News is circulating that the adoption of solar power on a large scale by well-to-do domestic customers in Pakistan is burdening the ordinary customer with additional cost; and due to this it is claimed that the present system of net-metering is promoting unhealthy investments in domestic solar power.

The energy ministry stated that affluent consumers have been massively installing solar power due to which domestic, industrial consumers and the government must bear the burden of Rs 1.9/kWh under the head of subsidy. It is reported that the total quantum of domestic solar is around 3,000MW, a significant proportion of Pakistan’s electricity generating capacity!

The government wants to address this situation by discouraging further growth in the sector through cutting the domestic solar buy-back rates. It has also been reported that the ministry issued a warning that the subsidy was affecting some 25 to 30 million “poor consumers” (NEPRA State of Industry Report 2023 reports 38.25 million electricity customers in Pakistan) and if the trend of the domestic solar growth continued, the bills of ordinary consumers would surge by at least Rs 3.35/kWh.

Further justification was given saying that the impact of the reduction in the buy-back rate would only affect a minority – that is 20,700 consumers (NEPRA State of Industry Report 2023 reports 56,427 net metering customers in Pakistan) in total all across Pakistan who have been allowed net metering as per the NEPRA regulations.

Under the domestic solar policy, NEPRA, the power regulator, notifies the tariff periodically and the tariff set by NEPRA for net-metered electricity procurement for 2023-24, through its decision dated 14 July 2023, which is based on projections for the DISCO wise energy procurement (GWh), capacity utilization (MW), projected cost of energy generation and capacity charges for each mode of generation resulting in a projected national average power purchase price (PPP) for 2023-24 of Rs 22.42/kWh (energy Rs 6.20/kWh + capacity Rs 16.22/kWh).

Our own view is that the domestic solar generation injected in the grid, replaces the highest priced (fuel + variable O&M) thermal energy units dispatched for that month and accordingly it would be correct to price such solar power equal to this rate.

It is worthwhile at this point to comment on the present reporting format of aggregating all the power generation modes, i.e., renewable and thermal, which is not very meaningful as it disguises the real average cost of thermal power.

It is the thermal cost that we must focus on and reduce; mixing this with renewables that have a close to zero variable cost distracts the reader from the real issue.

It is thus recommended that hydel, wind, solar, nuclear and bagasse should be aggregated and computed as one segment while all the thermal generation should be clubbed and computed separately as show in the following table which separately shows the total thermal energy procurement, total cost (fuel cost + variable O&M) and per kWh cost for August 2023. The renewable category has an average cost of Rs 0.4379/kWh while the thermal segment has an average cost of Rs 19.2725/kWh and a combined average of Rs 8.6834/kWh, which is currently being reported.

The theoretical justification for the recommended approach is derived from the recognized method for dispatch of electricity, where the power purchaser accepts bids from generators in price order, from lowest to highest, until demand is met, in what is known as the ‘merit order’; sources of electricity with the lowest marginal cost of generation (typically renewables, as they do not use any fuel) are the first bids to be accepted, and sources such as oil, RLNG and coal-fired power stations are the last.

The marginal cost of the last generating unit used to meet demand sets the price that the buyers (energy suppliers or traders) pay to the sellers (energy generators or traders). The marginal producer of electricity in Pakistan is most often FO but this is being slowly phased out and the next most expensive fuel is imported RLNG or coal, so it is chosen last in the ‘merit order’.

It can be seen that the domestic solar generation purchased at Rs 22.42/kWh and injected into the Grid would replace FO generation of Rs 36.41/kWh thus at this point the domestic solar should be valued at Rs 36.41/kWh!

It is clear that such replacement would be beneficial as it would reduce the overall cost of power for the ordinary customer and the benefits of carbon emission reduction, by switching from thermal to solar generation, are additional and not only beneficial for the public health but also go some way in meeting Pakistan’s international commitments towards carbon reduction.

There is a need to formulate a standard policy where the domestic solar buy-back price would be equal to the marginal (highest) price for thermal generation, necessary to fulfil the prevailing demand, at any given point in time. Such price would be linked with the highest marginal price for generation procured by the DISCOs as notified by NEPRA monthly and posted on its web site. This will be a fair and sound economic decision and will benefit all parties concerned.

