The adaptation of solar energy in the electricity mix is happening in Pakistan at one of the fastest pace in the world. There are unintended consequences and implications on the grid where the burden of capacity payment (which was a problem even before the rapid solarization) is skewing towards non-solarized consumers – mainly the middle and lower classes.
This issue is well covered in a recent study by Arzachel which has explored the economic and operational implications of net metering, including cost shifts, revenue losses, and grid stability concerns, alongside policy recommendations to balance the interests of prosumers, utilities, and non-solar consumers. It underscores the urgent need for reforms to ensure equity and sustainability in the evolving energy ecosystem.
Over 2,200 MW of solar capacity has already been added, and 13 GW of solar panels imported in 2023 alone - with projections of 10–15 GW added capacity in 2024. With this, the adoption rate of net-metering systems in rooftop solar is also increasing, with 141,800 consumers participating and projections for even greater growth in 2024. The net metered prosumers contribute ~2,200 MW of solar capacity.
While the government is actively negotiating with Independent Power Producers (IPPs) to reduce capacity payments and renegotiate tariffs for cost savings, the rising adoption of rooftop solar is offsetting these efforts by shifting substantial fixed costs to non-solar consumers. The government needs to rethink its strategy.
There are hidden costs of solar adoption such as maintaining grid flexibility costs which are borne by power utility companies and a share of it is being redistributed to non-solar users. In FY 2023-24, approximately Rs200 billion in grid fixed costs were borne by non-solar consumers, increasing their tariffs by PKR 2/ KWh.
The damage is nothing less than what older IPP’s idle capacity is doing. Solar adoption has displaced an estimated 9,942 GWh of grid demand annually, comprising both net-metered and behind-the-meter systems. Solar prosumers avoid Rs20.93 per unit in fixed costs on average while earning Rs 27 PKR/kWh for surplus electricity sold to the grid. The financial benefits enjoyed by solar users (prosumers) are subsidized by non-solar consumers, leading to equity concerns.
Non-solar customers bear a growing burden as solar users avoid grid costs while still benefiting from grid services. Thus, non-solar users effectively subsidized a loss of Rs80 billion due to unrecovered network costs and balancing losses from net-metering exports.
Then there is a financial strain on discos due to revenue erosion from Net Metering. High solar panel imports indicate rapid adoption, but infrastructure and policies lag behind, exacerbating inefficiencies. Utility companies struggle to recover fixed costs as volumetric electricity sales decline due to reduced daytime demand caused by solar adoption.
The study estimates that solar penetration could reduce grid demand by 10%, pushing up the base tariff by 17%. This would result in a cost shift of Rs261 billion annually to non-solar customers. Then increased solar penetration creates operational challenges like reverse power flows, voltage instability, and the need for costly ancillary services.
Without reforms, utilities risk entering a “death spiral,” where reduced sales lead to escalating tariffs, further driving customers to off-grid solutions. Australia and Germany have adopted feed-in tariffs and time-of-use pricing to balance the benefits and costs of solar energy. The United States (California) uses the ancillary services market to manage distributed generation effectively. Pakistan needs to think on a similar line sooner rather than later.
The need is to have a transition from net metering to net billing for fairer cost distribution. It is imperative to introduce minimum monthly charges for solar prosumers and incentives for BESS to stabilize the grid. The concept of locational marginal pricing (LMP) should be developed to optimize grid efficiency.
The regulatory authorities should be addressing equity concerns and technical challenges through policy reforms which is critical for ensuring the long-term viability of renewable integration. All the stakeholders, including regulators, utilities, and consumers, must collaborate to create a fair and sustainable energy ecosystem.
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