backPakistan is the sixth most populous country in the world with a rapidly growing population currently in excess of 190 million. However, the country had faced a severe energy crisis over the last decade with peak electricity demand exceeding supply by anywhere between 3,000 MW and 6,000 MW during peak hours. As a consequence there has been a concerted effort on behalf of the state to encourage all forms of power generation projects to meet the long term growth needs of the country.
Excluding hydroelectric (hydel) power generation, renewable energy currently accounts for less than 1% of the energy mix of the country and efforts have been undertaken to increase the renewable share in the national electricity market. These include the issuance of the Policy for Development of Renewable Energy Generation in 2006 which remains the currently applicable policy in this regard. The government has also established the Alternative Energy Development Board (AEDB) with the aim of facilitating the development of renewable energy projects in the country.
Pakistan does have a long history of independent power project (IPP) development. Over the last 20 years, 36 IPPs with an installed capacity of 9,000 MW have been commissioned and there are an additional 18 IPPs with an expected capacity of 5,000 MW under development. This has resulted in a well-developed legal regime governing such projects with clear and consistent policies. In addition, the National Electric Power Regulatory Authority (NEPRA) is a strong regulator with the authority to set tariffs and govern other matters in the energy market.
The development of renewable energy projects has been somewhat slow over the last decade. What little progress has been seen in the last five years has been concentrated more in the wind and hydel sectors than solar. There is currently only one utility scale solar project (of 100 MW) in the country and this is a publically sponsored project in the Punjab province. However, there are an additional 35 projects (with a total nameplate capacity in excess of 1,100 MW) currently in development.
The Potential for Solar Project
Solar irradiance levels, particularly in the southwest part of the country, are on par with the best in the world and, in general, the provinces of Sindh, Balochistan and southern Punjab have tremendous potential for solar projects.
In addition, NEPRA regularly updates tariffs applicable to solar generation based on a number of factors (explained in more detail below). The revised tariffs, issued in January 2016 (for projects greater than 50 MW) are USD 0.1136 per kWh in northern Pakistan and USD 0.1073 in southern Pakistan. These would form the basis of 25 year energy purchase agreements (EPA) to be entered into by the applicable developer and a public off-taker. These tariffs are valid for six month periods, i.e., they would only apply to developers that apply for the tariff until June 2016, following which there would be a redetermination the level of the tariff.
The tariff issued in January 2016 is the third round of such tariffs. Down from the range of USD 0.16 0.17 when it was first issued in 2014.
In January 2016, the IFC Middle East and North Africa Renewable Energy Development Support Advisory Program published the Solar Developers Guide to Pakistan (available at http://www.ifc.org/wps/wcm/connect/b46619004b5e398cb8b5fd08bc54e20b/IFC+-+Solar+Developer's+Guide+-+Web.pdf?MOD=AJPERES) which is meant to facilitate prospective developers in understanding the process of establishing solar projects in the country and also understand some of the issues presently faced in the industry. The remainder of this article summarizes the process laid out in this guide.
The Steps to Developing a Solar Project
There are three main phases in the development of a solar project:
*initial letter of interest (LOI);
*LOI to letter of support (LOS); and
*LOS to financial close. The first step is to obtain a letter of intent from the AEDB (the LOI can also be obtained, on essentially the same terms, from a provincial government, however, this article focuses on the process as relates to the AEDB). Only a high level overview of the project is required to make an applicable for the LOI and the LOI can be issued prior to the land acquisition for the project being complete. It is important to note that a bank guarantee in an amount of USD 500/MW must be provided for the LOI to be issued.
Once the LOI is issued, the developer has 18 months (extendable under certain circumstances) to meet the conditions required to obtain the LOS. These include a complete feasibility study (including grid connectivity and environmental impact studies), a tariff and generation license from NEPRA and posting of the performance guarantee in an amount of USD 2,500/MW. In addition, the developer must also secure land rights for the project.
Following the issuance of the LOS, the developer has 12 months to achieve financial close. During this time it must also enter into the project agreements with the various government entities. The principal ones are the EPA and an Implementation Agreement (IA) with the Government of Pakistan. The latter is a sovereign guarantee payment support mechanism provided by the federal government. The essential terms of these documents have been used in the Pakistan IPP market since the 1990s and the resulting security package and sovereign guarantee used has been used to finance numerous projects developed by key international entities like Engie, GE Capital, AES and International Power.
Other Issues to Consider
The IFC guide book also addresses a number of others items to consider in the development of solar projects in Pakistan, including security and political risk issues, taxation and additional detail on the determination of the tariff. Some of these are highlighted below.
Tariff Process
The IFC guide provides considerable detail on the tariff determination process. NEPRA issues a notice of the tariff determination and interested parties are allowed to file notices to intervene. Following a hearing, the tariff is announced by NEPRA and, as noted above, the tariff is awarded to developers applying for it within a 6 month period. In determining the tariff, NEPRA assigns certain values to the various project costs (EPC, O&M, insurance, reference interest rate, etc.) and also assumes capacity factors (currently 17% for northern Pakistan and 18% for southern Pakistan). There are also adjustments to account for fluctuations in the exchange rate between the Pakistani Rupee and US Dollar. Tariff for excess generation from any project is set so as to share the benefit between the off-taker and the developer.
Grid Connectivity
In general, there is no grid interconnection agreement in Pakistan and the responsibility for providing such connectivity rests on the off-taker. However, since this can result in considerable delays, the developer may consider constructing and financing these facilities by agreement with the off-taker (or the National Transmission and Dispatch Company (NTDC), as applicable).
Land Acquisition
There are multiple ways of acquiring land for the project. Private agreements can be entered into with landowners or the support of the provincial governments of Sindh or Punjab can be sought. Each of these provinces has detailed rules and guidelines in place which are explored in detail in the IFC guide. In general, it should be noted that securing land rights can be a lengthy process and should be commenced as early as possible. Ideally, if an international developer intends to partner with a local entity, the local entity should be one that already has land rights.
Taxes / Currency Convertibility
Prior to financial close, the developer is able to obtain a State Bank of Pakistan consent to conduct transactions in foreign exchange and also a commitment to make available foreign currency if required (this is also guaranteed in the Implementation Agreement).
There is no tax on income from generation from electricity in Pakistan and non-residents are allowed to own shares in power companies without the permission of the central bank. In addition, equipment intended for use in renewable energy assets is exempted from customs duties. However, withholding tax may apply in the event of dividends to foreign owners as well as on interest payments and, as such, tax advice should be sought to ensure optimal structuring of the project.
Despite the early lack of enthusiasm in the solar sector in Pakistan following the publication of the renewable energy policy 2006, there is now considerable interest in the industry and numerous international developers are partnering with local developers in an effort to complete projects. Given the overall improving performance of Pakistans economy in 2015 inflation was down to 4.5% and the GDP growth was 4.2% and is expected to reach 5.2% from 2018 and the improved country risk perception, the future of the solar industry in Pakistan certainly appears bright.