technical assistance consultant’s reportassociated with technical, management, and economic...

Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 34339-02 (TA 4881) April 2008

Islamic Republic of Pakistan: Renewable Energy Policy Formulation and Capacity Development of the Alternative Energy Development Board

Prepared by Hagler Bailly Pakistan and Mercados EMI, Spain

For Alternative Energy Development Board

Islamic Republic of Pakistan

Associated with PA Consulting Group Technical, Management, and Economic CounselHagler BaillyPakistan

Hagler Bailly Pakistan (Pvt.) Ltd.

[email protected], www.haglerbailly.com.pk

39, Street 3, E7, Islamabad 44000, PakistanTel: (92 51) 261 0200-07, Fax: (92 51) 261 0208-09

Ref: L9164PRP April 3, 2009

Mr Arif Alauddin Chief Executive Officer Alternative Energy Development Board (AEDB) 3, Street 8, F 8/3 Islamabad 44000

Subject: ADB TA 4881-PAK: Final Project Reports

Dear Mr Alauddin,

It gives us great pleasure to submit the final reports for ‘ADB TA 4881-PAK: Renewable Energy Policy Formulation and Capacity Building of AEDB’, for which Hagler Bailly Pakistan and Mercados EMI, Spain were engaged by the Asian Development Bank under Contract No. S/70-128 on June 27, 2007.

As you are aware, the draft final reports were submitted on December 20, 2008, and an extended review period was designated for receiving comments and feedback, which concluded on February 28, 2008. We hope the final reports—two copies of which are enclosed herewith in printed form as well as on a CD, which also contains the RES-E pricing model developed for the study—will meet your requirements.

I would also like to take this opportunity to thank you for the keen interest and support extended by AEDB for the completion of this important assignment, and hope that it will prove to be beneficial for the effective development of the renewable energy sector in Pakistan.

Sincerely,

Dr Jamil Masud Director/NTL

Hagler BaillyPakistan

2

Encl.:

1. Formulation of Pakistan’s Renewable Energy Policy for On-grid and Off-grid Areas (R9FR1PRP, dated March 11, 2009)

2. AEDB’s Capacity Assessment and Institutional Needs (R9CA1PRP, dated March 11, 2009)

3. Pakistan RES-E Model (ver. 1)

cc:

1. Dr Parvez Butt, Member (Energy), Planning Commission, Government of Pakistan, Islamabad (1 printed copy, 1 CD)

2. Mr Sean O'Sullivan, Director, CWID, Asian Development Bank (ADB), Manila (3 printed copies, 1 CD)

3. Mr Rune Stroem, Country Director, Asian Development Bank (ADB), Islamabad (1 printed copy, 1 CD)

ADB TA 4881PAK: Renewable Energy Policy Formulation and Capacity Development of AEDB

Final Report

Formulation of Pakistan’s Renewable Energy Policy

for Ongrid and Offgrid Areas

Hagler Bailly Pakistan

and

Mercados EMI, Spain

Asian Development Bank Manila

Hagler Bailly Pakistan | Mercados EMI R9FR1PRP ‐ FINAL REPORT: 11/03/09 i

Final Report

Formulation of Pakistan’s Renewable Energy Policy

for Ongrid and Offgrid Areas

Contents

Abbreviations and Acronyms ....................................................................................... iii

1 Introduction ............................................................................................................. 1

2 Proposal for Pakistan’s Medium Term On‐Grid RES‐E Policy ..................................... 4

2.1 Background ............................................................................................................ 4 2.2 Extension of RE Short‐term Policy ......................................................................... 5 2.3 Medium Term RES‐E Policy Highlights ................................................................... 5

2.3.1 Target Markets .......................................................................................... 5

2.3.2 Implementation Period ............................................................................. 6

2.3.3 Consistency Across Policies ....................................................................... 6

2.3.4 Tariff Incentives ......................................................................................... 6

2.3.4.1 Selected Approach .................................................................... 6

2.3.4.2 Structure of Tariffs .................................................................... 7

2.3.4.3 Indexation for Upfront Tariffs ................................................... 7

2.3.5 Type of Contracts ...................................................................................... 7

2.3.6 Allocation of Network Investment Costs ................................................... 7

2.3.7 Mandatory RE Power Purchasing .............................................................. 7

2.3.8 Direct Sales ................................................................................................ 7

2.3.9 Allocation of Carbon Credits...................................................................... 7

2.3.10 Land and Site Access .................................................................................. 8

2.3.11 Incentives Other Than Tariffs .................................................................... 8

2.3.12 Roles of Institutions ................................................................................... 8

2.3.13 Institutional, Legal, and Regulatory Consents ........................................... 8

2.3.14 Procedural Requirements .......................................................................... 8

3 Proposal for Pakistan’s Medium Term Off‐Grid RES‐E Policy .................................... 9

3.1 Background ............................................................................................................ 9

Asian Development Bank Formulation of Pakistan’s Medium Term Renewable Energy Policy TA 4881‐PAK: Final Report for On‐grid and Off‐grid Areas

