Thar Coal: Locking Pakistan into Unsustainable Capacity Payments’ by Simon Nicholas, IEEFA

Two more Thar coal power projects have reached financial close so far in 2020 as the high capacity payments of such fossil fuel-based plants threaten to become financially unsustainable. Pakistan has now asked China for easier repayment terms on 12GW of CPEC power projects totaling US$30bn of investment, hoping to lower the burden of capacity payments.

Meanwhile, the economic downturn caused by COVID-19 is now increasing the risk of Pakistan being burdened by overcapacity which will make the financial issues within the power sector even worse. Overcapacity was an issue in Pakistan even before the pandemic as slow economic growth lowered power demand growth. Pakistan isn’t alone in dealing with overcapacity concerns, Egypt recently shelved plans for a huge 6.6GW China-backed coal-fired power plant due to concerns about overcapacity and a preference for renewable energy.

A switch of focus towards smaller, modular renewable energy additions, grid improvements and energy efficiency can help reduce the risk of overcapacity whilst avoiding the further burden of capacity payments. In addition to being the cheapest source of new power generation Pakistan, renewable energy also has the advantage of being able to attract a wider range of potential investors to Pakistan who would not want to invest in coal. Sindh province, the location of the Thar coal projects, is Pakistan’s renewable energy leader and demonstrates the nation’s renewable energy potential. IEEFA’s modelling suggests Sindh province could reach more than 50% renewable energy capacity by 2030, leading Pakistan in meeting the national renewables target. As Pakistan shortly begins to emerge from the COVID-19-induced economic downtown, it faces an opportunity to overhaul its power capacity addition plans in favour of renewable energy, thereby avoiding the further financial burden of large, expensive power plants with their unsustainable capacity payments.