February 24, 2021 (MLN): Fitch Solutions have made downward revisions to Pakistan’s coal power growth forecasts for the ongoing quarter, given the slow progress on China-Pakistan Economic Corridor coal-powered projects of late, and increasing downside risks to the sector from the moratorium on coal.
That said, Fitch stress that even with this revision, coal will still continue to see strong growth, due to its robust project pipeline and challenges with expanding alternative generation sources.
In research issued on Tuesday, Fitch Solutions said newly-released historic data from the National Electric Power Regulatory Authority and Energy Information Administration have shown that coal generation grew a lot weaker in recent years than we initially expected, and resulted in the skewing of our forecasts this quarter.
In late December 2020, Prime Minister Imran Khan had also announced that it will no longer approve any Chinese-backed coal power projects, signaling a shift away from the fuel source in a bid to use cleaner generation sources.
According to the report, this comes largely as a surprise, given that the Pakistani government previously identified the fuel as one of its key strategies for power expansion, and had prioritized the development of coal-fired plants due to its cost competitiveness and sizeable reserves of domestic coal.
“This is also largely in contrast with their existing power development plans, particularly as the existing state grid operator National Transmission and Dispatch Company(NTDC) had released the Indicative Generation Capacity Expansion Plan (IGCEP 2047) just earlier in the year, which showed a strong focus for coal,” Fitch Solutions, an arm of Fitch Rating Agency said.
This has once again highlighted the disconnect and lack of coordination between the government and key domestic power players, and a lack of clarity in the policy environment for the power sector at present, it added.
As such, the exact trajectory of the power sector for the coming few decades remains unclear, and these regulatory uncertainties are expected to weigh on investor sentiment towards the market.
Fitch Solutions now expects coal generation to grow at a slower rate than previously expected, at an annual average of 9.9% between 2021 and 2030 to reach 38.7TWh. That said, it stresses that even with this revision, coal will still continue to see robust growth.
Over the past few years, the project pipeline for coal-powered projects has grown significantly. Fitch’s key Projects Database currently registers more than 11GW of coal-powered projects in the pipeline. While projects in the pre-approval stages will face risks of being derailed.
Fitch noted that there is still a significant amount of coal capacity that will likely continue to progress and be commissioned over the coming decade. Furthermore, given that the majority of these projects are under the CPEC and procured on a government-to-government basis, it might be difficult to renegotiate or divest from some of these given the further strategic complications.
“We note that there has also been muted response from both the Chinese government and Chinese investors following the announcement, which we believe could signal some level of confidence to the progress of existing projects,” it said
As of February 2021, due to slow progress on CPEC projects that have yet to begin construction, the government has also directed all the relevant ministries/divisions to submit before the Cabinet Committee proposals to resolve problems confronted in their respective projects, signifying an ongoing commitment to the initiative.
“As such, we expect coal generation will continue to replace less competitive oil generation, supported by a few large-scale projects in the pipeline that have continued to progress. The share of coal will increase significantly over our 10-year forecast period, from an estimated 10.1% in 2020to around16.6% by 2030,” Fitch said.
As per the research note, the above-mentioned view is also underpinned by ongoing challenges with expanding other generation sources, particularly amid a power demand surge over the coming years. Pakistan has long faced power supply issues due to the ongoing disparity between electricity supply and demand. Given ongoing efforts to reduce barriers of entry for foreign investors in other sectors and boost industrial and manufacturing activities, power demand is also expected to surge over the coming decade.
Hence, there is a need to ramp up capacity over the coming years there is a need to ramp up capacity quickly to meet with the upcoming demand surges.
In line with the aforementioned coal moratorium, the government intends to rely more heavily on hydropower. An affiliate of Fitch Ratings noted that there is a substantial hydropower project pipeline of total capacity worth more than 40GW, with many large-scale and expansion projects underway. However, many of these projects face high risk. Many unresolved issues continue to shroud the progress and feasibility of various projects, increasing the risks of delays or even cancellations.
Some of these issues include financing, the government's ballooning deficit, environmental issues, land acquisition, compensation packages, and other related concerns. Furthermore, the recent changes in weather patterns and droughts have significantly weighed on hydropower generation output reliability.
Natural gas currently accounts for close to 40% of total electricity generated, and while the country has considerable natural gas reserves that it can rely on to provide affordable power to its citizens, chronic mismanagement has led to a shortfall in gas in Pakistan, research highlighted.
Pakistan’s Oil and Gas Regulatory Authority (OGRA) anticipates the domestic gas shortfall to more than double over the next five years, from an estimated 1,447mmcfd in FY2019 to 3,684 mmcfd byFY2025 and 5,389 mmcfd by FY2030, as supply fails to keep pace with strong growth in usage across the power, residential, fertilizer, captive power, and industrial sectors.
There is some upside as the government turns towards LNG imports to secure gas supply given the limited domestic upstream opportunities but will be limited by gas-related infrastructural bottlenecks, including pipelines and LNG import terminals, research cited.
Pakistan has announced a new policy to increase the share of renewables generation to 20% by 2025 and 30% by2030. This is expected to be driven by wind and solar power expansion, with investments largely coming from the private sector.
That said, it still remains unknown what specific policies will put in place by the government to encourage investment into the sector and fulfill the targets at present. Furthermore, the intermittent nature of wind and solar power coupled with an underdeveloped grid capacity remains a bottleneck to generation growth, it added.
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