Hagler Bailly Pakistan | Mercados EMI R9FR1PRP ‐ FINAL REPORT: 11/03/09 ii

3.2 Medium Term Off‐grid RE Policy Recommendations ............................................ 9

3.2.1 Target Markets .......................................................................................... 9

3.2.2 Implementation Period ........................................................................... 10

3.2.3 Rationale and Institutional Organization ................................................ 10

3.2.4 Targets and Incentives ............................................................................. 13

3.2.5 Project Funding ........................................................................................ 13

3.2.6 Pricing ...................................................................................................... 13

3.2.7 Incentives Other Than Tariffs .................................................................. 14

3.2.8 Roles of Institutions ................................................................................. 14

3.2.9 Institutional, Legal and Regulatory Consents .......................................... 14

3.2.10 Performance Monitoring and Enforcement ............................................ 15

3.2.11 Allocation of Carbon Credits.................................................................... 15

Annex I: Policy for Development of Renewable Energy for Power Generation in Pakistan (2009‐2014) ................................................................................ 17

Annex II: AEDB Position Paper 1: Proposal for Pakistan’s Medium Term On‐Grid RES‐E Policy ................................................................................. 57

Annex III: AEDB Position Paper 2: Proposal for Pakistan’s Medium Term Off‐Grid RES‐E Policy ................................................................................ 67

Annex IV: Working Paper 1: Relevant International Experience in Incentives for Renewable Energy: The Case of the EU‐25 and Selected Countries ........... 79

Annex V: Working Paper 2: Review of Pakistan’s Short‐term Policy for Development of Renewable Energy ........................................................ 153

Annex VI: Working Paper 3: Pakistan’s Energy Sector: Market, Growth and Supply Options ....................................................................................... 189

Annex VII: Working Paper 4: Study of Costs and Potential Penetration of On‐grid RE under Different Policies ........................................................ 241

Annex VIII: Working Paper 5: Development of On‐grid RE in Pakistan: Medium Term Policy Recommendations ................................................ 301

Annex IX: Working Paper 6: Medium‐term Off‐grid RES‐E Policy Assessment ......... 325


Hagler Bailly Pakistan | Mercados EMI R9FR1PRP ‐ FINAL REPORT: 11/03/09 iii

Abbreviations and Acronyms

A Ampere

AC Alternating current

ACGR Average compound growth rate

ADB Asian Development Bank

AEDB Alternative Energy Development Board

Ah Ampere‐hour

AJK Azad Jammu and Kashmir

AKRSP Aga Khan Rural Support Programme

API American Petroleum Institute

APL Asia Pipelines Limited

ARL Attock Refinery Limited

bbl Barrel

Bcfd Billion cubic feet per day

BOI Board of Investment

BOO Build, own, and operate

BOO Build‐Own‐Operate

BP Basis point

BPL Basic poverty line

BRIC Brazil, Russia, India, and China

BST Bulk supply tariff

Btu British thermal unit

C&F Carriage and freight

CAA Civil Aviation Authority

CapEx Capital Expenditures

CBO Community‐based organization

CCGT Combined cycle gas turbine

CDM Clean Development Mechanism

CER Certified Emissions Reduction

cf Cubic feet

CFL Compact fluorescent lamp

CH4 Methane

CHASHNUPP Chashma Nuclear Power Plant

CHP Combined heat and power

cm2 Square centimeter

CNE Comisión Nacional de Energía

CNG Compressed natural gas


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CO2 Carbon dioxide

COD Commercial operations date

CP Contract price

CPI Consumer Price Index

CPPA Central Power Purchasing Agency

DC Direct current

DDGS Decentralized Distribution Generation Systems

DGG Directorate General, Gas

DGM Directorate General, Mineral

DGO Directorate General, Oil

DGPC Directorate General, Petroleum Concessions

DISCO Distribution company

DNA Designated national agency

DSM Demand‐side management

DVC Damodar Valley Corporation

E&P Exploration and production

E10 10% ethanol blended gasoline

EAC Electricity Authority of Cambodia

EAD Economic Affairs Division

ED Excise duty

EDB Engineering Development Board

EHV Extra high voltage

EIA Environmental impact assessment

ENERCON National Energy Conservation Centre

EPA Energy Purchase Agreement, or Environmental Protection Agency

EPC Engineering, procurement, and construction

EPD Environmental Protection Department

EPE Energy Policy for Europe

ERTIC Programa de Electrificación Rural y Tecnologías de la Información y Comunicación

