Wednesday, July 10, 2024

Solar Power Boom in Pakistan

Falling solar panel prices and soaring rates for grid electricity are driving a renewable power boom in Pakistan. A second factor spurring the growth in clean energy installations is the requirement of major western apparel brands for garments and textile manufacturers to switch to clean energy. As a result, the solar panel imports in the country jumped from 2,800 MW in 2022 to 5,000 MW in 2023, in spite of stringent import controls imposed by the government. Solar imports are on track to reach 12,000 MW in 2024, according to solar installers. The total current installed generation capacity in Pakistan is around 40,000 MW. Grid electricity demand in Pakistan plunged in 2023 by nearly a sixth and a decline in 2024 would mark the first time in 16 years that annual electricity use has fallen consecutively, data from energy think tank Ember showed, according to Reuters.

Pakistan Solar Panel Imports. Source: PV Magazine

Omar Malik, the CEO of Shams Power, a major solar system contractor in Pakistan, was recently quoted by PV Magazine as saying: “In 2022, 2.8 GW of solar panels were imported into Pakistan. In 2023, about 5 GW, despite the import controls, and this year the prediction is for up to 12 GW”. 

Aamir Hussain, chairman Pakistan Alternative Energy Association, told Arab News that solar panels of around 1,800 MW were purchased and installed last year, which was expected to jump to 3,000 MW this year due to the lower prices of the panels and increased customer demand.

 “Pakistan will be spending over $3.5 billion [this year] on solar panel imports only as this doesn’t include import of batteries, inverters and other auxiliary items,” Hussain said. “Pakistan needs to follow consistent policies regarding renewable energy to meet its national and international obligations for the greenhouse gas emissions.”

Japanese publication Nikkei Asia recently reported seeing residential building rooftops covered with solar panels in Islamabad. It also reported proliferation of rooftop solar in small towns and villages across the country. In particular, the Nikkei story mentioned the remote village of Kardigap with a population of 5,000, in Balochistan province, where solar panels are becoming more common on the rooftops of houses. 

Responding to western apparel brands' demand for sustainability, a number of large Pakistani textile manufacturers are switching to clean energy, particularly solar. Tayyab Group of Industries (TGOIs), a major textile manufacturer, has recently signed an MOU to install a 20 MW solar system for its needs. Gul Ahmed Textile Mills Limited announced recently that it will install a 17.1 MW roof-top solar power plant to meet its energy needs.

While rapid uptake of solar is good news for the planet, it does create a major fiscal issue for the Pakistani government struggling to pay for power produced by the independent power producers (IPPs). The IPPs, many of them Chinese, secured a guaranteed return on investment indexed to the U.S. dollar, plus payment for fixed capacity charges -- covering their debt servicing and other fixed costs -- regardless of whether the power plants are operational, according to Nikkei Asia. As the demand for the grid power from the IPPs declines with rising solar, the taxpayers are still on the hook for the unused installed capacity charges running into billions of dollars. Higher power tariffs and taxes will only make the situation worse. 

Capping Net Metering power and reducing payments for supplying excess power to the grid are not going to solve the problem either. It will only encourage more consumers to switch to rooftop solar and use less electricity from the grid. Self consumption of the rooftop solar power saves significant energy costs for the consumer. 

It seems the only way forward for the Pakistan government is to renegotiate the terms with the IPPs to significantly reduce grid power costs to address the growing cost gap between rooftop solar and the grid power. 

Related Links:

Haq's Musings

South Asia Investor Review

Clean Energy Revolution in Pakistan

Pakistan Electric Vehicle Policy

Nuclear Power in Pakistan

Recurring Cycles of Drought and Floods in Pakistan

Pakistan's Response to Climate Change

IPP Contacts Bankrupting Pakistan

Renewable Energy for Pakistan

Net Metering in Pakistan

LNG Imports in Pakistan

Growing Water Scarcity in Pakistan

China-Pakistan Economic Corridor

Ownership of Appliances and Vehicles in Pakistan

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Riaz Haq's YouTube Channel

PakAlumni Social Network


Vineeth said...

"Grid electricity demand in Pakistan plunged in 2023 by nearly a sixth and a decline in 2024 would mark the first time in 16 years that annual electricity use has fallen consecutively.."

