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In August of this year, the Asian Development Bank (ADB) launched an ambitious programme to foster the energy transition in emerging Asia, the Energy Transition Mechanism (ETM) for Southeast Asia.

The ETM is a blended finance facility that seeks to facilitate early coal-fired power plant retirements while replacing them with cleaner energy technologies. The ETM initially targeted Indonesia, the Philippines, and Vietnam. It appears that coal-heavy Vietnam has developed reservations about being part of the scheme in the run up to COP26 due to limited grid capacity and concerns for finding alternatives for coal in the given timeframe.

In Vietnam’s place, the ADB has approached Pakistan to enter the facility, allocating grant funds worth $300,000 to conduct a pre-feasibility study of potential assets that could be retired by the mechanism. The study will commence in January 2022, as the new year begins.

For Pakistan, the ADB programme’s scope has been expanded to target not only coal-fired power plants, but diesel and furnace oil-based plants as well. Coal-fired generation is a recent player in Pakistan’s energy mix, with almost all the coal-fired capacity entering the grid after 2017. So, the ADB rightly assumes that aging, economically inefficient and highly polluting furnace oil/diesel-based power plants seem to be the bigger problem for Pakistan.

Around 66 percent of Pakistan’s power generation mix is thermal based, proving crucial for the system’s grid reliability and baseload generation. Furnace oil-based power plants constitute 19 percent of this share with a total installed capacity of 6507 megawatts (MW). Despite being a recent entrant, coal holds a significant portion of the generation mix, contributing 13 percent of the total installed capacity in the power sector. Coal’s share of electricity generated is even higher, as it has consistently contributed over 30 percent of the energy supplied to the national grid since 2019. This paints a picture of high carbon lock-in within Pakistan’s grid.

Targeting coal-based power assets would come with many complications. Pakistan’s present coal fleet is extremely young; the oldest coal-fired power plant is only four years old. More capacity will enter generation by 2024 to replace aging furnace oil/gas-based plants as they retire, but the average age of coal-fired capacity will remain under five years. These assets would still be paying off their debt for another 10-15 years. It could be a costly bet for the ETM’s coal retirement facility to take on this debt, while equity investors might not be interested in taking a haircut on profitable assets.

While coal-based power is relatively new to Pakistan’s power sector, Pakistan’s dependence on furnace oil/diesel dates back to the 1970s, when oil and hydro were the only form of generation assets the country had. Three out of the four public generation companies (GENCOs) use natural gas or furnace oil in plants commissioned between 1974-1999.

Subsequent policy revisions (the power policy of 1994 in particular) incentivised private-sector investment in the power sector and led to numerous Independent Power Producers (IPPs) over the years, mainly operating on oil or gas. As a result, 42 percent of the installed thermal capacity is aged above 20 years, ranking very low on the merit order dispatch list. At least 11 percent of this capacity has also lived out its economic life of 30 years, yet continues to operate, albeit at very low utilisation rates.

Not surprisingly, these assets have been marked down by the National Transmission and Despatch Corporation for scheduled retirement. Beginning in 2022, almost 6.5 gigawatts (GW) of thermal power generation is expected to retire, of which 5.9 GW are furnace oil-based power plants.

Given this wave of already planned oil and diesel retirements, questions arise as to what precisely the ADB’s ETM will be targeting in Pakistan. Care must be taken to ensure that the ADB’s role is additional, and the government doesn’t consider this a bail-out package for these already retiring assets.

Barring the nationally owned GENCOs, all IPPs have been ensured power off-take through long-term power purchase agreements (PPAs). Re-negotiating these contracts could prove an arduous task, given the demonstrable difficulties the government recently faced in trying to remove foreign indexation and lower the cost of capital when re-negotiating IPP PPAs.

IPPs receiving generous capacity payments baked into their PPAs contribute to circular debt in the power sector and, at the same time, are impacted by delayed payments by the government of Pakistan. Will the ETM take on the financial burden of these capacity payments? If so, this could lead to very high electricity prices in the accelerated timeframe of the ETM; the International Monetary Fund is already insistent that these costs be passed on to consumers to tackle the build-up of circular debt.