EU European Union

FATA Federally Administered Tribal Areas

FBR Federal Board of Revenue

FEC Final energy consumption

FFV Flex‐fuel vehicle

FIT Feed‐in tariff

FO Furnace oil

FOB Freight on board


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FX Foreign exchange

FY Financial year

GDP Gross domestic product

GEF Global Environment Facility

GENCO Generation company

GES Growth environment score

GHG Greenhouse gas

GoP Government of Pakistan

GSA Gas Sales Agreement

GTZ Gesellschaft für Technische Zusammenarbeit GmbH

GW Gigawatt

GWh Gigawatt‐hour

ha Hectare

HDIP Hydrocarbon Development Institute of Pakistan

HDR Hot dry rock

HEB Hydro Electric Board

HH Household

HOBC High octane blending compound

HSD High‐speed diesel

HSE Health, safety, and environment

HSFO high‐sulfur fuel oil

HV High voltage

I&P Irrigation and power

IA Implementation Agreement

ICT Islamabad Capital Territory, or information and communication technology

IEE Initial Environmental Examination

IFEM Inland freight equalization margin

IFI International financial institution

IGCC Integrated gasification combined cycle

IIE Initial environmental examination

IPDS Irrigation & Power Department, Sindh

IPP Independent power producer

IREDA Indian Renewable Energy Development Agency

IRR Internal rate of return

ISCC Integrated Solar Combined Cycle

JP Jet propulsion

KANUPP Karachi Nuclear Power Plant

kcal Thousand calories


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KESC Karachi Electric Supply Corporation

kg Kilogram

kha Thousand hectares

km Kilometer

kT Thousand tonnes

kV Kilovolt

kVArh Kilovolt Ampere reactive‐hour

kW Kilowatt

kWe Kilowatt electrical

kWh Kilowatt‐hour

kWp Kilowatt peak

KWSB Karachi Water and Sewerage Board

lb Pound

LDO Light diesel oil

LIBOR London Interbank Offered Rate

LMM Locally manufactured machinery

LNG Liquefied natural gas

LoI Letter of Intent

LoS Letter of Support

LPG Liquefied petroleum gas

LRMC Long run marginal cost

m Meter

MC Marginal cost

MGCL Mari Gas Company Limited

MMscfd Million standard cubic feet per day

MMTPA Million tonnes per annum

MNES Ministry of Non‐Conventional Energy Sources

MoE Ministry of Environment

MoFR Ministry of Finance and Revenue

MOGAS Motor gasoline

MoPNR Ministry of Petroleum and Natural Resources

MoST Ministry of Science and Technology

MoWP Ministry of Water and Power

MoWP Ministry of Water and Power

MPC Marginal private cost

MS Motor spirit

MSB Marginal social benefit


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MSC Marginal social cost, or

Medium‐Term Service Contracts

MSW Municipal solid waste

MT Metric tonne

MTDF Medium Term Development Framework

MTOE Million tonnes of oil equivalent

MW Megawatt

MWe Megawatt electrical

MWh Megawatt‐hour

NA Northern Areas, or Not applicable/available

NAPWD Northern Areas Public Works Department

NARC National Agriculture Research Council

NEPRA National Electric Power Regulatory Authority

NGO Non‐governmental organization

NHA National Highway Authority

NOx Nitrous oxides

NPO National Productivity Organization

NREL US National Renewable Energy Laboratory

NRL National Refinery Limited

NTDC National Transmission and Dispatch Company

NTRC National Transport Research Centre

NWFP Northwest Frontier Province

O&M Operations and maintenance

OBA Output‐based aid

OECD Organization for Economic Cooperation and Development

OGDC Oil and Gas Development Corporation

OGEA Off‐grid Electrification Agency

OGEAC Off‐grid Electrification Account

OGRA Oil and Gas Regulatory Authority

OMC Oil marketing company

OpEx Operational expenditure

P&D Planning and Development

PAEC Pakistan Atomic Energy Commission

Pak EPA Pakistan Environment Protection Agency

PARC Pakistan Agriculture Research Council

PARCO PakArab Refinery Company

PASMA Pakistan Sugar Mills Association

PC Project Committee


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PCRET Pakistan Council for Renewable Energy Technologies

PCSIR Pakistan Council for Scientific and Industrial Research

PCU Project Coordination Unit

PED Primary energy demand

PEPCO Pakistan Electric Power Company

PER Rural Electrification Program (Chile)

PHA Pakistan Housing Authority

PIAC Pakistan International Airlines Corporation

PIB Pakistan Investment Bonds

PIDC Pakistan Industrial Development Corporation

PLF Plant load factor

PMD Pakistan Meteorological Department

PNAC Pakistan National Accreditation Council

PNRA Pakistan Nuclear Regulatory Authority

POE Panel of Experts

PPA Power Purchase Agreement

PPC Private Power Cell

PPDB Punjab Power Development Board

PPDCL Punjab Power Development Company Limited

PPEPCA Pakistan Petroleum Exploration and Production Companies Association

PPIB Private Power and Infrastructure Board

PPL Pakistan Petroleum Ltd.

