proof) that the Thar lignite field is mineable”. It recommended that a test-pit be dug to assist in establishing mineability as a certainty.

To achieve the objective of acquiring an international consortium with ability to develop Thar coal filed and to set up power plants, the request for proposal (RFP) should be based on proven, mature and bankable technology for mining and the power plant. To identify the technology pre-RFP assistance of an international expert should be sought. A carefully constructed financial and mining risks matrix and corresponding risk mitigation measures should be part of the RFP. The GoP should give premium for contributing to energy diversity and security. Further, an indexation mechanism, e.g. indexation to international coal prices, and if coal prices rise by more than 5 percent, 70 percent of the cost be passed on to the consumers and 30 percent to be absorbed by the generators or shared between the generators and the government should be part of the RFP. A predictable tariff model should also be included in the model power purchase agreement (PPA) issued with the RFP.

In a normal Power Purchase Agreement (PPA), the economic life of the project is protected through indexation and payment guarantees. These are normally called "take or pay contracts". This means that as long as the plant is available the power purchaser stands obligated to pay the debt and equity part of the projects. The feedstock risk of coal, water or other fuel is borne by the purchaser. As the PPA are long life, it is essential to cover the technological life so as to benefit form the advances in technology even though the overnight cost may be higher. The synthetic natural gas could be utilised to supplement natural gas and thus be piped into the existing gas grid, where it could be utilised in fertiliser manufacture along with power generation. Whatever the approach it is imperative to move fast with the Thar coal project. The two energy hungry economies, China and India, in order to produce cheaper energy and for energy security continue to add new coal based generation. Coal-fired power plants account for over two thirds of China’s installed capacity. Last year China’s total generating capacity surpassed 622 gigawatts. More than 70 per centr of China’s energy comes from coal, compared with less than 25 percent in the United States and Japan, according to the Worldwatch Institute.

Coal also provides energy security to the nation, which has many decades of reserves, and is less expensive than other energy sources. China’s demand forecast for import of coal is 18.5 million tonnes by 2008 from 15.5 million today, while Indian demand for imported coal will reach 34.3m tonnes in 2007, rising to 38.4 million next year1. Mark Mobius, of Templeton Asset Management Ltd. in Singapore expects Asian coal prices to surge 42 per cent in five years, he said, “which would be good news for China’s Shenhua Energy, the biggest coal company. The Australian mining giants like Rio Tinto and BHP are also considered favourable investment based on the increasing demand for coal by Templeton.

The above is presented to illustrate the need to move ahead swiftly on developing a bankable and investor friendly bidding and pricing process. As the price of imported coal becomes higher the attractiveness of indigenous exploitation becomes more attractive.

Lignite coal similar to Thar coal is being used efficiently by a large number of countries. The world’s largest lignite-fired steam power plant is Schwarze Pumpe in Germany equipped with two 800-MW steam turbine generators designed for supercritical steam conditions. Environmental concerns are addressed by a dual train flue gas discharge (without bypass around the flue gas desulphurisation system) via the cooling tower.

Thar coal deposits have been known to geologists in Pakistan since 1958. At this critical juncture the exploitation of these deposits is crucial to alleviate the electric power crises. Thar coal is plentiful and is devoid of security concerns. When awarding the contract it would be essential to award it to a company of repute in this field. At this time many "gold diggers" are in the filed, but it would be prudent to treat such investors with caution and rather close the deal with a major company directly. It may be more expensive but hopefully the company will deliver.