Further, new enabling regulations may be required to enable the ETM to affect the transfer of targeted assets into a third-party vehicle for retirement; this could delay the ETM implementation timeline.

Pakistan’s entrenched reliance on thermal-based sources, serving both baseload and peaking power, raises serious questions regarding the country’s energy security. The role of variable renewable energy appears not to be deeply considered as part of the country’s long-term capacity expansion planning. Vietnam’s withdrawal from the ETM was also based on this facet as it deemed its existing coal-powered fleet crucial for the nation’s economy for the next 10-20 years. The same could be true of Pakistan unless these retirements are accompanied by replacement from robust, reliable, and, arguably, more cost-efficient renewable energy-based back-up power solutions.

The ADB ETM programme aims to be cognizant of its target countries’ legal, political, and financial realities to ensure that the scheme works within the local context of the power systems it seeks to change.

However, the fundamental questions loom large for Pakistan: can the ETM help reduce the circular debt burden facing the energy sector? How will the ADB and domestic policymakers ensure that the proposed retirement facility doesn’t target sub-optimal assets already nearing the end of their life? How will the ETM’s goals be reconciled with demand growth in Pakistan and abundantly available, purportedly ‘cheap’ domestic coal? How will the ADB help Pakistan create a more economically and environmentally sustainable grid? Will the money exchanged really flow towards investment in renewable energy?

All the players involved need to think more holistically beyond a ‘mere’ ETM transaction.

In a world that is increasingly moving towards high climate ambition, there are still examples of people vouching for the ‘development and prosperity’ that coal could bring to a developing economy.

Pakistan is one such case where multiple stakeholders, be it project developers, corporate entities or government officials, genuinely believe that investing in coal power development is the optimal pathway to rid the country of its energy woes.

Outdated arguments such as coal being the only ‘least cost’ generation option available to Pakistan and the ‘unreliability’ of renewable energy because of its intermittency are often quoted by proponents of coal development to propagate the misguided notion that Thar Coal development has indeed brought prosperity to the region.

At the crux of the argument is the premise that Thar coal has led to indigenization and security of energy supply in Pakistan. What is conveniently neglected is the fact that variable renewable energy such as solar and wind are equally capable of doing the same. In Denmark, for instance, solar and wind energy contributed around 50 percent of the country’s total energy generation in 2019-2020 – a case in point for the reliability and flexibility of renewables.

The incumbent government has shown good ambition on the climate front by allocating more resources to fighting climate change this year. However, when it comes to coal, the government’s policies are confusing and give mixed signals.

At the Climate Ambition Summit in December 2020, the prime minister announced a moratorium on coal fired power generation but at the same time indicated Pakistan’s plans of giving a second life to coal via coal gasification and liquefaction for energy generation.

While the premier’s intentions for a cleaner energy mix cannot be doubted, existing cases for such technology show that these projects are neither economically nor environmentally feasible and will soon be a technology of the past. An example is SASOL in South Africa which is supported by massive state sponsored subsidies or the Bukit Asam Coal to Gas plant in Indonesia which is set to lose millions annually.

The technological obsolescence of such projects is compounded by a dwindling political and financial support worldwide for investments in coal in general. Public and political pressure and high investment risks have pushed governments and commercial banks to quit coal altogether. Just last month, the G7 group of rich nations agreed to end support for unabated coal. Global financiers such as HSBC and the Sumitomo Mitsui Financial Group Inc have also declared clear intentions to halt their financing for coal.

South Korea and Japan not only announced that they would decarbonize by 2030 but also committed to exiting from coal-based investments overseas. The announcement is a huge triumph in itself, since South Korea and Japan stand to be the biggest investors of coal in Asia to date and have funneled billions of dollars into coal power projects in Vietnam, Indonesia and Bangladesh.

China also announced an intention to reach a peak in domestic coal consumption by 2025 in April this year. This sets the stage for further commitments and climate ambition from China in the months to come. China’s hosting of the Convention on Biodiversity, COP15 in Kunming this fall could also bear some positive surprises for environmentalists around the world.