PR Pakistan Railway

PRL Pakistan Refinery Limited

PROINFA Programa de Incentivo às Fontes Alternativas de Energia Elétrica

PSDP Public Sector Development Programme

PSO Pakistan State Oil Company

PSQA Pakistan Standards and Quality Control Authority

PTC Production tax credit

PV Photovoltaic

PWD Public Works Department

R&D Research and development

R&M Renovation and modernization

RE Renewable energy

REC Rural Electrification Companies

RED Renewable Energy Development

REDB Renewable Energy Distribution Backbone

REDSIP Renewable Energy Development Sector Investment Program


Hagler Bailly Pakistan | Mercados EMI R9FR1PRP ‐ FINAL REPORT: 11/03/09 ix

REF Rural Electrification Fund

RES Renewable energy source

RES‐E Renewable energy sourced‐electricity

RET Renewable energy technology

RFP Request for proposals

RGGVY Rajiv Gandhi Grameen Vidyutikaran Yojana

ROE Return‐on‐equity

RON Research octane number

RoR Run‐of‐river

RoW Right of Way

RPS Renewable portfolio standard

SAARC South Asian Association for Regional Cooperation

SBP State Bank of Pakistan

SC Self consumption

SCA Sindh Coal Authority

Scf Standard cubic feet

SEB State Electricity Board

SECP Securities and Exchange Commission of Pakistan

SERC State Electricity Regulatory Commission

SHS Solar home system

SHYDO Sarhad Hydel Development Organization

SMEDA Small and Medium Enterprises Development Authority

SNGPL Sui Northern Gas Pipelines Ltd.

SO2 Sulfur dioxide

SOx Oxides of sulfur

SRO Statutory regulatory ordinance

SS Small‐scale

SSGCL Sui Southern Gas Company Ltd.

SWERA Solar and Wind Energy Resource Assessment

T&D Transmission and distribution

TA Technical assistance

TCE Technical Control Entity

Tcf Trillion cubic feet

TPA Tonnes per annum

TRANSCO Transmission Company

TWh Terawatt‐hour

UNEP United Nations Environment Programme

US United States


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VC Variable cost

VEI Village Electrification Infrastructure

W Watt

WACC Weighted average cost of capital

WAPDA Water and Power Development Authority

WHS Wind home system

WPI Wholesale Price Index

WTE Waste‐to‐energy

WTG Wind turbine generator

WTP Willingness‐to‐pay

Hagler Bailly Pakistan | Mercados EMI R9FR1PRP ‐ FINAL REPORT: 11/03/09 1

1 Introduction Renewable energy development in Pakistan has been conceived under a phased, evolutionary approach constituting a strategic policy implementation roadmap adopted by the Government of Pakistan (GoP). The initial phase (i.e., the ‘short‐term‘) has involved lenient policy measures and strong incentives in order to attract investment in this relatively new business area, remove existing barriers to project implementation, and ‘hand‐hold’ reasonable‐sized pioneering projects through to successful commercial operation.1

The goal of this report, the final output under the Asian Development Bank (ADB) TA 4881‐PAK: Renewable Energy Policy Formulation and Capacity Development of AEDB, is to help design a sound approach for the development of a medium‐term (i.e., five‐year) RE policy for Pakistan that would succeed the current short‐term RE policy in 2009 and help create a conducive environment for the growth of the domestic RE industry to at least 2014, and upon which future policy directions could then be evolved.

In order to develop the new policy proposal, the TA consultants have completed the following tasks:

• An assessment of key challenges, threats, and opportunities faced by RE and related technologies in Pakistan. This assessment was carried out by analyzing the potential of RE supply by comparison with alternative (conventional) technologies.

• A review of the existing RE institutional framework in Pakistan, identifying the current and future roles of all stakeholder institutions which could have an important role or impact in RE promotion or regulation in the country.

• A critical review of past and present policies (especially the 2006 RE Policy), strategies, and incentive mechanisms currently in place, and success in promoting renewable energy development in Pakistan achieved thus far. Where problems or bottlenecks were detected or envisaged in this regard, possible solutions or actions to overcome these impediments were proposed.

• A medium term policy package of guidelines, regulations, and incentives for grid‐connected2 RE power generation and sale from priority, feasible RE technologies.

• Policy and action guidelines for the development and implementation of dispersed RE use in standalone or isolated grid configurations, including programmatic, sustainable rural RE energy supply schemes.

1 Under the GoP’s Policy for Development of Renewable Energy for Power Generation, 2006, issued by the

Alternative Energy Development Board (AEDB), hereinafter referred to as the 2006 RE Policy. 2 For the purposes of RE policy terminology, the term ‘grid’ is meant to imply either national or regional electricity

T&D networks operated by the NTDC/CPPA and/or DISCOs of 11 kV or higher voltage. Isolated, community‐based local distribution networks are considered ‘off‐grid’.



• A set of comparative economic and pricing criteria for determining optimum RE rates for grid‐connected applications, accounting for externalities and marginal avoided costs of conventional alternatives.

• Determination of overall institutional arrangements at the federal, provincial, and local levels required for the proper implementation of policy and regulatory framework, with well‐defined capacity requirements, institutional roles, and procedural arrangements that eliminate ambiguity, delays, and discretion faced by investors and end‐users in routine RE application and operation.

This report is organized as follows:

• The main body of the report includes a short summary of the policy proposal that was suggested by the consultants, discussed with stakeholders at a national workshop, and presented in detail to the AEDB, which provided its consent in the form of two position papers.

• Annex I comprises proposed text for a draft policy document, for consideration and approval by the Government of Pakistan as its official medium‐term RE policy statement.

• Annexes II and III contain the position papers issued by the AEDB, indicating its consent to the proposed policy approach.