Isn't the fall in demand for grid electricity in Pakistan also due to many industries suspending production or shutting shop because of the ongoing economic crisis? For example, I see a sharp fall in production of autombiles in Pakistan during 2023 (79,513) compared to 2022 (235,454). Such industrial shutdowns will obviously result in a fall in demand for grid electricity. Though the increase in adoption of solar power is obviously a good news for developing economies, such falls in demand for grid electricity are more likely signs of an economy facing a crisis.

"It seems the only way forward for the Pakistan government is to renegotiate the terms with the IPPs to significantly reduce grid power costs to address the growing cost gap between rooftop solar and the grid power."

Only if the Chinese would agree. No investor likes such "renegotiations" that would potentially cut their profits. Pakistani authorities should have thought this through when the deals were signed.

Riaz Haq said...

Vineeth: "Isn't the fall in demand for grid electricity in Pakistan also due to many industries suspending production or shutting shop because of the ongoing economic crisis?"

Maybe. But the new additional solar capacity of 5,000 MW itself is about 12.5% of the total installed grid capacity of 40,000 MW. And the demand on the grid went down by about 10%.

"In fiscal year 2023, Pakistan’s total electricity consumption, as measured in terms of sales, amounted to 112,891 GWh, with 97,337 GWh coming from ex-Wapda distribution companies (Discos) and 15,554 GWh from K-Electric. This represents a decline from the 124,629 GWh consumed in FY2022....... According to Power System Statistics 2023, 47 per cent of electricity consumption comes from residential load".

Majumdar said...

Brofessor sb,

But the new additional solar capacity of 5,000 MW itself is about 12.5% of the total installed grid capacity of 40,000 MW. And the demand on the grid went down by about 10%.

This is not an apple to apple comparison of course. As solar power plants have much lower capacity utilisation than conventional. 5000 MW additional would represent about 9 billion unit of actual generation, which I suppose more or less offsets the 12 billion units lost from the grid.

Nonetheless, it is great to hear that the solar industry is doing well in Pakistan. Hopefully the govt wont take steps to curb growth of this industry.


Arun said...

At the time the Sahiwal thermal power plant was being built, I did the calculations --

(a) the Chinese were charging 50% more than equivalent plants being built in India and Vietnam

(b) had some figures about the coal import and transport for the plant. the Indian National Thermal Power Corporation was providing wholesale power in Delhi at a unit cost equal to just the coal import and transport cost for the Sahiwal plant. (Then think of the other operations costs and the repayment of the investment.)

How can Pakistan be internationally competitive with the world with such expensive power? The economic isolation of Pakistan from India makes absolutely no sense. Like it or not, the subcontinent is one economic unit.

Riaz Haq said...

Arun: "the Chinese were charging 50% more than equivalent plants being built in India and Vietnam"

Chinese IPP agreements are not unique to China; all IPPs operating in Pakistan have similar agreements based on an IPP policy adopted in the 1990s to attract investment in the power sector.

Please read this post I wrote on it back in 2013:

The biggest issue with this policy is US dollar indexing of payments, especially because of the huge currency depreciation of PKR in the last decade.

In a blog post published in Financial Times, Dr. Kamal Munir of Cambridge University's Judge Business School blames the IPP contracts signed as part of the power privatization in 1990s.

“The 1994 privatization of the energy sector offered investors generous returns and created pricey overcapacity,” he told Financial Times. “This created an expensive legacy which is the real problem of today’s energy crisis.” Unless that problem is dealt with, he sees no light at the end of the energy tunnel.

He says Pakistan’s government, helped by the World Bank, “sweetened” its energy privatisation with attractive conditions, fearing it wouldn’t be able to attract investors otherwise. It guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself. ”The deal was too good to be true for investors,” Munir says.

Munir says the model turned out to be badly constructed in terms of creating value for the government and people of Pakistan. Even in an environment of economic growth and efficient energy generation, it would have been hard for the government to finance the plan. But since both have been absent, it became nearly impossible to pay for privatised energy.

Since there were no incentives to be fuel-efficient, most private investors chose to build plants using furnance oil as fuel because of their low construction costs and short lead times. This backfired as the oil price has trebled since the 1990s. Variable costs, and therefore prices to consumers, are at unsustainable levels. “No wonder many consumers can’t afford to pay their bills,” Munir says.

To make things worse, the government neglected to step on the brakes when its generous conditions attracted too many investors. Assuming economic growth would continue, it allowed too much capacity to be built and guaranteed the same return on that extra capacity, whether it was used or not.

Munir says the government should develop new power plants using cheaper fuels, and that this shouldn’t be a problem in a country with an abundance of coal, waterways and sun.

