Coal Conversion Project to benefit common consumers by lowering tariff: KESC


Karachi Electric Supply Company has refuted a report published in “Pakistan Today” on Oct. 6 which criticised the coal conversion project and alleged that KESC had the tendency to purchase power rather than generating its own electricity.

In a rebuttal, KESC said that the conversion of power units to coal was aimed at benefitting the common power consumers through reduction of the cost of power generation which would in turn bring down the tariff.

Referring to the report titled: “KESC all set to milk the IPP cow again,” KESC said there was no truth in the allegations because over the past four years, the power utility had added nearly 1000 MWs of high efficiency generation assets with an expenditure of approximately One Billion dollars in the form of debt and equity.

Apart from adding its own capacity, and generating from its own sources, KESC also purchases power form IPPs such as Gul Ahmed, Tapal and others which were formed under the 1994 power policy. It is in KESC’s strategic plan to bring in more IPPs into its system as the company is within its right to do so and such a model falls under prudent utility practices. The purchase of power from outside sources is a well established international practice and NTDC is also doing the same.

Referring to the mention of K-Energy Pvt Ltd in the report, KESC clarified that the investors of K-Energy comprised of a consortium of an Indonesian business conglomerate and Hong Kong and Korea based private equity companies. This consortium had created an off shore entity by the name of Bright Eagle Enterprises Group Investments Limited (BBEGIL).  BEEGIL had formed Special Purpose Company (“SPC”) under the laws of Pakistan by the name of K-Energy (Pvt.) Limited. This company has been formed for the purpose of undertaking the coal conversion Project. Currently, K-Energy was in the process of acquiring all the approvals to function as an IPP.

KESC further said that if it was not to undertake this Project, KESC would keep on burning furnace oil to provide expensive electricity to its consumers whose cost was much higher than providing cheap coal fired energy today in the form of IPP, which would benefit the consumers of KESC. This was a commercial decision which had been firmed up after interactions with the Regulator and other senior government officials, and all relevant approvals were in the process of being obtained.

KESC said that the major equity contribution for the Coal Conversion Project was from Titan Business group from Indonesia, Sprint Capital of Hong Kong, and Korean private equity firms which will be channeled into BEEGIL. Because of this reason, the majority shareholders of K-Energy were BEEGIL.  The main sponsors of K-Energy have sound industrial experience and carry with them the coal expertise forward to Pakistan. It should be noted that the sponsors normally do not themselves build a new power plant or convert an existing one to other fuels. The practice is to engage EPC contractors who enjoy well-established credentials to do such jobs. Similarly, it is a standard practice worldwide as well as in Pakistan to engage companies with operations and maintenance expertise who would operate the power plant.

Knight Piesold & Co, a reputable US based consulting company was engaged to undertake the feasibility study of the Project. K-Energy has selected Lahmeyer International, one of the most renowned engineering companies in the world as the independent engineer which would also facilitate negotiations with the highly renowned EPC Contractors. K-Energy would also hire renowned experts for the operations and maintenance of the plant.

The sponsors and creditors of K-Energy would be making substantial investments and taking the risks associated with the project and therefore entitled to appropriate returns as per the policies of the GOP. K-Energy would be doing practically everything that an IPP is expected to do while engaging reputable technical experts to ensure smooth operations of the plant.

KESC further said that the reduction in tariff after conversion of power generation units into coal would benefit the consumers of KESC, since it would reduce the cost of power purchase and replace the existing generation of RFO. The Project would also benefit the economy since conversion to coal will provide foreign exchange savings on import of approximately $ 350 million per annum, and savings of approximately $ 255 million  (cost differential between production on furnace oil and purchase from coal IPP) that would be passed on to consumers via reduction in tariff.