• Annex IV presents the consultants’ evaluation of the development (and potential) of renewable energy resources in Europe and selected emerging countries (China, India, and Brazil), focusing on current policy schemes for promoting renewable energy sources, specifically for electricity generation. It also contains an analysis of various incentive mechanisms and their impact on the deployment of different RE technologies, with a special emphasis on widely developed options, such as wind, hydro, biogas and biomass, which can operate on a grid‐connected, commercial scale.

• Annex V presents the consultant’s evaluation of Pakistan’s current, short‐term RE policy 2006 (applicable over 2007 to 2009) for the development of renewable energy for on‐grid power generation, including a comprehensive analysis of the incentive structure it creates and its performance regarding the main RE sources it targets. The focus of the short‐term policy is on RE options amenable to immediate commercial development, i.e., small hydro, wind, and biomass‐based power generation. This phase is marked with beneficial risk‐sharing and attractive tariffs for developers so as to enable a reasonable generation capacity to be installed as ‘first‐of‐kind’ RE projects in the private sector, that can then serve as successful business and technology‐assimilation demonstrators.

• Annex VI presents an overview of Pakistan’s energy sector and its organizational structure, prospects for its growth and anticipated constraints on primary supplies, and possible future options and strategies that the country may adopt in order to provide for the energy needs of a rapidly developing economy. The purpose of this study is to provide estimates of anticipated



growth in the country’s energy demand, a comparative evaluation of different conventional energy supply options available to it, and the circumstances under which such needs can be met, especially in terms of electrical power.

• Annex VII presents an economic assessment of renewable energy deployment options in Pakistan, in order to fine‐tune the tools required for the design of a successful medium‐term RE policy for the country. More specifically, the objective of this annex is two‐fold: firstly, to evaluate the cost structures of renewable energy sourced‐electricity (RES‐E) in Pakistan, classifying different renewable sources by the marginal cost of tapping them; secondly, to analyze the social and private costs and the potential penetration of each type of RES‐E under different policy environments. The model provided in this paper should allow policy makers to move forward on a more sound analytical basis that allows Pakistan to set feed‐in tariffs, based on avoided cost analysis, for on‐grid RES‐E.

• Annex VIII presents the consultants’ draft proposal for the design of a medium term policy for the development of on‐grid RES‐E in Pakistan. This proposal takes into account the analyses presented in Annexes IV to VII, and has been the basis for stakeholder discussions and development of the AEDB Position Paper on medium term on‐grid RES‐E development.

• Annex IX presents the consultants’ assessment and proposal for the design of a medium term policy framework for the development of off‐grid RES‐E in Pakistan. This analysis takes into account some critical issues regarding off‐grid renewable energy services, selected relevant international experience, and an assessment of the overall costs implied in the ensuing policy recommendations. This document presents general guidelines for formulating a detailed medium term off‐grid RES‐E policy approach for Pakistan that has been the basis for stakeholder discussions and development of the AEDB Position Paper on medium term off‐grid RE development



2 Proposal for Pakistan’s Medium Term OnGrid RESE Policy

2.1 Background Our studies (see Annex VII) show that the economic penetration of on‐grid RE power in Pakistan should be around 17 TWh per annum by 2020. This would be approximately 7% of total grid‐based electrical power generation expected for that year. Almost 60% of this future RE share would be comprised of hydel plants that are much cheaper than conventional fossil fuel‐based generation. The fact that any capacity approaching this share is not currently under development indicates that some strong barriers to RES‐E investment may exist in the country, especially if we consider that the marginal cost of RES‐E is about USD 75/MWh while the cost of generation based on FO is more than USD 125/MWh. There therefore appears to be a very strong economic signal favoring the development of RE, and it can thus be concluded that some impediments are responsible for the current lackluster state of RE deployment in the country.

A national on‐grid RES‐E policy should be based on a social assessment of costs and benefits. The analysis of natural penetration based on private costs alone represents a limited subset of such an analysis. Market failures appear hamper the development of about 8 TWh per year of RE in 2020, and so an economic incentive mechanism needs to be put in place (assuming that all other barriers will have been removed by then). Under social cost assessment, hydel, biomass, biogas and wind energy plants are required to generate, in order to replace CCGTs—as a matter of fact, all FO‐based generation would need to be replaced, as well as around 15% of gas‐based generation, by 2020. If the policy to achieve these results is properly defined and implemented, the social wealth (total surplus) that may be created in Pakistan would be about USD 2.1 billion per year.

Several symptoms exist that indicate potential problems in achieving these RE penetration goals unless policy elements are suitably adjusted (see Annex VI). One of the critical issues is the existing dual mechanism offered by the regulator, NEPRA, for setting tariffs for RES‐E projects in Pakistan. In terms of its formulation, the current tariff system for unsolicited RE proposals is based on a ‘cost‐plus’ approach. The cost‐plus computation requires a case‐by‐case determination of the applicable tariff for every single producer. From the regulator’s point of view, the advantage of this methodology is its ability to reduce infra‐marginal rents (i.e., producers’ surplus) down to zero and, therefore, maximize the consumers’ surplus. Nevertheless, this approach presents several major shortcomings, which can be summarized as follows:

• Investors, taking advantage of asymmetries in project‐related information access, can ‘game’ against the mechanism to enhance their infra‐marginal rents.

