Coal contributes only 0.2pc to thermal power despite cheaper alternative

Oil, Gas and Power

LAHORE –– Thermal energy contributed 68 percent towards electricity generation, and most of the thermal energy was derived through Oil and Gas (56 percent and 44 percent respectively).

According to a report, coal continues to be a minor contributor despite being a cheaper alternative to oil and abundant reserves present in the country. During FY10 coal contributed only 0.2 percent towards total thermal electricity generation. This contribution has also fallen over the last 5 years at a CAGR of 7 percent.

According to the Energy Yearbook total coal reserves in the country stand at around 186b tons. Measured and indicated reserves stand at 3.5bn tons and 16.7bn tons respectively out of which 97 percent reserves lie in the province of Sindh in the area of Thar.  Despite a sharp increase in mineable reserves of coal, production of coal in the country has fallen at a CAGR of 18 percent over the last 3 years. Fall in local production of coal has led to an increase in its imports; at a 5 year CAGR of 11 percent. Consumption of coal, on the other hand, has experienced an inverted “U pattern touching its peak during FY08 at 10mn tons and then declining to 8.1mn tons during FY10.

Latest coal consumption figure suggests that the cement sector alone consumes 56 percent of the commodity followed by brick-kiln industry (37 percent) while the power sector only consumes 1.5 percent. Therefore, any changes in prices of coal going forward are expected to impact cement and brick-kiln industry the most. However, greater reliance of the power sector on oil & gas as a source of thermal energy would be most resilient to changes in coal prices.

Coal prices have significantly increased over the last 6 months in the wake of floods in Australia. As a result, cement industry of Pakistan also had to increase prices of the end product as a measure to maintain margins. As coal shipments from Australia normalize, we expect coal prices to exhibit stability over the next 6 months.

It is interesting to note how coal prices in the international markets have moved compared to oil prices. For our analysis, we have obtained 2 years weekly data for McCloskey Spot Price Index and Richard’s Bay Spot Price Index to represent coal prices prevailing in Australian and South African region (largest coal mining nations in the region). Both the price indices are then compared with Arabian Light Crude Oil Spot Price Index (Asia) on a weekly basis over the same period. Various correlations of Crude Oil price with McCloskey Index and Crude Oil price with Richard’s Bay Index at different lags are obtained. The results depict that 5th lag of McCloskey Index has highest correlation of 0.885 with crude oil price, on the other hand 6th lag of Richard’s Bay Index has the highest correlation of 0.892 with crude oil price. This clearly suggests that increase in Arabian light crude oil price in Asia translates into an increase in coal prices in Australia and South Africa after 5 weeks and 6 weeks respectively.

Pakistan currently utilizes only 0.1 percent of its measured coal reserves, and only 0.002 percent of its total coal reserves. Import of coal in FY10 was valued at USD418mn, utilization of indigenous coal reserves can help curtail import of coal and lead to an immediate savings of USD418mn. Ample local supply of coal can also result in significant potential for exports of coal which can in fact generate extra revenues for the country and ease-off current account imbalance. Currently imported coal costs USD185/ton of oil equivalent (TOE), while imported crude oil costs USD824/TOE. Hence cost of coal is 4.5x less than that of Crude Oil. Pakistan’s power industry currently consumes 8.6mn TOE of Oil, which if gradually substituted with coal over the longer run can lead to an annual saving of USD5.5bn. Coal remains an untapped commodity in Pakistan.

Due to its low quality with high sulphur and moisture content, per ton of indigenous coal has low energy content -0.45TOE/tonne compared to 0.66TOE/tonne for the imported one. Efforts are being made to enhance the utilization of its vast resources.

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