As they say, “make hay while the sun shines”. The origin of the proverb may have been different for medieval English farmers, however, it applies to rooftop solar installations in Pakistan.

The utility prices of electricity have significantly increased in recent years due to various reasons, including but not limited to decades-old inefficiencies and missteps, that have plagued the power sector. The steep rise in power prices has compelled electricity consumers with means to carry out these installations, replacing consumption with inexpensive electricity generated during the day through photo voltaic (PV) solar.

The benefits are enormous as the owners, along with slashing their electricity bills, help create sustainable power, reduce carbon footprints, and help utilities to reduce generation using expensive imported fuels, thus enabling the country to conserve foreign exchange.

To understand the business case for solar installation, one must understand that depending upon the irradiation levels, solar produces energy (KWh) between 18 per cent to 22pc of the installed capacity.

Solar energy is generated while the sun shines, whereas usually, maximum electricity utilisation is during evening peak hours between 6pm-10pm. So, more often than not, solar produces energy that is more than what is required by a household during the day, and therefore, the concept of net metering kicks in.

A distributed generation facility can provide an average per annum return of more than 22pc

Consumers with net metered installations can sell their excess energy to the grid during the day and adjust their non-solar hour consumption with their earlier exported power. One can calculate the expected savings by taking the current grid price, hovering around about Rs42 per KWh, and assuming an average annual increment of at least five per cent throughout the remaining 25 years of the expected life of solar installations.

A prudent assumption is that solar production will only displace about 60pc of annual in-house consumption, while the rest will have to be sold to the utility at the national average power purchase rate, which is currently around Rs22 per KWh.

Accounting for key factors like the cost of capital, current capex, panel degradation, operations and maintenance (O&M), soiling losses, unavailability of solar due to grid failure and the time required for corrective maintenance, one would be able to produce solar power at approximately Rs17 per KWh.

Based upon these savings, the owner of the distributed generation facility will be able to pocket an average per annum return of more than 22pc on a rupee basis and a return of 12pc on a US dollar basis, calculated under the assumption that the rupee will lose about 9pc of its value against the greenback.

These numbers are staggering compared to alternate investments such as the yields offered by 10-year Pakistan Investment Bonds, which stand around 15pc and the 4pc-5pc yield offered by the long-term US treasuries.

Interestingly, there is an upside to this return if the power utilities prove to be more inefficient than the initial 5pc per annum assumption taken for this forecast. The added advantage is that the grid utility prices are also, in most cases, indexed with the Consumer Price Index, exchange rate parity, cost of capital etc. Therefore, the distributed generation returns are automatically insulated from these factors.

Before you fall for this rosy picture, knowing the inherent risks associated with these results is critical. There could be a scenario of lower than assumed PV yield due to cloudy weather, rains and high ambient temperatures.

Other challenges include equipment failure, excess panel degradation, high soiling losses due to panels not being cleaned on a regular basis, severe load shedding causing the unavailability of the grid, which is necessary for solar production, and increments in the amount of taxes currently being levied on the sale of electricity.

Further, under the current regime, conventional power generators offer the price of ‘ancillary services’ free of cost, and solar inherently lacks this capability. With the expected rise of solar penetration into the power mix, additional requirements for these services will likely arise, for which an incentive may have to be created, ultimately lessening the equivalent amount from the solar generators.

Moreover, there have been some deliberations in the recent past that the export price of net metered generators, which currently includes capacity as well as energy prices, should be reduced to the energy price only. Although it was not pursued, since the energy price hovers around Rs9 per KWh, this would have hit the earlier forecasted returns by at least 3pc to 4pc.

Due to the intermittent nature of solar and the excessive rise of its penetration in the grid, it is expected to provide constant headaches to the grid operators for balancing power. This issue can be overcome by incentivising the installation of a battery energy storage system (BESS), increasing the delta between peak and off-peak rates, which currently stands at Rs6 per KWh.

If this is doubled, then installation of four hours of stationary BESS, having a life of 10 years, starts making sense for the distributed generator as soon as the all-in capex of residential BESS starts coming below $150 per KWh.

For these workings, earlier mentioned grid price forecasts have been taken, along with other standard assumptions for the BESS like depth of discharge, round trip efficiency, O&M, the cost of capital, etc. Under the current BESS prices, the attractiveness of its installation is lower. However, it is bound to grow with the expected decline in its prices, along with a sharp rise in utility tariffs, making the case more viable.

Therefore, the regulator will have to keep a close eye on the aforementioned factors, along with the extent of solar penetration in the network, before they start altering the incentive in favour of BESS, as it will also provide relief to the utilities by injecting power thus overcoming solar intermittency, reducing the cost of startups and sub-optimal operations cost of the conventional power plants.

Meanwhile, it is high time that the incumbents, i.e. utilities, do their best to improve their performance, stem the rise of utility electricity prices and adapt to the unfolding disruption to protect their legacy way of doing business, or else become a thing of past like Kodak and BlackBerry.

The writer is an energy expert.
X (formerly Twitter): @deHAMMAD

Published in Dawn, The Business and Finance Weekly, October 23rd, 2023

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