• It decreases the financial incentive to invest in RES‐E technologies, as developers are explicitly deprived of most of the infra‐marginal rents (the previous point notwithstanding).



• It increases in the administrative burden in processing projects and verifying the cost structures in each case.

This approach has been adopted in Pakistan so far in order to help reduce the developer’s risk, since it guarantees an ROE of at least 15%. While it is true that this method reduces some of the risks to the developer, it is also true that it eliminates any additional incentive to develop these types of projects and can make tariff negotiations protracted and contentious—which appears exactly to have happened with respect to the RE IPP experience in Pakistan so far.

Additionally, available international evidence shows that feed‐in (upfront) tariffs are perhaps the most successful incentive mechanism for developing RE capacity. International experience (see Annex IV) also shows that grid access, administrative issues, and uncertainties with respect to the incentive mechanisms are as relevant as tariffs as far as fostering RE capacity installation is concerned. Moreover, RE technology‐wise feed‐in tariff would offer the most economical, ‘least‐cost’ power generation mix for the country in the medium term and beyond, and would maximize the social surplus created within society through the avoided costs of more expensive alternatives. Such fixed, non‐negotiable tariffs would help circumvent the prolonged rate negotiations, introduce an element of competition and urgency in project implementation, ensure that all commercially feasible RE technologies are simultaneously developed, provide an economically viable basis for the regulator to determine sustainable RE pricing, and help prioritize available ‘least‐cost’ and ‘best‐site’ RE development on a fast track.

2.2 Extension of RE Shortterm Policy This report recommends that the short‐term on‐grid 2006 RE Policy should be officially extended to 2009 from its originally stipulated expiry date of June 31, 2008, as appears de facto to be the case. This is required in order to allow projects that are presently at an advanced processing stage to achieve financial closure under existing policy stipulations, as well as to afford a reasonable timeframe for stakeholders to confer about and familiarize themselves with the medium term policy approach proposed herein.

2.3 Medium Term RESE Policy Highlights

2.3.1 Target Markets The scope of this policy is grid‐connected power generation fueled by renewable resources. ‘On‐grid RES‐E’ includes the following technologies, for individual installed project capacity greater than 1 MW:

• Small hydro up to 50 MW • PV and solar thermal energy for power generation • Wind power generation • Municipal solid WTE power • Landfill methane recovery, and



• Bioenergy, resulting from anaerobic biogas digestors, pyrolytic biomass gasification, co‐firing, cogeneration, etc.

2.3.2 Implementation Period The medium term RES‐E policy should be applicable from 2009 to at least 2014, as we recognize that incentives‐based policies require at a minimum five years of sustained promotion in order to be successful; policy incentives must remain stable and assured over a reasonably extended period in order for investor confidence to build up, supportive institutional capacity to develop, and implementation bottlenecks to be gradually and systematically removed.

2.3.3 Consistency Across Policies An RES‐E project that achieves financial closure before the onset of the forthcoming medium term policy phase should continue to be guaranteed all the incentives, terms, and conditions defined in the presently applicable 2006 RE Policy over the tenure of its respective PPA. This approach ensures the consistency and stability of an RE deployment climate from the perspective of both investors and power purchasers, as well as other relevant stakeholders.

2.3.4 Tariff Incentives

2.3.4.1 Selected Approach Our proposal for determining bulk RE‐based power procurement tariffs is:

• Set upfront tariffs for each RES‐E technology based on the ‘avoided‐cost’ for those technologies whose marginal cost is lower than the avoided social cost. NEPRA will need to set technology‐wise feed‐in tariffs based on the characteristics of the selected RES‐E technologies (‘supply curve analysis’), bounded by the range obtained from the use of private and social avoided costs. This means for small‐scale hydel, biomass, biogas, and wind, tariffs would range between approximate USD 75‐100/MWh (see Annex VII).

• Set upfront tariffs for each technology based on the marginal cost of providing the quota set by the GoP for those technologies whose marginal cost is higher than avoided social cost. An upfront tariff is also proposed to foster the deployment of any specific RE technology that promises additional benefits to society; however, a good policy should prevent a reasonable, justifiable target quota for them (defined in terms of installed MW) from being overshot.

• Discontinue the present system of negotiated RE power purchase tariffs. • The competitive bidding alternative (i.e., tendering) must be kept as an option

for only those technologies whose marginal cost is higher than the avoided social cost.



2.3.4.2 Structure of Tariffs Upfront tariffs should be denominated in Pakistan Rupees/kWh. The upfront tariffs should be based on a one‐part pricing approach (i.e., a single ‘energy charge’). Two‐part tariffs (‘capacity payments’ plus ‘energy payments’) are difficult for most RES‐E technologies, as most of them cannot guarantee capacity availability.

2.3.4.3 Indexation for Upfront Tariffs Upfront tariffs must be adjusted based only on local currency variations. The indexation of tariffs with the US dollar exchange rate should be automatic, carried out on a six‐monthly basis. Another possibility presently is to use a reference currency basket comprising of both US Dollars and Euros (e.g., in a 50:50 ratio).