An announcement from China to end overseas coal investments would be a huge blow to the handful of countries with plans on pursuing new coal projects including Pakistan. The People’s Bank of China (PBOC) has already tightened its purse strings for overseas coal and many more are expected to follow in its wake. The Industrial and Commercial Bank of China (ICBC), one of the major lenders for four coal power projects in Pakistan, recently pulled out of a $3 billion coal power plan in Zimbabwe. The ICBC termed the project a ‘bad plan’ due to environmental problems.

These recent developments should be sufficient to put coal project developers in Pakistan on alert. Pakistan’s nascent coal industry is entirely dependent upon Chinese financing for sustenance. If a decision to shelve coal investments comes forth from China, Pakistan would be left with no ally to make its dreams of coal-based indigenization of the country’s energy mix come true.

Energy policymakers in Pakistan thus need to preempt a shift away from coal towards cheaper and cleaner renewable energy as early as possible. If Pakistan gives the signal, their Chinese counterparts will be responsive for sure. We saw this happen in Bangladesh, where China recently announced a coal-phase out upon Bangladesh’s request to halt the construction of five coal power plants. The government’s decision in turn was prompted by a massive outpouring of resistance against coal power plants from local residents and the current state of Bangladesh’s domestic energy sector.

Bangladesh’s power sector has been riddled with problems of overcapacity and the rising costs of coal – a situation not very different from Pakistan. Pakistan too has a massive overcapacity problem and coal developments in Thar are being met with increasing pushback from the locals.

COP26 is just around the corner and this year’s focus is solely dedicated to putting an end to investments in coal around the world. Both Pakistan and China will have the world watching them to come forth with smart economic decisions and an ambitious timeline to phase out coal.

China’s willingness to respond to the need of host countries and the recognition of coal as a risky investment by Chinese banks should be enough to initiate a shift away from coal in Pakistan. Such a move however wouldn’t be possible without Pakistan’s keenness to do so. The sooner this happens, the better it will be for Pakistan’s climate, economy and environment.

Ahead ofthe 26th UN Climate Change Conference of the Parties(COP 26) scheduled at the end of the year in Glasgow, many countries have been upping the ante on the ‘green agenda’ to deliver new ambitious commitments. Pakistan has also expressed strong support for advancing renewable energy and fast-tracking energy transition, which is certainly an admirable, and necessary, pathway. This support could be tracked in multiple policies and political statements including the Nationally Determined Contribution (NDCs), Net Metering Regulation 2015, National Energy Efficiency and Conservation Act 2016,Pakistan 2025: One Nation, One Vision, National SDG 7 Framework, and most notably the Alternative Renewable Energy Policy (AREP, 2019) which set a target of reaching 30 percent of non-hydro renewable energy by 2030.

Let’s theorise compatibility of thesecommitments, policies, visions and inter-linked broader political economic landscape.Evena cursory look at themost recent policies and statementsalone indicates major misalignments.For instance, the National SDG Framework targets to increase share of renewable energy to 25 percent in the total final energy consumption.The AREP targets 30 percentof power generation capacity from non-hydro renewables by 2030.Whereas the recently revised Indicative Generation Capacity Expansion Plan (IGCEP) for the period 2021 to 2030 envisage the share of solar and wind at 10 percentin the overall energy mixby 2030. The stated differences in mandates, goals and targetshave created widespread confusion and scepticism toward a uniform decarbonisation strategy and roadmap.

It is important to note here that the very idea of having aplanned power sector expansion trajectory was to avoid misbalanced growth and misaligned systemic institutional logics.The plan itself states its overall purpose to be “fulfillment of outlines, actions, and strategies as stipulated in the relevant policies and decisions of Government of Pakistan”.To this note, IGCEP hence raises several questions, notably its misalignment with ARE Policy, and its blatant disregard for the 30 percent non-hydro RE target.