The question arises that what would happen to the merit order curve when increasing volumes of solar power are injected into the grid. It will be observed that an increase in renewable energy bids will drive down the clearing price, for the same demand curve, and push the more expensive thermal generation out of the market.

(To be continued)

August 2023
Mode                kWh                Rs          Rs/kWh
Hydel          6,005,503,621     1,124,857,323     0.1873
Wind             804,702,192                 -     0.0000
Solar             84,070,643                 -     0.0000
Nuclear        2,040,452,000     2,530,983,515     1.2404
Bagasse           37,755,719       272,777,950     7.2248
Renewable      8,972,484,175     3,928,618,788     0.4379
Coal Local     1,637,920,000    12,545,269,593     7.6593
Coal Imp         719,306,800    14,266,229,830    19.8333
HSD                        -      (15,133,218)          -
FO               649,164,133    23,636,214,850    36.4102
Gas            1,213,613,034    18,465,080,292    15.2150
RLNG           2,740,586,875    65,097,602,794    23.7532
Mixed                      -                 -     0.0000
Import            26,199,400       657,556,429    25.0981
Thermal        6,986,790,242   134,652,820,570   '19.2725
Grand Total   15,959,274,417   138,581,439,358     8.6834
Note: (1) Data extracted from CPPA-G DISCO monthly Energy
Purchase data from NEPRA web site

Copyright Business Recorder, 2024


Comments are closed.

Az_Iz May 09, 2024 06:28am
Buy solar power at the highest thermal price. Ridiculous. Looks like you are a lobbyists for the solar power industry. Wanting to make a case to fleece the country.
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Mumtaz khan May 09, 2024 07:23am
Pakistan needs to manufacture solar panels ….and invest in smart grids …and increase solar power rather than limiting it …..the issue is absence of long term economic and energy policy
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Tahir May 09, 2024 08:15am
Additionally, solar energy has near zero line loss as it is consumed by immediate neighbors and avoids travelling tgrough our extremely inefficient distribution network thereby avoiding 15-20% losses.
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NXT May 09, 2024 09:24am
A thoughtful and factual analysis. Unfortunately, it’s beyond the comprehension of our illustrious decision makers!
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Tariq Qurashi May 09, 2024 09:46am
Mr. Faizi has written a logical, clear and excellent Analysis. I hope our decision makers take time to read it. We seem to spend so much time fire fighting that we loose sight of the big picture.
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KU May 09, 2024 11:57am
Its more of a monkey in the works, while rational pricing issue is deliberately ignored. It makes sense too, the energy mafia does not want to lose over Rs. 600 billion electricity theft/corruption.
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KU May 09, 2024 12:05pm
Farmers paid on avg Rs. 2 million electricity bills annually for a 30 acre farm, only 2 crops. The same is true for industrial units who do not indulge in bribing the baboos. Killing them in hurry?
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Anonymous May 09, 2024 02:05pm
Did someone tried to audit the O&M cost of Power plants?
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Aftab Siddiqui May 09, 2024 02:12pm
Once electron hits grid whether it's generated via renewable or fossil it gives same value 2users. At point of gen renewables create added value stops forex outlay, min impact on env & carbon credits
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Mubashir Munir May 09, 2024 06:01pm
The solar panels be made in Pakistan Please support for making solar panels invertors and solar related equipment in Pakistan as soon as possible to get rid of costly power from grid
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Waheed ud din May 10, 2024 06:33am
The issue is very simple and clear that buy back rate from domestic solar power producer should be same as by big solar producers. The presenr buy back rate of around Rs. 22 per KWH is not justified.
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Builder May 10, 2024 11:59am
The corrupt system doesn't want to address real issues like line losses and theft. The same goes for tax system - they go on burdening the documented class and can't expand the tax net.
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Mohsin Malik May 10, 2024 03:01pm
Pakistan is in this state thanks to our dumb, incompetent curropt public sector and bureaucracy. Every thing that flourish in other countries becomes a burden for Pakistani.
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