Low power generation is no more an issue. The fact of the matter is that the country has enough electricity for now. The real issue is fixing the import-reliant fuel mix, reducing the subsidy burden and upgrading and expanding the whole power evacuation infrastructure. A latest working paper by Asian Development Bank named ‘Green Finance in Pakistan: Barriers and Solutions’, has hit the nail on the head where it not only highlights these lingering issues, but also puts forward a case for renewable energy in Pakistan.
The country has around 10 GW of electricity and 1.2 billion cubic feet per day of LNG added in the last five years. At the cost of being repetitive, there is a need for reducing reliance on imported fuel in the power generation mix, lowering the cost of generation, and addressing the inadequate transmission and distribution capacity. The report highlights how the existing regulations and structure of the power sector is both amicable as well as limiting for renewables inculcation.
For example, it says that the country’s energy policy is import driven rather than indigenous renewable friendly. There is a need to fix this tilt not only to boost foreign exchange reserves but also to save the country from international energy price shocks and the energy subsidy as a result. It also highlights the issues on the transmission and distribution side for the renewables. Apart from the general power sector issues like high T&D losses and overloaded distribution infrastructure, there are renewable energy related grid stability challenges that the T&D operators need to address as electricity produced via renewables varies with time and season. All this is possible with investment in the segment, which will only come if the whole T&D setup is deregulated like the rest of the power sector.
At the same time, the ADB working paper points out that the existing ‘one-buyer’ and ‘take-or-pay’ models of the power sector supports the financial viability of renewable energy and enables easy access to finance. How? The current highly regulated model ensures that even if the power generation is expensive but provides other benefits like clean energy or improvement in balance of payments, these projects could still be undertaken and be financially viable provided the government approves the project. And once into a long term power purchase agreement with the CPPA-G, the lenders may not differentiate between renewable or non-renewable. In short, the one-buyer market protects power companies against commercial, macroeconomic, and technology obsolescence risks.
However, all this comes at a cost – power plants have to make capacity payments which translate into high operational inefficiencies and energy prices to end consumers. To bring down the energy costs and the subsidy burden, moving from a regulated take-or-pay model to a competitive one with unlimited buyers is then the option. This too comes with some cost to the renewables: in a competitive/liberalised market, renewables have lower rate of return and high credit risk. The paper however highlights that the rapidly decreasing costs of wind and solar energy and increased maturity of these technologies at least makes these two sources of green energy less risky.
Some other challenges that the renewables face include the three stage cost-plus tariff process for hydro projects, which increases the development cycle of the project. Also, water and power projects like dams are not able to generate enough returns to become financially viable because water is under priced, and the projects end up being financed by the government. Solar power scalability is inhibited by issues like tariff uncertainty due to sharp fall in international solar tariffs, land identification and grid interconnection. Furthermore, the regulatory environment for off-grid renewable projects (like distributed solar, wind power) is not as supportive as it is for on-grid projects, and as such smart metering and net metering have still not picked up.
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