2.3.5 Type of Contracts RE IPP projects for sale of all power output to the grid system shall be implemented on the basis of Build, Own and Operate (BOO) contracts valid for a period not less than 20 years.

2.3.6 Allocation of Network Investment Costs The construction of transmission lines for evacuation of power from any RE IPP should be the responsibility of the NTDC, KESC or a DISCO (depending on the location and supply voltage of the project) if the length of the connection required from the project’s outgoing bus bar to existing grid installations is shorter than 20 km, unless the IPP, of its own choice, undertakes to install such infrastructure on a mutually agreed upon transmission charge with the NTDC. The NTDC should bear all expenses associated with power balancing on the grid to accommodate priority dispatch.

2.3.7 Mandatory RE Power Purchasing As long as the CPPA exists and is carrying out its activities, all contracts for power generation from RE should be signed by the CPPA—excepting ‘direct sales’. After the CPPA eventually ceases its activities, neither distributors nor transmission companies should have the right to reject, in part or in entirety, any contract signed previously between the CPPA and an RE power generator. NEPRA should establish a future methodology for compensating those DISCOs/TRANSCOs that are forced to accept contracts at a stipulated RES‐E feed‐in tariff.

2.3.8 Direct Sales RE power producers should be allowed to enter into direct (bilateral) sales contracts with eligible end‐use customers. In this case, prices should not require approval by NEPRA.

2.3.9 Allocation of Carbon Credits RE investors should assume the entire risks and benefits of qualifying for and obtaining CERs for their RES‐E projects. The current shared allocation of carbon credits under the 2006 RE Policy is unnecessarily complicated and was considered necessary under the prevailing ‘cost‐plus’ tariff methodology. Additionally, the allocation of future CERs to



the RE developer would act as a stronger financial incentive, especially for those projects where costs are closer to the fixed feed‐in tariffs and financial returns relatively lower.

2.3.10 Land and Site Access The federal, provincial, and AJK governments shall facilitate investors in acquiring land or RoW for project development, as well as in obtaining site access. However, the primary responsibility for acquiring land and site access should rest with the project sponsors.

2.3.11 Incentives Other Than Tariffs We understand that current general incentives, including sovereign risk guarantee, the financial regime, and the fiscal regime, as defined in the 2006 RE Policy, are adequate and should be continued into the medium term policy regime as well.

2.3.12 Roles of Institutions We do not recommend major changes in the roles that each key RE stakeholder institution presently has defined for itself in Pakistan. However, some clarification of AEDB and NEPRA roles may be to the benefit of the policy.

We strongly believe that the development of competent prefeasibility studies is critical for the development of future RE projects in Pakistan. The cost and complexity of undertaking such studies is currently a major barrier to serious investor interest in such schemes, and therefore the AEDB and provincial governments must take a leading role in identifying and developing such ‘bankable’ studies.

The proposal requires NEPRA to define feed‐in tariffs, as well as to approve the application of them to specific RE projects, and to adjust grid and distribution codes in order to facilitate project development and operation.

2.3.13 Institutional, Legal, and Regulatory Consents We judge that the general existing institutional, legal, and regulatory consents required prior to the approval and implementation of RE IPP projects need not be changed, except for simplified permitting provisions for small‐scale plants (i.e., less than 5 MW capacity).

2.3.14 Procedural Requirements We believe that the processing schedule foreseen in the 2006 RE Policy is adequate. However, it must be adjusted to the tariff regime that is instituted, and should be reduced in overall duration to the extent reasonably possible.



3 Proposal for Pakistan’s Medium Term OffGrid RESE Policy

3.1 Background Historically, the predominant model for electrification in developing countries has been grid extension and/or conventional energy‐powered mini‐grids developed by large, state‐owned utilities. Recently, the spectrum of electrification models has widened, including a long list of off‐grid solutions, such as WHSs and SHSs, amongst many others.

Annex B of Pakistan’s 2006 RE Policy provides only a brief set of guidelines for the development of small off‐grid hydel projects, with some provisions applying to other RE technologies as well. At present, there is no national policy for off‐grid electricity investments. Additionally, the guidelines assign identical roles to the AEDB, provincial, and AJK governments for RES‐E project implementation, and this overlapping can be confusing and counterproductive.

Several off‐grid RE projects have recently been initiated in Pakistan—with varing outcomes—and the AEDB has been actively participating in such efforts. Probably, the most ambitious project has been the Khushaal Pakistan program (2001), which envisaged 100% electricity coverage by the end of 2007, a target which was obvioulsy not accomplished. Currently, the most active project is the Roshan Pakistan program. The objective is to provide electrification services to 7,874 isolated villages. So far, 400 villages have been electrified through this program in Sindh and Balochistan provinces.

A critical issue in the current rural RE deployment strategy in Pakistan is the absence of a clear demarcation of off‐grid areas and/or isolated/scattered populations. Such a definition should define the geographical areas for which the grid extension would remain uneconomical into the near future (say, next decade). This is an essential first step in designing a rural electrification project, as it provides a means for understanding key characteristics of the unelectrified villages to be targeted. It was estimated that in 2006, approximately 40,000 villages in the country lacked electricity services and about 8,000 out of them could only be electrified based on off‐grid solutions. Despite the lack of proper data, it can be estimated that for electrifying 8,000 villages and scattered populations, USD 800 million would be required (see Annex IX); in case some of the villages planned to be electrified by grid extension (around 32,000) also require off‐grid solutions, the financial cost would be even higher.

