The government decision to introduce competition in the country’s alternative energy market must help bring down power prices, but it can hurt new investment in renewables in the short to medium-term.
The move can also force a shutdown of numerous ‘initiated’ but smaller hydro, solar and wind schemes where implementation agreement (IA) or energy purchase agreement (EPA) are yet to be signed between the government and the investors.
The Cabinet Committee on Energy (CCoE) last month significantly changed the renewable energy policy of 2006 for all alternative energy sources including wind, solar, biomass, baggasse and small hydropower projects below 50 megawatt capacity.
The changes will replace feed-in or upfront tariffs that have attracted substantial private capital into such projects with competitive bidding, cut the power purchase contract period from 25/30 years to 15, and pass on the risks of variability in wind speed, solar irradiation and hydrology for small hydro projects to the sellers.
“The changes in the 2006 policy were long overdue,” argued Vaqar Zakaria, a director at Hagler Bailly Pakistan, who has rich experience in energy and environment management.
“The upfront tariffs guaranteeing profits for renewable generation were given in the policy to kick-start private investment in alternative energy sources. Such incentives are meant to be for a limited capacity and period.
“But in Pakistan solar and wind (power) projects have become such money making machines (for investors)… and consumers here have been burdened with the high cost of electricity (owing to a lack of competition in the market). There’s no other example like this in (the rest of the) world.”
The changes in the policy for renewables has nevertheless pitted the governments of Sindh and Khyber Pakhtunkhwa, (and Azad Kashmir) against Islamabad as these feel that the new policy would deal a serious blow to smaller wind and hydro projects where letters of intent (LoIs) or letters of support (LoS) have been issued to investors.
‘The upfront tariffs guaranteeing profits for renewable generation were given in the policy to kick-start private investment in alternative energy sources. Such incentives are meant to be for a limited capacity and period’
Both Sindh and Khyber Pakhtunkhwa have already challenged the federal government’s authority to make these changes without discussing them at the platform of the Council of Common Interest (CCI) and demanded that they be withdrawn.
“The provinces feel — and rightly so — that small hydropower and wind power investors in Khyber Pakhtunkhwa, Sindh (and Azad Kashmir) — have been disadvantaged because the government is building large projects based on imported coal and gas in Punjab,” says a senior official of the Private Power Infrastructure Board (PPIB).
The official, who requested anonymity, claimed more than 70 small hydropower schemes with aggregate capacity of 200MW to 250MW will be affected by the policy change. “A few of these projects are at an advanced stage of completion.”
An Alternate Energy Development Board (AEDB) director, who also declined to give his name, contended that the government had rejected a proposal by the board to exclude the already ‘initiated’ solar and wind schemes from the application of the changes in the renewables policy.
“These investors had decided to launch their projects based on the incentives given in the original 2006 policy. They should not lose their money because they couldn’t see the policy changes coming or because the government decided not to warn them of the changes it planned to make.”
The changes could affect projects with a combined capacity of 2,000MW to 3,800MW, he added.
The AEDB official was of the view that the new competitive regime could hurt investor sentiments and hamper investments in solar and wind generation in the short to medium-term.
Alternatively he argued that new investment could still be attracted in alternate energy sources provided the government came clean about how much of solar, wind or baggasse based power it wanted to add to the grid in, say, the next five to 10 years.
“We can develop different business models to bring new investment in renewables. That should not be a problem if the government makes its intentions clear.”
Investors like Nadeem Babar, who have invested their money in both conventional and renewable generation, are not very concerned about the competitive regime in the renewables market except in the reduction in the contract power purchase period to 15 years.
They also think that the government should have given a cut-off time to investors who have already undertaken wind, solar or small hydro power schemes instead of implementing the changes without a warning.
“The problem is that the centre has created excess generation capacity (based on conventional imported fuels) and now wants to discourage new projects. It (government) doesn’t want to decline anyone but also doesn’t want to encourage new investment at this moment. That’s why this sudden decision to introduce competitive regime.
“I strongly feel that the government should have excluded the projects where it has issued LoIs and LoSs from the purview of the new policy. It shouldn’t have suddenly pulled the rug from under their feet,” Babar contended.
Vaqar, however, has a different point of view. “Investors have become used to enjoying high tariffs and guaranteed profits and capacity payments for 25/30 years… they have made a money-making machine out of the power (sector). What are we doing to our country and consumers?
“Consumers have paid a heavy price for electricity for quite a long time because of governmental policies. Now is the time investors understood that markets in countries like ours have such risks. They shouldn’t be complaining because they didn’t see it coming. Let the cheaper put up the next power project.”
Published in Dawn, The Business and Finance Weekly, January 22nd,2018