GREEN FINANCE IN PAKISTAN: BARRIERS
Pakistan’s economy is currently facing the dual challenge of a burgeoning annual fuel import bill and climate change. The oil import bill for 2017–18 was $13 billion (a 30% year-on-year increase) (Hussain 2018). Although the national power generation mix has been restructured in recent years to reduce reliance on imported oil, the new fuel mix leans heavily towards imported LNG. Pakistan should continue to expand indigenous sources including renewables, reduce reliance on imported fuels, and incentivize the development of green energy projects by providing a conducive policy environment, raising awareness, and improving access to green finance.
Currently, renewable energy comprises less than 3% of Pakistan’s total power generation fuel mix. However, the government is actively trying to promote the development of renewable energy, particularly the use of solar photovoltaics, small hydro, and wind facilities. The government is also exploring initiatives to improve the management of demand and supply in this market by introducing net metering, which would allow consumers to sell power back to the grid. However, while the concept is theoretically sound, Pakistan’s biggest challenge is the lack of adequate electricity transmission and distribution infrastructure to absorb large quantities of power from intermittent renewable energy sources such as wind and solar.
This article focuses on the economic case for renewable energy in Pakistan, discusses the financial barriers to the development of green energy projects, and outlines the policy instruments needed to unlock the potential of commercial banks to finance such projects. The second part of this paper provides an overview of the energy sector in Pakistan and the macroeconomic challenges it raises. In the third section we describe how the structure of the power market in Pakistan supports the financial viability and bankability of utility-scale renewable energy projects. In the fourth section we describe the challenges to developing new projects of hydro, wind, solar, and distributed energy (despite the favorable regulatory framework) that are specific to each source of energy, and finally in the fifth section we present some policy recommendations for increasing the share of renewable energy in Pakistan’s energy mix.
OVERVIEW OF PAKISTAN’S ENERGY SECTOR
Pakistan has a structured and formalized energy sector, accessible to both local and international investors. Except for the transmission and distribution of electricity and gas, which are currently almost entirely owned by the government, most other energy sectors are open to private investment. The two main independent regulators overseeing the energy sector are the Oil and Gas Regulatory Authority (OGRA) and the National Electric Power Regulatory Authority (NEPRA). OGRA monitors pricing and the protection of consumer interests in the midstream and downstream petroleum sector, whilst NEPRA does the same in the generation, transmission, and distribution of electricity.
CHALLENGES FACING PAKISTAN’S GREEN ENERGY SECTOR
In this section we discuss the three major sources of green energy in Pakistan – hydropower, wind, and solar – and the unique challenges being faced by each source of energy prior to government approvals and the signing of power purchase agreements with the CPPA-G. The utility-scale projects either operate on a cost-plus tariff basis or the upfront tariff basis. In the cost-plus tariff case the electric power regulator, NEPRA, evaluates a project and its costs basis and determines a tailor-made, unique tariff for the project. In the upfront tariff (for a particular fuel type and size of project), NEPRA predetermines a fit-for-all tariff structure and invites projects to opt for it.
Much of Pakistan, especially the regions of Balochistan, Sindh, and southern Punjab, receives abundant solar irradiation in the order of over 2 MWh/m2 and 3,000 hours of sunshine a year, which is at the highest end of global insulation averages (Alternative Energy Development Board 2006). However, currently, about 418 MW of utility-scale solar projects are in operation. The major challenges slowing the development of utility-scale solar power plants in Pakistan are:
• Tariff Uncertainty: Projects awarded tariffs under the 2014 and 2015 solar upfront tariff determinations have been stalled, as international tariffs on solar have decreased sharply compared to the announced tariffs, which raised questions regarding the price discovery process of the regulator and subsequently necessitated that auctions/bids for the purchase of electricity from the private sector be introduced for solar as well. Hence, it is likely that those projects that hold development rights may not be allowed to proceed, which has impacted investor confidence. In addition, the issuance of letters of intent by the government has also been stalled since 2015 in anticipation of a reduction in tariffs as solar technologies mature and more lately due to surplus power in the system.
• Land Identification: Land identification is one of the main hurdles for developers interested in investing in the Pakistani market. If a local partner who already has land access is not found, it may take some time to identify lands that are suitable for development. This is further hampered by a lack of public access to good digitalized maps (IFC 2016).
• Transmission Bottlenecks: The grid interconnection approval process takes time in Pakistan and a number of applications are pending with the relevant government agency for solar projects. It is recommended that project developers initiate the approval process as soon as possible and work with the government transmission and distribution companies as well as local consultants to identify areas that are most suitable for evacuation of power and that do not require substantial construction of transmission lines (IFC 2016).