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Is solar power really the best solution for Pakistan?

October 02, 2015
An aerial view of QASP. — Photo Courtesy: Quaid-e-Azam Solar Power (Pvt) Ltd
An aerial view of QASP. — Photo Courtesy: Quaid-e-Azam Solar Power (Pvt) Ltd

A lot is being quoted, and misquoted in the media on how best to overcome the 'existing' energy crisis in our country.

As most of the debate is, at best, misinformed, it will be helpful to analyse what is the best source of electricity and more importantly how kosher solar is.

Solar power — which was once the darling of media folks and ‘aam awaam’ for its supposed ”free power” nature — is subject to much ridicule these days ever since it emerged that the recently setup 100MWp Quaid-e-Azam Solar Power Plant (QASP) in Bahawalpur is producing too little and too expensive electricity. In fact, the second most expensive in the existing energy mix.

How could this be true? If sunlight is free and abundant, how come solar power is that costly and rare?

Is this a scam?

Interestingly, much of the outrage on the recently setup QASP can, at best, be described as an assault on laws of economics, physics and nature.

The solar power plant is being criticised for being expensive and for having low power output. Let’s talk about the expensive bit first.

Massive cost

Every power project, whether solar or any other, has two major cost components — the one-off upfront capital expenditure component called the Capex for setting up the power plant and the recurring operating cost called the Opex to run the plant.

Compared to the conventional fuel-based power plants, the renewable power plants (solar, wind or hydro) have high Capex (measured in terms of $/MW) and low Opex simply because there is no fuel involved.

Both Capex and Opex components, along with the agreed investment return element, are ultimately reflected in the tariff of a particular power project.

The first 100MWp of the QASP has a total upfront Capex of $131.15mn ($1.31mn/MWp) and a levellised tariff of US14.15 cents/kWh1.

So is this tariff expensive or cheap?

To find out, we can compare these numbers with those of India which has a similar geographic and economic profile and risk factors like that of ours.

Doing that tells us that in terms of tariff, the QASP is pretty much in the range of what they have in India where CERC had announced a levellised tariff of US12.45 cents/kWh for FY2014-15.

And India had its first grid-scale solar power project operational in May 2011 — four years before Pakistan.

In developed countries, the tariffs for such grid-scale solar power plants will be considerably lower. So then why is it lower in developed countries and higher in Pakistan and India?

Answer: laws of economics.

As mentioned before, ultimately the project cost is a function of costs and required investment return which is, in turn, reflected in the tariff. The higher the required return, the higher the tariff. And while the technological factors (level of local solar industry and availability of domestically produced solar plant components) also play a role, the investors require a substantially higher return for their investments in developing countries to compensate for the higher risk.

The Government of Pakistan presently guarantees, subject to certain conditions, a 16 per cent $-indexed return to the equity investors in renewable power projects.

This may look excessive but justifies the considerably higher country risk of Pakistan vis-à-vis other developed countries.

Low power output

The other criticism on QASP is that its power output is very low. Despite having a capacity of 100MWp, it generates on average only 18MW every hour for the whole day!

This is indeed too low. But then this has to do with laws of physics and nature.

A solar plant will generate power only in presence of solar light. No sun, no power. It’s as simple as that. Adjusting for solar panel efficiency (technology factor), the amount of power produced is directly proportional to the intensity of sunlight (often measured in terms of solar insulation) and number of sun hours in a day.

Pakistan is blessed in a way that the solar insolation here is among the highest in the world. Yet no solar power plant in the world can run 24 hours a day. And this is what makes the power output (called the capacity factor or the availability factor) of such plants so low.

Moreover, this is true for all renewable-based power plants.

Since there is no fuel involved and they are entirely dependent on natural factors (sunlight, wind speed, water flow), they cannot run 24/7 and 365 days a year.

All renewable projects have low capacity factors, and that’s why no country in the world can solely be dependent on renewables for its power needs.

So it turns out that, our solar power has, indeed, a higher tariff and a lower capacity factor when compared to the conventional fuel-based power plants. Yet none of this should be surprising because that is how solar technology works.

Solar power plants are meant to meet peak power demands during day time.

As technology advances and economies of scale kick in, and they are scaling rapidly, the costs will come down and eventually solar power will achieve thermal fuel-based power. But until that happens, it remains one of the costlier sources of energy.

Yet, despite all the negatives (high cost; low output) of solar power, let’s not lose sight of the significant positives it carries.

On the plus side

The first and foremost is the 'time to setup'. Solar plants take the shortest time to construct.

Compare this to a medium to a large size hydroelectric project, which can take around 10 years. Thermal projects take between 2 to 4 years.

The 'opportunity cost' of not having power for those 2, 4 or 10 years is immense. And that’s where solar power stations can be extremely useful. Quick to setup and even quicker to ramp-up.

The other big benefit of renewables, in general, and solar, in specific, is the non-dependency on fuels which makes them immune to rising fuel prices.

So the next time oil touches $100 a barrel, while the thermal electricity prices may shoot through the roof (as they did before), solar electricity prices wouldn’t.

And for a country like Pakistan, that relies on imports for bulk of its energy needs, the benefits will also accrue in the shape of saving precious forex reserves.

And we aren’t yet talking of the green energy factor as yet. Renewables are greener. They are environment friendly, which has positive long-term implications.

To conclude, solar power is not the panacea for all our energy problems. Clearly not!

As a matter of fact, no single power plant type, whether hydel or thermal or nuclear or solar, can be completely relied upon to meet the country’s energy demands. It has to be a mix.

Our energy mix, with a heavy reliance on expensive imported fuels, has deteriorated over the past two decades. Hence, cleaner, 'quicker' and natural solar power is a welcome addition to the energy mix and will only serve to improve it.

Musa Khan Durrani is a Chartered Financial Analyst (CFA) by qualification. He currently heads the business advisory function at a large industrial and services group in Islamabad. He takes a keen interest in politics, economy and energy.