An incoherent planning system cannot drive a coherent strategy. IGCEP must align with AREP. It is time to walk the walk and ensure that this 30 percent target is met by 2030

What is difficult to comprehend here is not only the paradox of policy and planning, but also the paradox of rationality. For the power sector of Pakistan, a long-standing objective has been reducing reliance on imported fossil-fuels and improving energy security. And although Pakistan always had abundant solar and wind energy resources yet till recently, competing counterclaims associated with the economic and technical constraints ofthese technologies held back its growth. However, withmajor technological breakthroughs, recently renewable energy technologies have undergone a dramatic downward shift in terms of cost, reaching grid parity. The cheaper and widely accessible solar and wind energy hence has the potential to bring down generation cost. Where intermittency of these resources remains a key challenge, but in the specific case of government’s 30 percent VRE target, the recent World Bank commissioned studies have concluded that a large and sustained expansion of solar PV and wind power, alongside hydropower and substantial investments in the grid, are both achievable and desirable. And that a substantial and immediate scaling up of solar and wind capacity could assure several advantages including lowering GHG emissions over the long term and reducing externalities. With these established techno-economic environmental efficiency gains, the only problemstill not addressed is fragmented state oversight, planning and coordination; absence of innovative organisation, business and finance models; as well as grid related constraints-consequently making the renewable transition highly resistant despite promising potential while the reliance on fossil-fuels continues unabated. Theskepticism surrounding renewables is another key impedimentundermining the entire process.The real challenge therefore remains- complementing policy tools with creating an environment for transition. If done so, this could effectively unleash a renewable revolution in the country.

The window of opportunity to achieve the 1.5°C Paris Agreement goal is closing fast. We need to timely head in the right direction. For Pakistan, renewable energy does not only offer an ‘irresistible alternative’ for advancing indigenous sustainable energy but a ‘necessary prescription’ for addressing longstanding challenges in the power sector-a much overlooked discourse. The challenge of advancing renewable energy,however,cannot be achieved by a single government, institution or sector-rather will require consolidated coordination and changes at every level of the energy value chain. Relevant actors and stakeholders, legal and political regulationsmust be organised to successfully leverage the underlying transformational forces substantiating the transition. A systemic approach to solving fundamental barriers and capturing opportunities is therefore imperative to foster the desired transformation. However, as a starting step, the government needs to face the reality and match its grand plan’s words with more action through aligned institutional logics.

Prime Minister Imran Khan’s coal moratorium announcement gains plaudits but the lack of reaction from investors in coal plants, mainly Chinese, raises troubling questions of the way forward.

In a surprising turn of events, the Prime Minister of Pakistan, Imran Khan, announced a moratorium on coal on December 12, at the Climate Ambition Summit held to mark the fifth anniversary of the Paris Climate Agreement, where 195 countries came together and pledged to limit temperature rise to two degrees Celsius (from the 1880 average) through stronger climate action. At the Climate Ambition Summit, leaders from around the world were invited to present their strengthened commitments for decarbonization and greener growth.

Khan’s statement received international acclaim, since Pakistan’s bid to achieve energy security was known to be based on coal-based generation is widely known, indicated by the heavy investments in the sector from Chinese and local investors alike. While the Prime Minister’s statement is certainly a step in the right direction, there is much that is desired in terms of explanation when it comes to its implementation.

See: Scrapping imported coal projects, Pakistan fails to let go of local lignite

When will this phaseout of coal occur? How will the transition happen? Does this mean that existing coal power plants will be shut down too? What happens to those already under construction? Such a transition would have far reaching impacts on most energy projects under the China Pakistan Economic Corridor (CPEC), so why have the Chinese coal investors kept quiet?

Explore a large-scale version of the map here. [Data source: cpec.gov.pk & CSIS]

China is Pakistan’s largest investor and contractor of energy projects, most of which are coal-burning power plants. CPEC includes 17 priority energy projects totalling 11.1 GW in capacity and USD 18.62 billion in investments. Three quarters (8.22GW) of this capacity is coal fired in nature, backed by roughly USD 8.7 billion of insured debt from major Chinese banks including the Industrial and Commercial Bank of China (ICBC), Export-Import Bank of China (China EXIM Bank) and the China Development Bank (CDB).

