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Rising with the wind

December 03, 2018

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WIND power in Pakistan has reached about 1,200 megawatts (MW) of cumulative installed capacity. Local entrepreneurs must be credited for defying all the odds and achieving this milestone. It’s now incumbent on the government to finally roll its sleeves up and accelerate the momentum.

Although fairly small compared to global leaders in the sector, Pakistan’s wind power market has several distinct features.

First, domestic investors spearheaded efforts to establish the wind power sector in the country. As the market started taking shape, it piqued investors’ interest from western countries. Moreover, the China-Pakistan Economic Corridor (CPEC) opened doors for Chinese companies to set foot in this emerging sector of the economy.

Second, the wind turbine market share is distributed among leading western and Chinese manufacturers. Such a diverse set of original equipment manufacturers (OEMs) is not common in similar-size wind markets, which underlines Pakistan’s ability to benefit from a more competitive market and to deploy state-of-the-art technology.

Third, local and international capital markets demonstrated their confidence in the country’s wind power sector by deploying over $2.5 billion in equity and debt finance. The financiers include development finance institutions, conventional and Islamic banks and equity investors. In fact, some syndicates structured innovative financing facilities comprising conventional and Islamic modes of financing.

Fourth, local and international manufacturers formed joint ventures for local production of turbine towers, which constitute a significant share of the cost of a wind power plant (WPP). Similarly, the wind sector spurred growth in the local construction industry.

Finally, several thousand people were employed during the construction phase of WPPs, including semi-skilled local population and highly qualified engineers from across the country.

It’s equally important to underline how cost competitiveness of wind energy has improved dramatically. Following a series of cuts in the wind power tariff through November 2018, the National Electric Power Regulatory Authority (Nepra) awarded cost-plus tariffs of Rs5-6 per kilowatt hour (kWh) to new WPPs.

The tariff reduction follows a global trend and can be attributed to – among other factors – a significant decrease in equipment costs caused mainly by a growing competition among turbine OEMs that are relentlessly optimising costs across the value chain.

As per Nepra’s 2017 merit order list, the marginal cost of power produced from 76 out of the country’s 93 thermal plants in the Pakistan Electric Power Company (Pepco) system ranges between Rs5 and Rs17 per kWh. The levelised cost of electricity for these plants is even higher when capital expenditure and the cost of financing are factored in.

Pakistan can procure wind power at a rate significantly below Rs5 per kWh in the near future despite a high cost of capital in the country. For future build-out, wind power could become cheaper than the ‘cheapest’ thermal power generated by burning highly subsidised domestic natural gas.

With all necessary elements for an ecosystem in place, the time is ripe for a forward-looking policy and regulatory framework, which will help Pakistan leapfrog in the advancement of the wind power industry. An overarching energy plan should prioritise wind, solar and hybrid renewables as a tool for industrialisation, job creation and energy and economic security over the decades to come.

Over 9.5 gigawatts (GW) of thermal capacity will retire through 2030, rendering an excellent opportunity to scale up wind and solar energy.

To optimise the benefits of the wind power market, the federal government, in coordination with provincial authorities, should lay down a long-term development strategy spanning 10 years. By setting a binding target of at least 4-5GWs of wind capacity addition by 2030, the government would convey its ambitions to the industry that can mobilise necessary resources.

This capacity threshold is necessary to catalyse the creation of a local supply chain and technology transfer, which can be funded through foreign direct investment. However, the requirement for local content must be defined delicately, rolled out in a phased manner and accompanied by sufficient capacity for OEMs to ensure commercial viability of their localisation ventures.

Some other measures are needed to improve the overall business environment and sectoral efficiency, ranging from the design of procurement schemes to project execution processes.

To encourage transparency and competition, many countries have enacted competitive bidding for renewables. Auctions have produced less than Rs2.5 per kWh wind tariffs in some markets. Although a certain level of competition has to be maintained, extremely low tariffs, awarded through an upfront or auction mechanism, may also risk commercial viability of WPPs and hence the industry. Therefore, while creating a competitive environment, policymakers ought to consider the long-term, multifaceted benefits of the sector.

By proactively collaborating with its development partners, the government can introduce tools to reduce risk premium since the financing cost plays a crucial role in wind power pricing. A coordinated effort among various government departments will be central to mobilise low-cost capital from European and Japanese economies and from our development partners.

Another important step is the elimination of red tapes through creating renewable energy zones. These zones streamline permitting processes and the provision of grid infrastructure for WPPs, which has become a major bottleneck for new installations in Jhimpir and Gharo. A similar policy is needed to facilitate the establishment of a local wind supply chain.

The global wind industry, financial institutions and local and foreign developers convened for the 17th World Wind Energy Conference and Exhibition in Karachi last week. The lack of interest shown by the federal government in such a crucial event was not welcomed by the industry.

Our energy policy has been discouraging the diffusion of renewable energy technologies. This ought to end. The policy should be overhauled with a primary objective to foster an environment where the industry can develop and implement solutions that are inexpensive, reliable and sustainable.

The writer is an analyst specialising in energy policy and political economy.

He tweets @sohaibrmalik

Published in Dawn, The Business and Finance Weekly, December 3rd, 2018

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