What Drives Pakistan’s Coal-Fired Power Plant Construction Boom? Understanding the China-Pakistan Economic Corridor’s Energy Portfolio

Karachi, Pakistan. Photo by Muneer Ahmed via Unsplash.

As countries committed to keep warming well below 2° Celsius, with efforts to limit warming to 1.5° Celsius in the Paris Agreement, investments in the construction of coal-fired power plants have come into the spotlight. China’s policies and actions in financing coal-fired power plants overseas have received much attention in recent years after major international financial institutions started to prohibit investment in coal-based generation. How then do host countries’ policies encourage or discourage the construction and use of coal-fired plants?

Using Pakistan as a case study, a new journal article by Rishikesh Ram Bhandary and Kelly Sims Gallagher analyzes Pakistan’s partnership with China to develop energy projects via the China-Pakistan Economic Corridor (CPEC). Based on interviews with key decision-makers and stakeholders, the research shows how the Pakistani government’s policies have steered Chinese investment towards coal-fired power plants. While this relationship has flourished, Chinese actors have also displayed risk aversion, which has translated into steep economic costs for Pakistan. This case study provides a fine-grained analysis of the demand drivers of China-backed coal finance.

Main findings:
  • After winning the 2013 general election, Prime Minister Nawaz Sharif made efforts to tackle the persistent energy deficit in the country. Sharif introduced the “National Power Policy” in 2013, which laid out his government’s vision for addressing the energy crisis.
    • Policymakers included renewables in the overall portfolio of projects planned under CPEC, however, the share of renewables was minor compared to coal.
    • Instead, the power policy laid special emphasis on developing low-cost sources of power, such as coal. Pakistani officials were drawn to the potential of the untapped coal reserves in the Thar region.
  • Pakistan’s options for coal financing became more limited with China emerging as the only major lender starting in the 2010s. Although Japan and South Korea continued to finance coal plants around the world, China eventually became the only major lender that was willing to finance overseas coal-fired power projects in Pakistan specifically.
    • The CPEC deepened the relationship between China and Pakistan. Launched in 2015 when Chinese leader Xi Jinping visited Pakistan, CPEC aims to foster close collaboration between China and Pakistan through investments in transportation, energy, communications and industrial development.
  • While Pakistan was able to attract finance from Chinese banks and the interest of project developers, the Pakistani government also offered special terms to mitigate risks to Chinese actors. 
    • First, the tariff payments paid by the Pakistani government to the power generation companies included a high return on equity. 
    • Second, the Pakistani government allows developers to claim China Export and Credit Insurance Corporation’s (SINOSURE) fees for reimbursement every year. Chinese policy banks have required developers to purchase political risk insurance provided by SINOSURE to finance projects.
    • Third, as the debt repayment period offered by the Chinese is often limited to ten years, the risk of non-payment is reduced to a shorter period of time, thereby increasing the financial attractiveness of these investments to both investors and Chinese policy banks.

Pakistan has benefited economically and developmentally from China’s willingness to finance coal-fired power plants, which now appears to have come to an end. By the time Pakistan discovered coal, the investment climate in the country had deteriorated sharply and attracting foreign capital was a challenging proposition. It is in this context that Chinese investments in coal came in through the CPEC. Up until Xi’s announcement at the 76th United Nations General Assembly, China was willing to finance energy projects in its partner countries.

More broadly, the findings from Pakistan highlight the power exerted by incumbent technologies and the desire of policymakers to use available technologies to address energy generation shortfalls. In Pakistan’s case, the sheer availability of coal was enough to drive the decision-making. Second, policymakers facing energy crises are attracted to technologies that can help address the short fall in an expedient manner. The inexperience of policymakers with renewables further reinforces their hesitation to use renewables as the technology to scale up generation.

The importance of domestic policy drivers also suggests that calls to ‘green’ the BRI must be accompanied by host country policies that generate the demand for renewable energy technologies and dismantle barriers to low-carbon development.

Read the Journal Article