Sugaronline’s Friday Editorial

PAKISTAN: Co-generation Potential for Sugar Mills

by Nauman Khan, Kashif Naseem, and Salman Shehryar

Though Pakistani sugar mills have been producing electricity from bagasse for their own use,
and occasionally for supply to the national grid, since the 1990s, only now is the government
starting to recognise the value this cheap and green form of energy can have for the country.

The old policy for cogeneration energy exported from sugar mills was known as the J-tariff
and was introduced in the 1990’s. The contracts under this policy were on an “as and when
delivered” basis and the maximum export allowed under the policy was 4 MW. The
interconnectivity costs were borne by the utilities. It was a bilateral contract and allowed for an
adjustment of power consumed from the grid by the sugar mill.

A few mills signed contracts based on the J-tariff and were connected to the grid at 11 kV but
over the years the actual power export shrank rather than increased because of a static tariff
(PKR1.70/kWh for fuel cost only), which became unviable with time. When the policy for
power generation projects was announced by the government in 2002, the status of the J-
tariff became unclear and no new contracts were signed after that. By 2007, power supplied
by mills under J-tariff contracts had become negligible.

Three policies have been announced by the government of Pakistan in the last two years
which could provide the overarching regulatory umbrella under which a sugar mill can sign a
Power Purchase Agreement (PPA) with their local utility.

The first and most simple is the Power Purchase Agreement of Captive Power Producers of
up to 50 MW designed on a “take and pay” basis. Under this policy the seller is paid a fixed
Operation & Maintenance (O&M) of PKR1.26/kWh and the fuel tariff is determined in addition
to that.

Almoiz Industries Limited has recently been the first sugar plant to sign an agreement with
Peshawar Electricity Supply Company (PESCO) under this new policy regime in February,
2008. This agreement has been signed for power supply up to 15 MW at a rate of
PKR4.88/kWh including bagasse fuel cost of PKR3.62/ kWh. This is a ten-year contract in
which the fuel cost has been indexed with the price of pipeline quality natural gas available to
other power producers. Target date of supply is currently set at October 2008 as
interconnection is still awaited. In the interim, the recent increase of gas prices by 31% from
July 2008 will mean that the tariff will be PKR6.002/kWh from the outset of supply.

The fixed O&M component is also subject to review from time to time with the next review
scheduled for December 2008. Other sugar mills applying under this policy are expected to
be given the same terms and tariffs already set out in the Almoiz PPA. We expect that due to
the linking of this tariff with natural gas prices, applicable tariffs under this policy will continue
to be favorable for sugar mills in the coming years.

The Policy for Development of Renewable Energy for Power Generation also allows for “take
and pay’ arrangements but provides many incentives beyond the SPP policy for those
producing and exporting power with renewable resources. Particularly, there are several
options available for tariff determination according to the needs of the supplier, including
wheeling on the network and/or a very favourable linking with the tariff paid by the utilities to
oil based Independent Power Producers (IPPs).

However, at this stage the government has decided to exclude biomass from the scope of the
policy. Furthermore, we think that even if biomass were to be included in the scope of policy,
the political will does not exist to implement PPAs under this policy since it undermines the
existing structure envisioned in the unbundling of the power sector. Proof of this is that up to
this time no PPA for any renewable energy has been signed under the auspices of this policy.

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 Sugaronline’s Friday Editorial

As a result, applying for a PPA under this policy would not be recommendable for a sugar mill
until such time as the government’s approach towards this policy becomes more welcoming.
The third policy is the recently introduced national policy for power co-generation by sugar
industry based on the concept of incorporating a separate IPP company associated with the
sugar mill. The company would export electricity by using coal and bagasse as fuel.

According to this policy the tariff will be leveled for 30 years and will be available for capacity
above 50 MWs. The incentives available to IPPs under Policy for Power Generation Projects
2002 would be available to the power cogeneration units of sugar mills and bagasse as per
requirement of the plant without any limitation of interchangeability. Under this policy, National
Electric Power Regulatory Authority (NEPRA) has recently determined an indicative tariff on
the petition filed by Pakistan Sugar Mills Association (PSMA) of PKR 5.552 PKR/kWh against
PSMA’s proposed tariff of PKR6.78 /kWh over the 30 years control period. The most
attractive features of this policy which make it stand out are:

-It is the only policy where the utility covers the entire capital cost of the project and
guarantees a certain rate of return on equity.

-The sugar mill does not need to set up its own boiler and power section and will be able to
purchase power and steam from the plant, while supplying it with bagasse.

-Obtaining financing from lending institutions will be much easier because of specific
government guarantees provided under the Policy for Power Generation Projects 2002.

-Most costs such as exchange rates, interest rates and fuel prices are considered pass
through items to the buyer, ensuring minimum inflationary risk.

While this is an attractive proposition for all the above reasons, the complexity of the deal
coupled with the size of investment will mean that it will not be possible for most sugar mills to
opt for it. However, for those who can take up the project, it would mean they could pass on
the entire cost of building a boiler and powerhouse for their sugar mill to the government.

Having discussed various options and ways for the industry to maximize revenues from power
generation it is important to mention that the government, under its policies, gives no
guarantee for purchase of power from the sugar mills that have the ability to export power
below 50 MW. Except for the National Policy for Power Cogeneration by Sugar Industry no
other policy guarantees that the government would not stop purchasing power from sugar
mills.

We feel that the true success of cogeneration by sugar mills in Pakistan could only come
when they can operate their power plants for the maximum duration of the year. Technically
this could be as much as eleven months with one month scheduled for planned as well as
unforeseen maintenance. However, in order to really achieve power generation for this long a
period, our calculations show that it would not be possible with just saving of bagasse by the
sugar mill.

Therefore, sugar mills that opt for high pressure boilers should consider other biomass widely
available in Pakistan such as cotton stalks, cane trash and rice husk. In the short run, this
could even be bagasse bought from neighboring sugar mills when feasible. However, given
the overall incentives now available to the industry this cannot be relied on as a long term
source of supply.

The use of such low cost fuels would be a win-win situation for the sugar mills which have
made the fixed investment and also for the government which is facing a severe electricity
shortage and a debilitating drain on its exchequer and foreign exchange reserves because of
an emphasis on imported fossil fuels for the country’s power generation needs. Under the
current policy regimes, it is not possible to use other biomass without obtaining a specific tariff
from the government.

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 Sugaronline’s Friday Editorial

Leadership is needed from policy making circles in this regard. The government could
calculate the efficiencies of the cogeneration systems based on various renewable biomasses
and their market prices similar to the policy on bagasse and come up with an easy to
implement tariff. However, because of the difficulty of determining and tracking the prices of
these biomasses which might not always have an efficient market and price mechanism in
place, it is recommended that the government should take a bold step to jump start this
process and allow all biomasses to be clubbed with the tariff announced for bagasse.

This data is proprietary and may not be copied, rebroadcasted, redistributed or

redisseminated in any way without the express written permission of Sugaronline.com