Solar

Sunrise in Pakistan as the Country Delves into Solar PV

Pakistan has joined the list of countries that are exploring solar power as a means to bridge critical energy generation shortfalls.  The tariff that has been announced is priced to be attractive and interest is already high.  Of the two provinces currently ready to implement the program, Punjab is in the north, and Sindh in in the south.  The prices on a levelized basis for these regions are:

Size of Project (in MW)

North Region Price in US cents per kWh

South Region Price in US cents per kWh

1-20

15.0270

14.4096

20-50

14.8953

14.2825

50-100

14.7588

14.1516

These are US dollar denominated tariffs for a 25-year PPA.  Regulators state that the tariff is designed to give sponsors a 17 percent return.  Each of the above tariff rates steps down at year 10, which is when the tariff assumes debt will be repaid.

Electricity generators in Pakistan are also not subject to taxation and the import of equipment for construction benefits from exemptions from duties.  

This program benefits from Pakistan’s track record in independent power projects — going back to 1994.  The electricity generation law has been amended a number of times to take account of lessons learned.  Independent power projects have been commissioned totaling over 9000 MW on a gross installed capacity basis.

Although project documents have not yet been issued for the solar program, they are expected to be released soon.  Most experts expect that they will be modeled closely on the documents that have been banked in conventional power IPPs.  The document suite will include government guarantees that based on past practice will be relatively robust.

Pakistan itself also offers a legal system based on the British model, with an independent judiciary, to which independent power producers have on occasion turned with some success.  

Not everything, of course, is rosy.  One particular problem is the so-called circular debt issue where retail subsidies have led to a shortage of cash leading to a history of delayed payments to power producers. While this is obviously an issue, the government of Pakistan would argue that it is manageable and largely historic.  The delayed payments have (albeit following some protracted litigation) been paid in full and with interest above a rate at which most power producers can borrow money to meet short term liquidity needs.  The government of Pakistan has also shown some willingness to take strategic actions to address this problem going forward.    

A second practical issue is that Pakistan can be relatively bureaucratic. The two provinces implementing the solar feed-in tariff have shown some concern over this issue.  For example, both are committed to assisting developers with the process to acquire land for their projects. The cost for obtaining this land will also be quite modest.  The government of Punjab has gone a step further.  The Quaid-e-Azam Solar Power project has been established by the Government of Punjab as a for-profit company with the express intention of being a trailblazer to smooth the path for later private developers.

A third area of concern is inevitably physical security.  While nobody would deny that this is a challenge, the government argues that it commits significant resources to protecting infrastructure and private developers.

Out of the two provinces that are ready to implement this program and which have allocated land for this purpose, Punjab has raced ahead in deployment.  Punjab has a solar park in which a number of projects have begun development, or have even (in the case of Quaid-e-Azam) entered into initial commercial operation.  In Sindh the pace has been a little slower, leading to the belief by some observers that there may be more opportunity remaining in Sindh.

Developers should be aware that the tariff that is currently on the table may be subject to future change – almost certainly in the direction of a reduction.  The goal for developers is therefore to lock in that tariff.   This happens when the National Electric Power Regulatory Authority (NEPRA) approves the generation license.

Before NEPRA will lock in a tariff, a developer must first obtain a letter of intent from either the Alternative Energy Development Board of the Government of Pakistan (AEDB), or from energy department of the Government of Punjab or Sindh (as applicable).  Once the LOI is obtained, the clock begins ticking to complete a feasibility study and a grid impact study.  Only once these are completed can a developer apply for the license that will lock in the tariff.

It should be noted that this process for applications is still evolving, and does not necessarily follow precisely the procedure outlined in published regulations.  Some of these regulations are close to 10 years old and have been overtaken in some respects. Developers are best advised to approach the relevant agencies directly, or through their advisors.

Developers may wonder whether it is better to begin the process by applying for their LOIs with AEDB or one of the provinces.  There may be some advantages for developers to obtain their LOIs directly from Punjab or Sindh rather than AEDB.  It is becoming unclear how many new applications will be accepted by AEDB as they are now only accepting new applications on a case-by-case basis.  However, the provincial governments are both still accepting applications more freely.  In addition, it is the provincial governments rather than AEDB who are in a position to allocate land.

However developers choose to initiate their applications, it seems clear that Pakistan presents a significant opportunity for the solar PV industry, with attractive tariffs and strong natural demand.  But like all such opportunities, the rewards will go to those who take advantage of them the swiftest.

Lead image: Sunrise in Pakistan. Credit: Shutterstock.