But Pakistan must first escape its vicious payment cycle.

“We need to get out of the the current deals,” says Munir. But at what cost, and does this imply default? “Your guess is as good as mine,” the academic admits.

Riaz Haq said...

The macroeconomics of electricity tariffs

The macroeconomic landscape and power tariffs in Pakistan undergo quarterly adjustments, driven by a medley of factors. For instance, data from the Sahiwal coal power plant illustrates how these variables impact electricity generation costs and, consequently, power tariffs. Exchange rates are a linchpin in the power tariff equation, affecting the cost of imported fuels for power generation. From a reference period of 2016 and the exchange rate of Rs104.594/USD, the rupee has depreciated sharply to Rs278.500/USD in the April-June 2024 quarter. The tariff has been indexed to the US dollar and it reflects increases in various costs: fixed operating and maintenance costs have risen by 235 per cent, return on equity has increased by 184 per cent, debt repayment has gone up by 169 per cent, and interest charges have surged by 343 per cent.

Interest rates, both domestic and international, also bear heavily on power tariffs. The three-month KIBOR (Karachi Interbank Offered Rate) surged from 6.150 per cent to 21.990 per cent, while the three-month LIBOR (London Interbank Offered Rate) climbed from 1.380 per cent to 5.560 per cent. These higher rates inflate the cost of borrowing for power generation companies, with the cost of working capital soaring from Rs0.1541/kWh to Rs1.2568/kWh. The interest charge component of the tariff similarly rose from Rs0.3458/kWh to Rs1.5314/kWh, reflecting the escalating costs of servicing local and foreign debt.

Inflation weaves its influence through every aspect of power generation costs. The US CPI (Consumer Price Index) increased from 246.819 to 310.326, while Pakistan’s N-CPI (National CPI) surged from 131.010 to 260.010. These inflationary pressures push up prices for goods and services necessary for power plant operation and maintenance. For instance, fixed O&M (Operations and Maintenance) costs for foreign components rose from Rs0.1601/kWh to Rs0.5360/kWh, and for local components, from Rs0.1976/kWh to Rs0.3922/kWh.

This dramatic slide has skyrocketed the cost of imported coal from Rs13,605 per ton to Rs73,901.55 per ton. The ripple effect of this spike in import costs is a steep increase in power generation costs, inevitably passed on to consumers through higher tariffs.

Fluctuating global coal prices and calorific values further compound the issue. The weighted average price of imported coal has shot up, driving overall energy production costs higher. This is reflected in variable O&M costs for foreign components, which rose from Rs0.0763/kWh to Rs0.2554/kWh, and for local components, from Rs0.0628/kWh to Rs0.1246/kWh. The combined effect of these macroeconomic factors is a significant rise in power tariff components. The total capacity charge escalated from Rs3.2696/kWh in the reference period to Rs10.3445/kWh for the April-June 2024 quarter. The variable component of energy purchase price similarly climbed from Rs0.1391/kWh to Rs0.3800/kWh showing 173 per cent increase.

Nitin B said...

Hope things change for the better for Pakistanis. It's energy consunption per capita was slightly higher in 1999 at 416.82kg of oil equivalent compared to India at 413.99kg. Since then Pakistan has remained nearly flat and in 2022 it was 431kg versus 630.9kg for India.

Riaz Haq said...

Nitin: "Since then Pakistan has remained nearly flat and in 2022 it was 431kg versus 630.9kg for India"

This data is outdated 2014 figures from World Bank

BTW, Pakistan's official data doesn't take into account the massive amount of oil smuggled from Iran into Pakistan.

Last year, some $1.02 billion in Iranian petrol and diesel was smuggled across the 900-kilometer-long Iran-Pakistan border. That accounted for about 14% of Pakistan's yearly consumption, and resulted in losses "to the exchequer" of about $820 million, the report said.

Riaz Haq said...

Solar energy is the only viable option amid skyrocketing electricity bills and after Punjab and Sindh, the government of Khyber Pakhtunkhwa is also planning to distribute solar panels among the needy ones.

The provincial government of KP now came up with program to distribute free solar panels among 1lac households in the region. CM Gandapur’s advisor on Finance, Muzammil Aslam, revealed this initiative.

Muzammil said each household will receive a complete 2-kilowatt solar setup, batteries, DC fans, and inverters. He explained that government is looking to equip 1lac households with these complimentary solar panel systems.

