Driven purely by increasing electricity prices and erratic supplies despite surplus generation capacity in the country over the last five years, the businesses and middle-class households are quietly embracing rooftop solar power in cities and villages across the country.

This shift toward renewable, off-the-grid energy has nonetheless been painfully slow and patchy because of various factors. In spite of the significant drop in solar panel prices and technological improvements, the growth in rooftop solar in Pakistan has been slow compared to China, India and other countries. This is because the upfront cost still remains daunting for a small scale business or an average middle-class family, as well as barriers to bank financing despite the central bank’s concessionary scheme for both solar and wind power.

The new policy developed by the Alternate Energy Development Board in 2019 is pushing for enhancing the share of renewables in the nation’s total energy mix from the existing five per cent to 20pc by 2025 and to 30pc by 2030.

The scale of Pakistan’s adoption of rooftop solar in the future will be determined mainly by banks’ lending practices

“Pakistan has one of the largest unserved populations as far as electrification is concerned and, thus, has a big potential for leapfrogging into bottom-up solar diffusion,” says a new study. “The demand for such diffusions is very high owing to such multiple faults and flaws as low electrification, load-shedding and high cost of grid-provided electricity that characterise the utility-scale energy system. Still, solar power so far has had limited usage in the country because of the barriers restricting financing for rooftop solar and small-scale solar systems, which is substantially slowing down the otherwise immense potential held by ‘bottom-up energy transition’ in the country,” argues the Rural Development Policy Institute study.

“Financing is critically important for the transition toward capital intensive technologies such as solar power characterised by a high upfront cost and lower operating costs,” it adds. In recent years, it says, the decreasing cost of solar systems and related appliances have spurred public interest in rooftop technology. “But the limited access to low-cost financing continues to be a key impediment to its wider adoption in Pakistan.”

This is in spite of the State Bank of Pakistan’s (SBP) ‘Financing Scheme for Renewable Energy’ launched in 2016 to provide up to 100pc financing for solar and wind power at a very concessional rate for up to 12 years for addressing Pakistan’s climate change and facilitating renewable energy uptake. The scheme offers financing options ranging from Rs400 million to Rs6 billion for both the entities and persons, including captive energy units, commercial projects, and individual consumers who may share their excess production with the national grid under the net metering facility.

The scheme deals with larger systems with a capacity ranging up to 50MW and vendors/suppliers certified by the Alternative Energy Development Board for installation of wind and solar systems on a lease basis or selling electricity to ultimate owners/users.

There are also a few other solar photovoltaic financing options. Some banks are advancing loans for solar systems under their independently designed schemes or regular financing. The interest rates, and terms and conditions, however, vary from bank to bank.

The study paints an unequal picture of the solar financing landscape as heavily skewed toward a handful of borrowers who could fulfil the eligibility qualifications. Despite the SBP concessionary scheme and other lending options, solar financing remains in its infancy, characterised by several demand-side and supply-side barriers. The majority of the banks continue to be wary of small-scale and rooftop solar systems of up to 1MW installations owing to high perceived risks and other concerns and are slow to adopt the SBP scheme. As per the latest data, 28 banks and development finance institutions (DFI), conventional and Islamic, have been allocated limits under the refinance scheme. Yet, according to the study, only 13 banks/DFIs are currently advancing loans under this scheme at limited designated branches with most lenders designing the ‘loan terms’ in terms of eligibility criteria, debt to equity ratio, payback tenor and equity etc in ways that it fails to cater to the needs of borrowers — marginalising a majority of the applicants and undermining an equitable spread of gains of the SBP scheme among different groups of society.

Furthermore, not all of them are lending to ‘all areas’, ‘off-grid sector’ and for certain solar-related equipment such as batteries. They continue to be wary of small-scale renewable installations because of high perceived investment risks, low returns and administrative costs of processing applications and so on.

The SBP scheme can play a key role in allocating capital for the decentralised renewable energy transition. But the scale of its success will remain dependent on its diffusion among relevant institutes as well as lending practices by these institutions. A financial model, which instead of profit-generation or securitisation emphasizes an environmentally and socially inclusive transformation, is the need of the hour.

The scale of Pakistan’s adoption of rooftop solar in future will be determined mainly by banks’ lending practices. Hence, the larger focus of the solar lending practices and business models needs to be converged toward the objective of inclusive transformation.

Published in Dawn, The Business and Finance Weekly, October 11th, 2021

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