The draft Renewable Energy Policy 2019 lays out Alternative and Renewable Energy (ARE) technologies targets of 20 per cent of Pakistan's capacity needs by 2025 percent and 30 percent by 2030. This coupled with over 30 percent from hydel is likely to make over 60 percent of the country's capacity to be renewable by 2030.
The ADB maintains that this is ambitious though achievable target; it would be useful to provide information on where this would rank Pakistan verses its peers in terms of overall electricity generation from renewable sources.
ADB suggests that these targets should correspond to country's roadmap and vision for ARE development and provide incentives to facilitate ARE equipment manufacturers investing in Pakistan to propel growth and bring cost of ARE deployment competitive with regional players including China and India.
ADB states that there is ambiguity around variable cost-what variable EPP for which thermal technologies? For example, for now RE only competes against imported RFO/ HSD. It cannot compete with either imported coal or domestic gas (the price for which is controlled by Ogra). ADB regards it as flow as Rs 200 per MMBTU. It would be useful to have last five-year data on what this cost has been for Pakistan and exactly what price point is being targeted. This would then allow RE technologies as expected to undercut via ICB.
On G 2 G mode and unsolicited projects, ADB has suggested limiting size of projects or to put a cap on the MW that could be procured under this methodology. From transparency perspective even if it's cost plus to avoid any rent seeking behaviour the tariff under these projects should be capped to factor of the last prevailing ICB tariff.
ADB has asked the Power Division to elaborate as to how limiting the RE projects to take and pay after debt years would lead to promotion of competitive forces. On the contrary, given the country's unstable grid (with many breakdowns per month-meaning when a RE project is available it cannot be given dispatch because of grid event), a take and pay mechanism without allowance for battery storage (battery storage means more costs and hence no battery storage projects would be able to bid under ICB route as they would never be able to recover their costs give the lower tariffs) would in essence mean that the project would cease to function after debt is fully repaid. This will have the impact of discouraging investment rather that encouraging investment. This is a major investment and a bank-ability issue that requires detailed deliberation and discussion. The ADB has recommended that " take or pay" (given the must run nature of RE projects) be kept for the duration of the EPA to give comfort to investor that their projects' dispatch would not be unnecessarily curtailed, which will be the most likely scenario under the "take and pay" methodology.
The ADB has also suggested that consideration should be made to move away from dollarized equity IRRs to partial - i.e. 50 per cent dollar rupee indexed Energy Purchase Agreements (EPAs) (equity component) rather than reducing the term of the EPA. Under this scenario as the equity returns will be partially protected against the risk of rupee depreciation, the sponsor should be compensated by allowing higher Rupee based IRR. Debt service would still be fully indexed to dollar until forex situation of Pakistan improves through creation of current account surplus and the availability of forex hedging instruments at reasonable pricing levels. This modality could theoretically work in sub-sectors where there is high interest from local sponsors like wind. Solar could be converted to partial Rupee based EPA once 1,500 MW to 2,000 MW solar in installed. Sub-sectors that strategically make sense but cannot be developed without foreign equity capital may be allowed full dollar indexation till certain mass is developed and there is major interest from local sponsors to further develop the sub-sector.
The Bank further observes that reduction in the EPA term or change in "take or pay" structure will not be in best consumer interest as this would result in increase in tariff. The take and pay will remain an undefined risk till rules for a merchant market are established.
Commenting on reduction in custom duty, the ADB has commented that although under the financial incentives in various power policies announced by the government the power projects have been exempted from customs duties, however, the ground reality is that the custom officials have always taken the narrowest possible definition of this exemption and have only allowed exemption for specific power generation equipment and not for allied/ miscellaneous equipment that is imported specifically for the project and have gone ahead and levied customs duty.
