IGCEP: Managing uncertainties

Pakistan formally adopted the Integrated Generation Capacity Expansion Plan (IGCEP) in 2020 to strengthen and regulate its energy system, aiming to meet economic growth and socioeconomic development.

The National Transmission and Distribution Company (NTDC) is responsible for preparing the plan. The latest IGCEP, approved by the National Electric Power Regulatory Authority (NEPRA) in February 2023, integrates hydro, renewable, and thermal technologies to predict future energy demands and optimize projects. Despite its potential advantages, it’s crucial to acknowledge existing obstacles and uncertainties in the implementation process.

The IGCEP’s methodology focuses on two key criteria: project alignment with 10-year demand forecasts and satisfaction of the least cost principle. If a project fulfils these criteria, it is selected for development and termed as “optimised” project.

However, the term ‘optimised’ in the IGCEP has caused investor apprehension. Nepra interprets this as a project’s competitiveness being re-evaluated annually until the signing of a Power Purchase Agreement (PPA). This leaves developers uncertain and fearing their project may be ‘de-optimised’ in future iterations. Understanding these concerns is crucial for both regulator and policymakers.

First, how much time is required to reach the stage of PPA for any project? This depends on the technology of the project under consideration and can range anywhere between one to four years. Renewable energy projects require less development time than hydropower project.

A hydropower project requires a substantial timeframe to finalize the PPA. Further complicating matters is the extensive list of requirements for a project to come to realisation, such as tariff and generation license obligations, detailed engineering designs, project financing and procuring necessary insurance and implementation agreements, among others.

Second, why project developers may consider this annual re-evaluation as a risk? Any medium size hydropower project requires an estimated capital of $30 to $40 million to cater to these requirements, an amount that no sane investor would be willing to risk on a project with an uncertain future, especially considering the grim possibility of being de-optimised at any stage.

Despite Nepra’s assurance that the project will remain optimised if it meets the least-cost criteria of the IGCEP, several ambiguities within the IGCEP’s methodology & its implementation scheme continue to cause the concern.

Three significant factors can potentially tip the scales against a project without project parameters being changed. These factors are entirely beyond control of project developers but are ones which can cause the total investment into sunk costs.

1- The backbone of the IGCEP is the forecasting of energy consumption dependent on expected economic growth rates. Economic growth is a highly variable phenomenon that transcends linearity. It is the outcome of a wide range of circumstances, including global and domestic macroeconomic conditions, national strategies and policies, geopolitical influences, technology disruptions, and even unanticipated catastrophes such as pandemics or natural disasters.

Each of these variables can influence economic growth in unanticipated ways. If the demand forecast is downgraded due to slower than expected economic growth, the fewer projects shall be needed/optimised in the next IGCEP iteration. Thus, any project optimised in one iteration stays uncertain to be developed due to a factor which is beyond control of developer/investor.

2- A particular conundrum in the IGCEP lies in its selection process, which is primarily based on cost-efficiency. Although economically sound, this criterion can lead to a project, once optimised and selected, being replaced by a ‘more economical’ contender in a successive iteration.

Continuous technological advancements could allow new entrants to propose projects at lower costs, thereby ousting previously optimised projects. In addition to technological advances impacting costs of projects, the location, complexity and design structures can also contribute to differing costs of similar technology projects. This factor is also beyond the control of project developers.

3- The government’s promotion of renewable energy sources, particularly solar power, is seen as a positive and forward-looking strategy in the evolving energy landscape. Notably, solar energy projects consistently exhibit lower tariff rates, making them cost-effective contributors to electricity supply.

The recent initiation of a bidding process for a 600 MW solar project underscores the government’s commitment to harnessing cleaner energy sources. A change in the government’s energy mix policy could render previously optimised projects irrelevant. Project developers cannot dictate the energy mix policy to the government, but they are the ones who suffer due to these abrupt changes.

Project developers may be hesitant to invest due to the risk of abandonment by government. Energy projects require significant resources, labour, capital, and time. However, the current setting does not protect them from this possibility, potentially discouraging key stakeholders and undermining the full potential of IGCEP. The following are some recommendations to cater these shortfalls.

Recognising that some projects may have an extended gestation period due to technology and financing constraints is a critical aspect. Such projects once optimised should not be up for re-evaluation in successive IGCEP iterations.

Instead, the Nepra could review the prudency of costs and other parameters of tariff based on the difference in macroeconomic variables at the time of optimisation and the time of tariff award. This approach would lend stability and ensure the continuity of long-gestation projects.

IGCEP could introduce two scenarios to address demand fluctuation: the highest possible demand and the lowest possible demand. The lowest demand scenario should focus on projects with longer gestation periods and base load, avoiding over-committing resources.

The highest demand scenario should optimise projects with quicker implementation times, triggering measures to ramp up generation in response to unexpected demand surges. This dual-scenario approach would provide project developers with certainty and flexibility to address short-term demand fluctuations.

Moreover, the selection criteria for optimisation should consider energy security, fuel dependency, and environmental impact, in addition to the least-cost parameter, to ensure that selected projects contribute not only to economic efficiency but also to the sustainability and resilience of the energy sector.

The IGCEP can effectively manage uncertainties and fluctuations in the existing planning process, ensuring a secure and sustainable energy future. However, successful implementation requires addressing methodological oversights discussed above, which pose a threat to the process.

If these issues remain unaddressed, a clear and urgent communication must be issued to all existing and prospective project developers about the deliberate discouragement of developing our natural resources.

Simultaneously, it seems prudent to initiate alternative plans for sourcing the next fleet of rental power projects because these shortcomings, if unaddressed, will inevitably steer us into a dire situation where crucial capacity additions will be left to the mercies of expensive rental power projects, generating a vicious cycle of improvidence and energy scarcity. Certainly, for a country as resource rich as Pakistan, this is an undesired and avoidable outcome.

Copyright Business Recorder, 2023