The potential of Variable Renewable Energy (VRE) remains largely untapped in Pakistan, even while the country is grappling with an energy crisis marked by soaring power tariffs and widespread outages. The progress of integrating VRE into our energy mix has been, indeed, disappointing, standing merely at seven percent of the total energy mix as of March 2024.
This low progress is in spite of the fact that Pakistan has immense solar and wind energy potential. It has an estimated solar potential of over 100,000 megawatts (MW) and wind resources in areas along Gharo-Keti Bandar coastal belt can generate an additional 50,000 MW of electricity.
Investments, or their absence, in renewables highlight this paradox. In 2023-24, foreign investment inflows in Pakistan’s energy sector totaled $998 million, with 42.3 percent of them allocated to hydropower and 43.2 percent to coal. This left renewable energy projects severely underfinanced. Contrary to this, the global transition to renewables has saved an estimated $521 billion in fuel costs for the electricity sector in 2022 alone.
This situation is all the more ironic, given that the trend of decreasing renewable energy prices has picked up an immense speed both in Pakistan and at the global level. This has resulted in a significant decline in the levelized tariffs for wind and solar energy.
The per-unit levelized tariff for wind fell from 12.54 US cents in 2013 to 4.45 US cents in 2023. The price of solar power has also dropped from around 14 US cents to 3.9 US cents per unit during the same period. This situation begs a serious question: if the prices of renewable energy have fallen so drastically, why are investors not ready to invest in it in Pakistan?
The answer lies in the country’s regulatory and financial landscape for VRE investors. Most policies for renewable energy are based on the same frameworks as those designed for fossil fuels. Consequently, VRE power plants in the pipeline have faced significant delays, primarily due to the slow official response in addressing requests for approvals and regulations. Most of these power plants have yet to receive their commercial operation date, despite having obtained their generation licenses over a decade ago.
Take the example of the Burj Wind Farm, a 14 MW project located in Gujjo town of Thatta, a district in Sindh. It has now been shelved. Initially launched under the Renewable Energy Policy 2006 on a Build-Own-Operate basis, the project received a Letter of Intent (LOI) from the Alternative Energy Development Board (AEDB) on October 31, 2012.
The letter was valid until April 10, 2018. Despite fulfilling all stipulated requirements, the generation license was delayed for over 16 months. The project is now reclassified from Category II to Category III. Many other VRE projects are still awaiting commissioning; had they been completed, they would have significantly bolstered Pakistan’s energy mix.
High inflation and high interest rates have further eroded investor confidence due to uncertainty about return on investment (ROI) and cash flows post-deployment. Additionally, from 2013 to 2024, the Pakistan rupee and US dollar exchange rate increased, resulting in a 1.67 times hike for solar project tariff determinations compared to 2015.
As a result, dollar-denominated project costs such as engineering, procurement, and construction (EPC), financing, and consultancy have also increased significantly. For instance, although the EPC cost for a 50 MW wind project dropped from 113 million US dollars in 2014 to 76 million US dollars in 2022, its costs, however, increased in rupee terms due to massive deterioration of Pak Rupee.
The regulatory and financial obstacles mentioned above are one of the reason why the government has failed to attract any investor for its proposed solar power park in Muzaffargarh.
Even though the government has spent considerable effort and money to allure investors, and despite the fact that the terms and conditions for the project have been changed more than once to make it attractive, it still remains unfinanced. In contrast, the K Electric hybrid wind/solar project of 220 MW capacity in Dhabeji, Sindh, has achieved a record-low tariff of 8.9189 rupees per unit, setting a new precedent for renewable energy in Pakistan.
These two contrasting examples illustrate a trust deficit among investors. They seem to be ready to trust the private sector over the government mostly because the government has had a very testy and tense relationship with them in the energy sector.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is a Research Associate at PRIED
Comments