He also highlighted KP’s existing infrastructure of over 90 power plants that produce electricity at rates between Rs 6 to Rs 7 per unit, contrasting sharply with the Rs 27 per unit charged by the Water and Power Development Authority (WAPDA).

KP Solar Scheme
In the first phase, only protected consumers will be able to apply for government funded solar scheme.

Solar Scheme 2024
Punjab CM Maryam Nawaz and Sindh CM Murad Ali Shah announced electricity to over 200,000 households in partnership with the World Bank. Each household will receive complete solar system for Rs 7,000, encompassing solar panels, charge controllers, and batteries to power one fan and three LED bulbs.

Maryam Nawaz also sanctioned distribution of 1-kilowatt solar systems to thousands of families. This decision was made during a meeting chaired by CM Maryam Nawaz to evaluate energy projects. The solar systems will be provided to low-consumption electricity users, including two solar panels, batteries, an inverter, and associated wiring.

Punjab Govt bringing solar system for 45 lakh consumers: Maryam

Chief Minister of Punjab Maryam Nawaz Sharif, chairing the 11th meeting of the provincial cabinet on Tuesday, said that they were bringing solar system for 45 lakh consumers who spend up to 500 units. She said, ”Due to increase in electricity bills, there is anxiety among the public, together with my team, have found a … Continue reading Punjab Govt bringing solar system for 45 lakh consumers: Maryam

Riaz Haq said...

Dr Gohar Ejaz
I'm sharing data from NEPRA for Jan 24 to March 24 showing a capacity payment of 150 billion PKR per month. Please note how this amount is distributed to various IPPs, with half running below 10% capacity. Four power plants are receiving 1000 crores per month each with #zero power supply.* This money, our halal income, is being given to 40 families under the guise of capacity charges. These plants should be declared merchant plants, where payments are made only for electricity produced, and we should buy from the cheapest suppliers. The government should not do business at the expense of the people of Pakistan. NEPRA must include representation from all large consumers in its distribution and management. This exploitation must end.
#Pakistan #ElectricityBill #IPPs


Pakistan faces a 70% electricity price hike due to hidden charges - Profit by Pakistan Today

During the seminar organized by the Centre for Economic and Energy Journalists (CEEF) in collaboration with SDPI, Dr. Waleed noted alarming increases in capacity payments, citing a 216% surge over five years in the capacity charges of an imported coal-fired power plant in Punjab. He attributed this escalation to factors like US dollar indexation and interest payments on circular debt, which now constitute 70% of the overall tariff.

Dr. Waleed underscored that the burden of these costs is disproportionately higher on smaller consumers, terming the current tariff structure as regressive. He urged the government to renegotiate IPP contracts, echoing past efforts that successfully ended US dollar indexation for some plants.

Ahad Nazir, another SDPI energy expert, pointed out that declining grid consumption, coupled with substantial investments in power generation without commensurate upgrades in transmission infrastructure, has led to excessive capacity and inflated capacity payments.

Efforts are underway to decentralize tariff structures at distribution companies to promote competitive pricing, although significant changes are not expected in the near term.

In conclusion, the escalating hidden costs embedded in Pakistan’s electricity tariffs are exacerbating affordability challenges for consumers and necessitate immediate policy interventions to stabilize

Riaz Haq said...

‘Sky-high power tariffs hindering exports’ - Business

“We are all sinking under the present Rs2 trillion capacity payments to 40 owners of these closed and partially operational IPPs,” Mr Ejaz told Dawn on Friday. He said that rising energy prices have affected industrial expansion, particularly in textiles and garments.

Mr Ejaz said that 53 IPPs are completely closed, but still receiving regular capacity payments from the government for not producing a single unit. He questioned the justification for such payments, which are collected from consumers and businesses.

In 2015, 13,000MW was consumed, and the capacity fee was Rs200bn with an installed capacity of 20,000MW. Mr Ejaz said that the current capacity payment was Rs2tr and that the consumption in 2024 still remains at 13,000 MW, with an installed capacity of 43,400 MW.

Mr Ejaz claimed that the same consumer is being charged ten times the capacity charges for the same units. He went on to claim that power is generated at Rs35 (including fuel charges of Rs10.60 and Rs24 in capacity charges) and distributed by Discos to paying domestic consumers at Rs60, yet the government still loses trillions of rupees.

He said the solution was to increase growth and invest in export-oriented industries, regretting that exports were not conceivable given the current high energy prices.