“Renewables are being sacrificed at the altar of the grid” CEO Sachal Energy Development Pvt. Ltd

Mr. Kashif Mateen Ansari possesses more than 25 years of diversified experience of leadership and management. He held the position of Chief Operating Officer of AWT, Askari Group. Currently, he is the Chief Executive Officer (CEO) of Sachal Energy Development (Pvt) Ltd which owns a wind power project that has completed its construction as an early harvest project of CPEC. He is a Harvard alumni and he has served as a member of the executive board of Harvard Club of Pakistan twice. He is also a Fellow of the Institute of Cost and Management Accountants of Pakistan and served as its President. BR Research recently sat down with Kashif to discuss the state of the wind energy sector in Pakistan and the issues being faced by the sector.

 BR Research: Let's start off with the framework for wind energy projects.  What are your views on the changes that have come about in the sector in the past few years and where we are heading in the future?

Kashif Ansari: Technically, in the last ten years we were at a very nascent level. There were very few LOIs moving around with some land allocations, which were mostly on paper. But we have come a long way from there. We were amongst the pioneers that sent our RFQs to the top five WTG manufacturers in the world. We did not receive a reply in two years. The situation was not different for any developer at that time. No one was even getting a reply let alone talk of a proper tendering document. Some suppliers were talking half-heartedly but they were coming in with obsolete designs and machines.

From there we have progressed significantly. Now if you see all the major wind turbine suppliers, they are either already working in Pakistan or they are actively lobbying to have their footprint in Pakistan.

I was about to sign up with one of the top 5 WTG manufacturers and we had finalised our deal. The EPC contractor of that deal just decided to quit Pakistan due to concerns of security just one day prior to signing. Now the situation is that the major EPC contractors are bending backwards to get the business in Pakistan. Secondly, international manufacturers and contractors have seen that we are ready to do it. Our overall regime has been good enough.

 BRR: Tell us about your views on the recently announced tariff under competitive bidding for wind projects.

KA: For the policymakers, it is very important to keep tariffs within some limit because ultimately they have to cater for the consumer. The wind tariff has to come down and it already has. I think that in our zeal to bring the numbers down we have gone a bit too far. People compare tariffs across different regions. I just want to point out that once you compare our tariff with other economies of the world please keep in mind that at the same places the inflows for normal investment and FDIs are far greater than us traditionally. They are seen as safe havens for investment and billions of dollars are poured into these economies in various sectors.

The reality is that there are certain economies that are seen as lucrative and stable for investments. We have been visualised a bit differently in this respect. For example, if we start comparing Chinese prices, EPC and cost and we want everything here to be the same way then we are taking an unrealistic view of ourselves, simply because at the moment we are not China. You do not have indigenous capability in many areas in this field. When we started there was no local expertise that could provide consultancy to us on wind projects.  I still doubt any bank would want to finance a wind power project in Pakistan on a non-EPC basis. In China they have done away with this a decade ago because the market there is at a much more mature stage.

The point is that we are working hard trying to pull the wind tariff down, but what about coal and hydro. The irony in our country is that wind is bad at 8 cents, and coal is good at 8-plus cents. In coal, you have not accounted for environmental cost and the real logistics cost. These are too simplistic tariffs, and I say that with a lot of responsibility. Why? Tariff is only based on numbers. The numbers don’t account for the emissions, environmental degradations, even the infrastructure degradation, say, a coal plant that is 500 km inland and requires millions of tonnes of coal transported to its location every year. How many trucks or rolling stock are you looking at? Where are the rails and roads coming from? What about the degradation and congestion of these arteries?

If you compare wind to hydel then the wind risk is no more guaranteed after the first upfront tariff. But the hydrology risk is still guaranteed for the hydro projects. We are cognizant that there might still be valid reasons why investors or financiers are not yet ready to fund our hydro-projects without the hydrology risk borne by the sovereign, but still that accounts for something favourable for wind that do not require such a coverage any more.

BRR: What’s your critique of the financing cost that Nepra assumes in its tariffs?

 KA: The sovereign loans that Pakistani government has taken have interest rates of 7.5 percent going as high as 8.25 percent. On the other hand, Nepra puts a limit of LIBOR plus 4.5 percent for power projects. At least hypothetically one can question as to how the private sector is expected to get cheaper loans than a sovereign entity.

If the government wants to make energy cheap, you have to go out and create funds behind which you have a sovereign guarantee. That will reduce the cost of the loan. Similarly, the government should be able to lower equipment costs by asking the top-notch suppliers to set up wind turbine manufacturing in Pakistan.

