News is circulating that the adoption of solar power on a large scale by well-to-do domestic customers in Pakistan is burdening the ordinary customer with additional cost; and due to this it is claimed that the present system of net-metering is promoting unhealthy investments in domestic solar power.
The energy ministry stated that affluent consumers have been massively installing solar power due to which domestic, industrial consumers and the government must bear the burden of Rs 1.9/kWh under the head of subsidy. It is reported that the total quantum of domestic solar is around 3,000MW, a significant proportion of Pakistan’s electricity generating capacity!
The government wants to address this situation by discouraging further growth in the sector through cutting the domestic solar buy-back rates. It has also been reported that the ministry issued a warning that the subsidy was affecting some 25 to 30 million “poor consumers” (NEPRA State of Industry Report 2023 reports 38.25 million electricity customers in Pakistan) and if the trend of the domestic solar growth continued, the bills of ordinary consumers would surge by at least Rs 3.35/kWh.
Further justification was given saying that the impact of the reduction in the buy-back rate would only affect a minority – that is 20,700 consumers (NEPRA State of Industry Report 2023 reports 56,427 net metering customers in Pakistan) in total all across Pakistan who have been allowed net metering as per the NEPRA regulations.
Under the domestic solar policy, NEPRA, the power regulator, notifies the tariff periodically and the tariff set by NEPRA for net-metered electricity procurement for 2023-24, through its decision dated 14 July 2023, which is based on projections for the DISCO wise energy procurement (GWh), capacity utilization (MW), projected cost of energy generation and capacity charges for each mode of generation resulting in a projected national average power purchase price (PPP) for 2023-24 of Rs 22.42/kWh (energy Rs 6.20/kWh + capacity Rs 16.22/kWh).
Our own view is that the domestic solar generation injected in the grid, replaces the highest priced (fuel + variable O&M) thermal energy units dispatched for that month and accordingly it would be correct to price such solar power equal to this rate.
It is worthwhile at this point to comment on the present reporting format of aggregating all the power generation modes, i.e., renewable and thermal, which is not very meaningful as it disguises the real average cost of thermal power.
It is the thermal cost that we must focus on and reduce; mixing this with renewables that have a close to zero variable cost distracts the reader from the real issue.
It is thus recommended that hydel, wind, solar, nuclear and bagasse should be aggregated and computed as one segment while all the thermal generation should be clubbed and computed separately as show in the following table which separately shows the total thermal energy procurement, total cost (fuel cost + variable O&M) and per kWh cost for August 2023. The renewable category has an average cost of Rs 0.4379/kWh while the thermal segment has an average cost of Rs 19.2725/kWh and a combined average of Rs 8.6834/kWh, which is currently being reported.
The theoretical justification for the recommended approach is derived from the recognized method for dispatch of electricity, where the power purchaser accepts bids from generators in price order, from lowest to highest, until demand is met, in what is known as the ‘merit order’; sources of electricity with the lowest marginal cost of generation (typically renewables, as they do not use any fuel) are the first bids to be accepted, and sources such as oil, RLNG and coal-fired power stations are the last.
The marginal cost of the last generating unit used to meet demand sets the price that the buyers (energy suppliers or traders) pay to the sellers (energy generators or traders). The marginal producer of electricity in Pakistan is most often FO but this is being slowly phased out and the next most expensive fuel is imported RLNG or coal, so it is chosen last in the ‘merit order’.
It can be seen that the domestic solar generation purchased at Rs 22.42/kWh and injected into the Grid would replace FO generation of Rs 36.41/kWh thus at this point the domestic solar should be valued at Rs 36.41/kWh!
It is clear that such replacement would be beneficial as it would reduce the overall cost of power for the ordinary customer and the benefits of carbon emission reduction, by switching from thermal to solar generation, are additional and not only beneficial for the public health but also go some way in meeting Pakistan’s international commitments towards carbon reduction.
There is a need to formulate a standard policy where the domestic solar buy-back price would be equal to the marginal (highest) price for thermal generation, necessary to fulfil the prevailing demand, at any given point in time. Such price would be linked with the highest marginal price for generation procured by the DISCOs as notified by NEPRA monthly and posted on its web site. This will be a fair and sound economic decision and will benefit all parties concerned.
The question arises that what would happen to the merit order curve when increasing volumes of solar power are injected into the grid. It will be observed that an increase in renewable energy bids will drive down the clearing price, for the same demand curve, and push the more expensive thermal generation out of the market.
(To be continued)
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August 2023
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Mode kWh Rs Rs/kWh
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Hydel 6,005,503,621 1,124,857,323 0.1873
Wind 804,702,192 - 0.0000
Solar 84,070,643 - 0.0000
Nuclear 2,040,452,000 2,530,983,515 1.2404
Bagasse 37,755,719 272,777,950 7.2248
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Renewable 8,972,484,175 3,928,618,788 0.4379
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Coal Local 1,637,920,000 12,545,269,593 7.6593
Coal Imp 719,306,800 14,266,229,830 19.8333
HSD - (15,133,218) -
FO 649,164,133 23,636,214,850 36.4102
Gas 1,213,613,034 18,465,080,292 15.2150
RLNG 2,740,586,875 65,097,602,794 23.7532
Mixed - - 0.0000
Import 26,199,400 657,556,429 25.0981
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Thermal 6,986,790,242 134,652,820,570 '19.2725
Grand Total 15,959,274,417 138,581,439,358 8.6834
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Note: (1) Data extracted from CPPA-G DISCO monthly Energy
Purchase data from NEPRA web site
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Copyright Business Recorder, 2024
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