BY DR. ERICA DOWNS
Pakistan is increasing its use of coal to generate electricity at a time when many other countries are reducing coal use in order to cut greenhouse gas emissions or pollution. China is helping Pakistan expand its coal-fired generation capacity through the financing and construction of coal power plants as part of the China-Pakistan Economic Corridor (CPEC). CPEC is a component of Chinese president Xi Jinping’s Belt and Road Initiative (BRI), which aims to forge greater global connectivity in part through infrastructure development. Nearly 75 percent of the generation capacity of CPEC power plants is coal-fired. Pakistan’s National Electric Power Regulatory Authority (NEPRA) expects that CPEC coal power plants will be largely responsible for the projected increase in the country’s coal-fired generation capacity from 3 percent as of June 30, 2017 (fewer than six months after the first CPEC coal plant began commercial operation), to 20 percent in 2025.
As part of its series on the Belt and Road Initiative, Columbia University’s Center on Global Energy Policy initiated research into the CPEC power sector projects, which account for the majority of the cost of CPEC projects. This paper examines two of the key concerns critics have about the BRI: environmental sustainability and debt sustainability. Concerns about environmental sustainability center on the ways in which an expansion of the amount of electricity generated globally by fossil fuels, especially coal, will increase greenhouse gas emissions, making it more difficult if not impossible to meet the emissions targets in the Paris Agreement. Concerns about debt sustainability focus on whether China’s lending in support of infrastructure projects will lead to problematic increases in debt, with some analysts maintaining that Beijing is intentionally seeking to push countries into debt distress in an attempt to gain control over strategic assets or decision-making in borrowing countries.
The main findings of this study are threefold.
First, the heavy focus on coal in the new generation capacity added by the CPEC power projects stems from both “pull” factors from Pakistan and “push” factors from China:
The CPEC coal power projects reflect Pakistan’s long-standing goal of diversifying its generation mix away from fuel oil toward domestic coal in an attempt to decrease generation costs and conserve foreign exchange. They also reflect the perception of the administration of former prime minister Nawaz Sharif, whose pledge to end power outages helped his party win the 2013 election, that coal was the best option to bring on a large amount of new capacity in the short term. Although Pakistan has vast renewable energy potential, solar and wind power were considered too expensive and difficult to integrate into electric grids.
Meanwhile, Chinese companies had several reasons to sell coal power plants to Pakistan, including exporting rather than warehousing excess power generation equipment, financial incentives provided by Beijing and Islamabad, and the ability to execute projects fast enough to help Sharif eradicate the blackouts hurting Pakistan’s economy before he stood for reelection in 2018.
Second, there is a mismatch between the dominance of coal in the CPEC power generation mix and Beijing’s recent emphasis on green development as an important feature of the BRI. This gap between Beijing’s rhetoric and the reality on the ground can be explained in large part by Pakistan’s preference for building coal-fired generation capacity. Ultimately, it is up to the host country to decide the composition of its electricity mix. The Chinese government has a long-standing reluctance to interfere in decisions of this type. Moreover, China regards some of the CPEC coal power plants as environmentally friendly because they use relatively modern technologies and are expected to emit fewer greenhouse gas emissions than the fuel oil plants Pakistan is replacing.
Third, there is a risk that the CPEC power projects will add to Pakistan’s sovereign debt burden, but multiple factors indicate that any increase in sovereign debt from these projects is unlikely to be the result of a deliberate strategy on the part of China. Although the debt financing arrangements for CPEC power sector projects primarily involve loans from Chinese banks to project companies wholly or partly owned by Chinese firms, these projects may increase Pakistan’s debt because of sovereign guarantees issued by Islamabad to support CPEC power projects and the liquidity crisis in Pakistan’s power sector known as circular debt. That said, several aspects of the China-Pakistan relationship and the large stake that China’s government and companies have in the success of CPEC indicate that Chinese interests are better served by sustainable CPEC projects than unsustainable ones.
INTRODUCTION
In May 2013, Chinese premier Li Keqiang proposed that China and Pakistan focus on developing “priority projects in connectivity, energy development and power generation” and an economic corridor linking the two countries.[1] China and Pakistan formally launched the China-Pakistan Economic Corridor (CPEC) nearly two years later when President Xi Jinping visited Islamabad in April 2015.[2] CPEC is a collection of energy and transport projects, some of which will connect western China to the Arabian Sea.[3] The Chinese Embassy in Pakistan reported that as of the end of 2018, 22 CPEC projects worth US$18.9 billion had been initiated or completed.[4] Although $18.9 billion is far below the $62 billion often cited as the value of the CPEC project portfolio, it is nonetheless a considerable amount of foreign capital for Pakistan.[5]
The Chinese government has regarded CPEC as the bellwether of President Xi Jinping’s Belt and Road Initiative (BRI), which he unveiled in 2013.[6] Once described by Xi as a “project of the century,” the BRI aims to forge greater global connectivity, including through the construction of infrastructure, notably in emerging economies.[7] The initial importance of CPEC as the leading edge of the BRI is reflected in the oft quoted remark made by China’s foreign minister Wang Yi in 2015: “if ‘One Belt, One Road,’ is like a sweet symphony involving and benefitting every country, then the construction of the China-Pakistan Economic Corridor is the sweet symphony of the melody’s first movement.”[8]
Power sector projects are a large component of CPEC. Generation and transmission projects account for 7 of the 11 CPEC projects completed and 6 of the 11 CPEC projects under construction at the end of 2018.[9] In addition, the 15 power sector projects that comprise the CPEC energy priority projects—those initially scheduled for completion by 2020 and the subject of this study—represent 55 percent of the value of all the projects on the government of Pakistan’s CPEC website with an estimated cost listed ($20.9 billion out of $38.6 billion).[10] This focus on power projects reflects the determination of former Pakistani prime minister Nawaz Sharif to honor his campaign promise, which helped his party win the 2013 elections, to end Pakistan’s chronic electricity shortages.
Three-quarters of the new generation capacity to be added by the CPEC power sector projects is from coal-fired power plants. If all these plants are constructed, they will be a major driver in Pakistan’s increasing reliance on coal for electricity. Indeed, the government of Pakistan expects the CPEC power plants to contribute to an expansion of coal’s share in Pakistan’s power generation mix from 3 percent on June 30, 2017, to 20 percent on June 30, 2025.[11] This push to produce more electricity from coal stands in contrast to the move away from coal for power generation in other countries in recent years.[12]