The tariff methodology in Pakistan is currently undergoing a positive shift towards competitive bidding from the former upfront tariff mechanism. The National Electric and Power Regulatory Authority (NEPRA) remains steadfast in promoting competition in the power sector. This can be evidenced by the recent order passed by the regulator in revising the prevalent model for wind power tariff.
Departing from the earlier practice of upfront tariff, the new tariff is a benchmark levelised tariff for the purpose of competitive bidding through reverse based auction mechanism. The above table shows tariffs on 100 percent foreign financing at 7.08 Rs/kWh (6.7467/US cents kWh) and local financing at 8.12 Rs/kWh (7.73/US cents/kWh) on a built, operate, own (BOO) basis.
The decline in tariffs is warranted due to the decreasing global trend in component prices such as wind turbines which have been reduced to $0.9 million/MW from an earlier price of $1.6 million/MW. Moreover, because of increased efficiency, a higher capacity factor has been taken at 38 percent at arriving at the benchmark tariff with the regulator pointing out that 35 percent has generally been achieved by various power plants.
Delving into the details, let us discuss the merits of arguments proposed to the authority by the relevant stakeholders. Unsurprisingly, there was reluctance by IPPs but also the Government of Sindh (GoS) that has also been the case in earlier hearings for renewable tariffs. The parties contended that competitive bidding would put investors who had already initiated project development at a disadvantage.
Although, a genuine concern was raised about the absence of a proper framework, which should be simple and follow a standard documentation procedure; the Alternative Energy Development Board (AEDB) submitted a timeline of 9 to 12 months for development of the required framework.
Interestingly the input varied substantially from different government agencies with the CPPA-G arguing the time had come for embracing competitive bidding. This column agrees that the extra premium awarded to entrants in wind energy is not required anymore due to several reasons. These include the fact that risk has fallen considerably, mainly due to the availability of wind data, which was not available to pioneer investors in the sector.
In keeping view of these considerations, the regulator has also decided to shift the wind risk from the power purchaser to the wind power generation company. Given the fact that upfront tariffs loaded with sufficient incentive have already been offered to investors in the past years, the time has come to open it up to competition.
The Ministry of Water and Power in its second submission to the regulator also proposed competitive bidding carried out through AEDB for remaining wind power projects and any future capacity determined by the Grid Code Review Panel.
To sum it up, sufficient wind speed, a high capacity factor coupled with good site locations and conditions as well as low labour costs, all point to competitive and encouraging market conditions in Pakistan. The reverse based auction mechanism has already resulted in not only steep reductions in tariffs but also market expansion for countries such as India, South Africa, and Turkey. Hopefully, the new competitive bidding tariff regime heralds the same for Pakistan as well.
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