See: Pakistani military in charge, provinces sidelined in a revived CPEC

Coal a major player in Pakistan

Despite being a recent player in the energy domain in Pakistan, coal is already a major part of the generation mix. The year 2019-2020 saw 19% of the power generation in the country coming from just four coal-fired CPEC power plants. The 4.62 GW of CPEC funded coal-fired generation includes the 1,320 MW Huaneng Shandong Ruyi-Sahiwal Coal Power Plant, the 1,320 MW Port Qasim Coal Fired Power Plant, the 1,320 MW HubCo Coal fired power plant and the 660 MW Engro Thar Coal Power Plant which started supplying electricity to the national grid between 2017 and 2019. A further 1,980 MW of capacity comprising the Thal Nova, Thar Energy (HubCo) and Shanghai Electric (SSRL Thar Coal Block I) power plant are under various stages of construction already.

A complete phase out of coal would gravely complicate matters for these power projects. Pakistan does not have a competitive market when it comes to buying and selling of power. Instead, power purchase is governed by contracts between the government and power producers. CPEC energy projects are considered Government to Government (G2G) projects, founded on the basis of state-to-state cooperation. To divest such huge investments a massive renegotiation and considerable strategic manoeuvring would be needed. The government’s recent attempts to reconfigure power purchase contracts with about 47 independent power producers (IPPs), which are proving to be exceedingly difficult, is a sign of the kind of trouble this would entail.

Effect on new projects?

Perhaps, then the biggest implication of the Prime Minister’s statement would be for coal-based power projects which are still in the pre-permit stage. Take Gwadar for instance, where a 300 MW imported coal fired power plant is in the pipeline, or Thar where a 1,320 MW project is being planned by Oracle. Both plants fall under the CPEC umbrella, with a cumulative worth of over USD 2 billion, a majority of which will be funded by state-owned enterprises in China.

An additional 2,473 MW non-CPEC coal-based capacity has also been planned in Thar, Jamshoro and Arifwala, financed by a mix of local and foreign sources that could possibly reach up to USD 3.3 billion. It would be logical for a moratorium on coal in Pakistan to start from these projects, effectively putting 4.1 GW of planned coal-fired capacity in jeopardy and risking the financial security of billions of dollars in investment.

See: Locals urge Pakistani government to drop CPEC coal mining plans

None of the CPEC coal power projects under operation or planning have responded to the PM’s statement yet. Could this mean that they think they have nothing to worry about? It would certainly not be the first time Pakistan’s climate policy discourse has not gone beyond promises.

New coal plans a big worry

While the first part of the Prime Minister’s statement could be a message of hope, the second part is cause for concern: it refers to the government’s recent plans for exploring the possibility of Coal to Liquid (CTL) and Coal to Gas (CTG) options in a bid to shift away from coal-based generation. The government has already been in contact with two Chinese companies – China Ghazuba and China Coal – for this. Three local fertiliser companies have also been asked to conduct a joint study on the feasibility of this venture. Individual studies conducted separately by these same companies indicated that such an endeavour would not be cost-effective.

Khan’s statement can be construed to essentially mean that mining activities would continue, but instead of coal being directly fed into power stations, it would first be converted to gas or oil. What is surprising is that the premier introduced this as his plan to mitigate climate change, while it is widely known how cost-prohibitive and water and energy intensive these CTL and CTG processes are. The closure of the Kemper County Clean Coal Power plant in Mississippi after construction delays of seven years and a cost escalation up to USD 7 billion is a warning.

Running the state-owned Shenhua’s pilot CTG plant in Ordos, Inner Mongolia, China, led to an almost four-metre drop in water level of the local aquifer in just the first year of operations. Greenpeace reported that several wells less than 30 metres in depth had gone completely dry in the area, and new wells up to 100 metres deep had to be dug to access water.

The same fate awaits Thar, a desert in which the government intends to start its CTG and CTL plants.

And then there are the social impacts surrounding the less-than-transparent process of land acquisition in Thar, which is proceeding without free, prior and informed consent of residents.

If Pakistan is to shift away from coal, then CTL or CTG is not the way to go. The government should come up with a solution that is better thought out, more rounded and ensures that Pakistan’s transition to cleaner energy is socially and environmentally just. Perhaps the government should be looking into the feasibility of battery storage and hybrid renewable energy systems instead.