Questions arise over coal import for power plants

ISLAMABAD: As unaffordable power supplies affect demand and push consumers out of the nati­onal grid, question marks are being raised over the procurement of imported coal for power plants in the long term despite the government’s and the International Monetary Fund’s (IMF) overall policy direction for localisation and import substitution.

The power plants are getting into long-term coal import — a market where liquidity and availability are in plenty — after the National Electric Power Reg­ulatory Authority (Nepra) streamlined spot imports through procurement guidelines, causing coal prices to tumble by almost half.

While feeling delinquency, former caretaker power minister Muham­mad Ali had ordered an investigation into coal purchases for the Sahiwal Coal Power Project, recommending a report within 14 days, i.e. by March 15, 2024. Investigations have apparently been shelved.

Asked about coal purchases, Central Power Purchasing Agency (CPPA) CEO Rehan Akhtar snubbed a questioner at a public hearing for raising such questions, insisting that similar questions had discouraged oil and gas exploration. He said that evidence, if any, should be provided to Nepra. Last week, Nepra also declined to comment on the issue, although it confirmed it had received the former minister’s letter for inquiry.

Interestingly, Nepra has no regulatory jurisdiction over coal procurement except to issue guidelines and bank on invoices provided by the CPPA for tariff calculations.

According to Nepra’s record, the Sahiwal power project had been purchasing coal at about Rs74,000 per tonne between June 2022 and December 2022. At the same time, the public listed companies in cement and textile industries, among others, were procuring coal for less than Rs45,000 per tonne as per their published financials.

The Sahiwal project’s monthly requirement is around 300,000 tonnes, with consumption based on demand. On average, over $100 per tonne translate to well above $360 million for a 100pc utilisation per year. If other plants — like Port Qasim and China-Hub Power — had followed suit, the additional annual burden on consumers could have been over $1.4bn.

These inflated purchases went unchecked until early part of January 2023 when Nepra finally notified “Guidelines for Procurement of Coal on Spot Basis”.

With these guidelines in place and the resultant multiple suppliers, the Sahiwal power project, which used to produce electricity at Rs28-30 per KWh (as per fuel price determinations for the June to December 2022 period), reduced it to Rs19 per unit. This resulted in a 34pc decrease in the cost of power generation from the same plant.

Multiple short-listed traders, however, complained that they faced significant hurdles from the power project, including unilateral liquidated damages, delayed shipments and reduced order upliftment. These actions caused significant losses to the new suppliers, who claim that the power producer aimed to teach new participants a lesson by forcing significant losses onto them.

Surprisingly, the historical supplier who was unable to win the tender on price was given the option to match the lowest bid and then given preference or first right to supply the coal, ignoring the lowest price bidders.

The lowest price bidders were then denied supplies as the power producers claimed that demand from the government had reduced in an official communication to Nepra. These suppliers have complained at multiple forums that they faced significant losses and were discouraged in words and actions while favouring the historical supplier.

In December 2023, the power producer again entered into a long-term coal supply contract, which appeared to have been tailor-made for the historical supplier who had already imported the coal prior to the tender (similar to the modus operandi in the wheat scandal). As per Nepra’s website, the bill of lading at the loading port is dated Dec 13, 2023, even before the date of award of the contract, i.e. Dec 22, 2023.

The bidding criteria specifically required the first shipment to arrive before the end of December 2023, practically within six days of signing the contract, which in fact it did as shipment arrived on Dec 28, 2023. Ironically, the bill of lading also mentioned the Sahiwal power project as one of the parties concerned, which clearly showed prior agreement with the preferred supplier on the supply agreement even before the date of signing.

The bidding documents required the bidder to complete the signing of the contract within five days, starting from the date when the buyer has given notification of intention to award the contract. Therefore, the seller could have only been aware of the intention to award by Dec 17 at the earliest while it loaded the vessel with the buyers’ name on the bill of lading on Dec 13, 2023. This indicated weak oversight, not only by the government but also by the regulator, at the cost of consumer and public interest.

Interestingly, this was done in the absence of any updated guidelines from Nepra for long-term procurement. As a result, the historical supplier emerged as the only qualified supplier and continues to supply coal without any competing offer. While there are clear guidelines for spot, the process for long-term procurement guidelines was initiated by Nepra but not finalised as yet while tenders were allowed and tariffs approved subsequently.

All of this is happening at a time when multilaterals raise concerns over inefficient procurement, opaque tender procedures and lack of competition, which continues to haunt consumers with high energy prices. A reduction of 7pc to 10pc has been witnessed in power consumption due to higher prices, and circular debt has been mounting while the government and the regulator ignore the basics of a free market where competition leads to lower prices for consumers.

According to multiple sources, a re-run of the Sahiwal Coal Power Project procurement process was in the making in other power projects as well, which are being pushed to get into longer-term contracts. These producers have since published tenders that would convert the exception into a market norm.