ADB for higher investments in hydropower

ISLAMABAD: Pakistan’s energy investment needs until 2030 vary significantly. Considering three scenarios –business-as-usual (BAU), government commitments and green growth - the estimates for energy investment range from $62 billion to $155 billion, highlighting significant requirements for transitioning to more sustainable sources of energy generation and implementing extensive energy efficiency measure, says the Asian Development Bank (ADB).

The bank in its report, “CAREC Energy Outlook 2030”, recommended the country for decrease in energy subsidies for generation and distribution and revising the existing tariff structure to allow higher returns for T&D companies, thereby decreasing circular debt while enabling larger infrastructure investments. The T&D system in Pakistan is outdated and suffers from constant underinvestment. The resulting poor technical condition of the infrastructure leads to substantial losses.

Several challenges need to be addressed to introduce a more favourable investment climate, including circular debt issues, and the overall condition and coverage of the T&D grid, it added.

The report noted that in all three scenarios, the largest investments are needed for the development of the country’s hydropower capacity, ranging from $11 billion to $26 billion. Investment needs for wind and solar energy are expected to reach nearly $12 billion in the BAU scenario, $36 billion in Government Commitments scenario, and $57 billion in the Green Growth scenario, which illustrate the country’s ambitious plans for harnessing its large renewable energy potential.

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In accordance with the country’s targets for nuclear power generation, investments needed for the expansion and rehabilitation of nuclear facilities account for nearly $12 billion in the BAU scenario, $21 billion in the Government Commit-ments scenario, and $31 billion in the Green Growth scenario. Generation rehabilitation and expansion are the investment categories estimated to require the largest share of the total—ranging from 60 per cent to 75 per cent, or $38 billion to $115 billion, varying across scenarios.

The second biggest category is energy efficiency measures on the consumption side, requiring $12 billion in the BAU scenario, almost $21 billion in the Government Commitments scenario, and over $26 billion in the Green Growth scenario. The modernization and expansion of the power and gas grids and the introduction of advanced metering equipment require investments of approximately $13 billion to $14 billion.

The report noted that rapid economic development and population growth in Pakistan are the main drivers for growth in primary demand, which is projected to increase from 111 million tons of oil equivalent (toe) in 2018 to 125–154 million toe in 2030, depending on the scenario.

Demand has fallen during the COVID-19 pandemic, with nearly a four per cent decrease from 2019 to 2020, although rapid recovery and growth in demand is expected. In the BAU scenario, primary energy demand grows significantly at an annual rate of 3.1 per cent, as this scenario assumes low to moderate efficiency gains and limited reductions of T&D losses.

The report noted that one of the key challenges is the lack of clarity regarding the categorization of resources. For example, although hydropower is generally considered a renewable energy resource across the world, the Alternative and Renewable Energy Policy has categorized hydropower sources as non-renewables.

Considering the 30 per cent renewable energy target in 2030, it would be hardly possible to reach this level only via wind and solar PV sources. If hydropower were to be included in the definition of renewable energy sources, it would make reaching the stated target and introducing stronger competition more realistic.

Another challenge is the lack of a detailed energy plan for the energy sector. Although the National Energy Policy has been approved, the corresponding division of roles in policymakers who would assign policy areas to all relevant stakeholders has not been completed yet. In the current framework, sector-specific policies are developed by relevant authorities.

With a strong focus on generation over the last several decades, T&D sectors suffered greatly from underinvestment. As a result, transmission losses in Pakistan are one of the highest in the region, with some distribution companies reaching losses of 38 per cent.

Another challenge stems from the country’s electrification rate, with more than 25 per cent of the population having no access to electricity. With increases in rural electrification, demand will increase significantly, putting more strain on distribution companies and generation.

Challenges in the T&D sector are reinforced by the issue of circular debt. With growing power generation from thermal plants, higher costs were inflicted via the import of high-priced fuels and currency devaluation. At the same time, distribution utilities tasked with energy supply face financial hurdles due to the low collection rate of tariffs and the inability to meet regulatory targets for T&D losses.

As a result, distribution companies are unable to pay generation companies for purchased electricity, starting a chain of debts that reach fuel providers via power generation companies. The differential between Nepra-approved tariffs and the uniform tariffs is paid via a tariff differential subsidy, which adds a significant financial burden on the government.

Copyright Business Recorder, 2022