Competitive power market in Pakistan still struggling to take off: report

KARACHI: Pakistan’s decision to move towards a competitive power regime has not been met with enthusiasm from the renewable energy development community, a study of International Institute for Energy Economics and Financial Analysis (IEEFA) pointed out.

Although competitive bidding had been one of the procurement methods prescribed by the Renewable Energy Development Policy of 2006, the sudden ending of the upfront tariff scheme left the project developers, clueless on how to proceed further, the study found.

The report “Choosing the Right Incentives for Pakistan’s Renewable Industry” authored by analyst Haneea Isaac stated that categorisation of these projects or the formulation of a new policy that formalised auctions, could not be announced until 2019.

By then, two years had already lapsed, and no new projects started during this phase, even though the tariff requests to NEPRA echoed some of the lowest renewable energy prices: roughly 3.2 cents/KWh for solar and 3.6 cents/KWh for wind.

These were some of the lowest regional tariffs and can only be defeated by results achieved in India’s auctions. It stated that with tariffs as low as these, it seems that price discovery has already been achieved.

Why did the government then want to move towards auctions?

“In 2015-2016, there was a lot of interest in renewable energy projects in Pakistan. Seeing this, the federal government disallowed issuance of LOIs, but despite this there was almost 6-7 GW of capacity in the pipeline. A lot of this capacity was dependent on NTDC (National Transmission and Despatch Company) providing adequate evacuation capacity and interconnectivity,” it noted.

The present grid network would not allow such a huge influx of variable renewable energy to be absorbed into the system. The government wanted more control over the volume of renewables that was brought into the grid, so that grid upgrades could be carried out in time.

Auctions could allow for this. There were also hopes for further price reductions. While issues of limited grid connectivity and the possibility of curtailment are valid and have been recognised by renewable energy developers as such too, what has hurt the sentiment of developers the most is the unprecedented delay in the conducting of these auctions, the report mentioned.

When the policy for competition was first announced in 2017, the government had allayed concerns raised by the developers by saying that framework guidelines and a mechanism for disposal of existing LOIs would be developed within 10-12 months but almost five years later, that framework is yet to be announced to the public.

Request for proposal (RFP) packages for solar and wind projects falling under Category III were prepared and shared with NEPRA for approval in 2020, but those have still not been finalised due to a myriad of concerns raised by the regulator.

At the forefront of these issues was the fact that the RFP did not define the quantum of capacity that was to be solicited through these packages, the report said.

It would however be ill-placed to blame this entirely on AEDB, it pointed out. In the matter of defining volumes of solar and wind energy to be auctioned, AEDB has to take direction from the NTDC, which has been key in holding AEDB back from arriving at an optimal quantum of power that could be auctioned. NTDC carries out an annual generation planning exercise through the Indicative Generation Capacity Expansion Plan (IGCEP), where it optimizes new generation capacity on a least-cost basis.

The first IGCEP was approved in September 2021, so any auctions to follow would only come at a later stage. In addition to this, other reasons for the delay in auctions include the country’s inexperience with competitive bidding in the power sector, and a difference of opinion amongst the provinces on finalising the auction design.

Pakistan has traditionally followed a thermal IPP model, where projects have come online unsolicited on a cost-plus or upfront tariff basis. Transitioning to a more liberal system has come with design challenges, and requires careful planning, the study said.