In the past such manufacturers asked for assurance of orders of 200 MW per annum for five years to bring their technology to Pakistan. So for five years, they're asking for 1000 MW. Ideally, if this had been done five years ago, we would have fulfilled our commitment and technology would have been transferred to Pakistan.  Still something can be done about it even now. Pakistan has good skilled labor. What is needed is to incentivize wind turbine manufacturers to come and set up production facilities in Pakistan. This will result in transfer of technology, bringing down the costs and a new avenue of industrial development.

Wind is one of the fastest routes to generate power; because if you reduce the delays in the regulatory framework, the time to develop and establish wind project should take 2.5 years max; hydel doesn’t come before seven years, coal doesn’t come before five years.

BRR: Given our market size, there won’t be more than one supplier to set up wind turbine manufacturing facility in the country. That could lead to monopolistic risks and rent-seeking?

KA: For some years you support them, after that you open the market. By that time, technology transfer would have happened, skills and experience transferred to locals. India only had Suzlon in the initial years of their wind sector development, later they opened it, and everybody is there competing to get a piece of the pie now.

BRR: How much of wind can we have in Pakistan’s energy mix?

KA: I'm not saying we should take wind to 50 percent of the mix. But our energy mix can easily contain 25 percent renewables if the necessary upgradation of the grid network takes place. Hence, renewables are being sacrificed at the altar of the grid, which you have witnessed with the issues the wind power projects have been facing such as delays in power evacuation or availability of grid. Keeping in view the potential we can go for higher number but at least now there should be at least 3000 - 4000 MW in wind power.

Wind is also about reducing dependence on imported coal, gas and oil. Look at what Obama did. He invested $15 billion in wind. It was about energy security - to reduce dependence on imported oil as much as possible. Wind has been taking up more than 20 percent – even 50 percent –of the energy mix of various European countries.

BRR: How can they have 50 percent in wind energy? What about the base load argument?

KA: They are improving the grid in a different manner, giving it the capability to accommodate the intermittent nature of wind and solar. There are new measures being taken in the way grids are being developed or improved. The technology is moving that way very fast.

So going forward I believe renewables including wind should have a bigger role.  I am well aware that renewables cannot be the base load, but increasing these in the energy mix is hampered only due to the weakness of our grid. I recently met with the Danish Ambassador who said the Danish government has formally offered assistance to Pakistan in strengthening of the grid, which will enable us to get in more renewables in our power system. I think the government must make use of this offer.

BRR: The government has repeatedly argued that the addition of the two transmission lines will be adequate. Would you agree?

KA: No. One DC line can take not more than 4000MW. Politically what you do is you run after something that is tangible. What was very tangible at the start of this government's tenure was lack of capacity in power generation. So they went for generation, and there are projects in various stages of development and that is good. But in the heat of it, they forgot that you need to have adequate infrastructure to evacuate the power, and that is the grid.

Now there are plans for two DC lines but that will not be enough; your grid needs a major overhaul. There has to be a will. Unless the grid is brought into a public-private mode like the IPPs, the kind of overhaul we require in the grid will take far longer. At the policy level, they’ve said the grid is available for private investment and if foreign investors want to come in they are welcome. But in reality, I don’t think that the government or NTDC is pushing it. Sooner or later, they have to allow local and foreign investors to be a part.

BRR: It seems than that like the majority of state institutions the transmission sector should also be opened to private sector participation. Do you think that is the way to go forward then?

KA: The effect of the grid not being privatized has resulted in the government itself proclaiming that more than 18000 MW cannot be moved due to constraints. So what have we achieved by keeping it centralised and under government control? I do not buy the energy security argument because that depends on having alternate routes and transmission lines. We cannot even fully transmit our generation capacity, which is why shut-downs have to be undertaken otherwise the grid becomes unstable.

Private sector investment is allowed on paper, but not in practice and the government's performance is in front of us. Then we blame renewables instead of rectifying our own faults. Those projects, which have already been set up and have awaited grid connections for months will have a big impact on their rate of returns and profitability in the long run. There has been a lack of holistic planning when it comes to power sector generally and renewables in particular which I believe should have been addressed by the policy-makers.

A major advantage of having a sizeable percentage in the energy mix is the savings in foreign exchange because wind and solar plants do not have fuel costs. Currently, we are enjoying lower oil and coal prices but what happens when they increase? Historically, it is always a cycle so they will increase again and it is better to be prepared for that rather than magnify the impact by setting up thermal and coal plants. Do you think if coal prices double then the tariff will still stay at around 8 US cents?

Lastly, we don’t have an open and free energy market. But ideally, that’s the direction we should take. For that, the policy framework would need major changes.