3.2 Medium Term Offgrid RE Policy Recommendations

3.2.1 Target Markets The target population is that living in ‘off‐grid’ villages.3 These villages can be supplied electricity, and eventually drinking water, based on RE generation. The AEDB shall be

3 For purposes of this policy, ‘off‐grid’ settlements are defined as those that are currently unelectrified, are not

included in any national or regional grid expansion plan for the next ten years, and are located more than 20 km from existing power grid(s).



responsible for elaborating a database of all villages falling under this definition, in collaboration with provincial and local governments and electricity utilities.

RE technologies included in this portfolio consist of, at a minimum:

• Micro‐ or mini‐hydel • Hybrid systems, in which at least one RE source is employed • Solar PV and thermal • Micro‐ or mini‐wind systems • Bioenergy resulting from anaerobic gas digestors, pyrolitic biomass gasification,

cogeneration, etc.

Grid expansion is outside the scope of this policy, as is any RE project that plans to electrify a village with an installed generation capacity larger than 1 MW.

3.2.2 Implementation Period The implementation period of this policy shall be 2009 to 2014.

3.2.3 Rationale and Institutional Organization Off‐grid RES‐E based electrification can be developed either:

• Directly by provincial and/or local governments on a voluntary basis and/or driven by social players without recourse to national subsidies, or

• Via national‐provincial coordination, in which provincial governments4 compete for federal government assistance to finance their off‐grid projects.

Under the first mechanism, provincial governments would be fully in charge of developing the electrification projects within their respective territorial jurisdictions using their own funds, or contributions and investments from the private sector, civil society, and/or the target communities.

Under the second alternative, a coordinated national plan would to be set up to assign competences to the different parties involved in its execution, in order to maximize their operational potential and capabilities for achieving effective and efficient off‐grid electrification. The main characteristics and tasks for stakeholders in this respect are summarized in Exhibit 1.

4 For the remainder of the document, the term ‘provincial’ shall refer to all distinct administrative regions of the

country, including the Punjab, Sindh, Northwest Frontier Province (NWFP), Balochistan, Northern Areas (NA), Islamabad Capital Territory (ICT), Federally Administered Tribal Areas (FATA), and Azad Jammu and Kashmir (AJK).



Exhibit 1: Proposed Federally‐Assisted Off‐grid RES‐E Deployment Approach

Ministry of Water and

Power

AEDB

ProvincialGovernments

(REAs) in coordination

with local governments

Developers and

operators

Project Proposals

AssessmentOff-grid

Villages and scattered population

Priv. InvestorsNGOs

CooperativesIndividuals

Others

Awarded Projects

Tendering Procedure

National off-grid project Portfolio

Management

OGREA budget request

Authorization issuance and

set tariffs

Guidelines for Authorizations

Performance monitoring

OGREA settlement

Project Execution

IFIs and donors

OGREA

Financial and technical assistance

State-owned banks

Soft loans

The main features of the regulation proposed are as follows:

• The AEDB will act as the national off‐grid RES‐E program coordinator and will decide the allocation of national funds to different off‐grid electrification projects based on rules previously defined by the Government of Pakistan and agreed upon by all provinces/units;

• The AEDB will create and update, with the assistance of the power utilities and provincial governments, a complete assessment of the unelectrified villages and scattered communities able to be supplied by RES‐E technologies which shall be approved as the off‐grid electrification ‘target’ population for the medium term (2010‐2014) by the Federal Cabinet;5

• Provincial governments—through their respective Off‐grid Electrification Agency (OGEA)6—will be the key stakeholders for promoting off‐grid rural electrification within their provincial borders. Based on the list of annual target villages/populations developed by them in collaboration with the AEDB and approved by the latter, each OGEA will prepare and submit to the AEDB a

5 Any village and/or scattered population not included in the approved list finalized by the AEDB will be excluded

from the off‐grid electrification program and not be eligible for the provisions of the present policy. 6 Or any related agency/department designated as such by the provincial government or regional administration for

the development of all off‐grid rural electrification projects in its territorial jurisdiction.



village‐specific electrification project in which, at least, the following aspects shall be covered:

o Socioeconomic characteristics of target village/scattered population. o Study on power demand potential and projected supply. o Generation technology/ies to be deployed. o Number of households to be connected. o Implementation period. o Total cost of the project, segregated between CapEx and OpEx. o Detailed cash flow projections for the project. o Social benefits due to project implementation. o Quality‐of‐service characteristics.

• Projects should include, to the extent feasible, domestic equipment, water installations, or any other facility that could expedite social development.

• Projects must strictly fulfill the AEDB’s guidelines for proper benchmarking, and analysis. The AEDB will document simplified procedures for project approval, including criteria for ranking the projects and the definition of the parameters needed.

• Based on the above, the AEDB will create an annual project portfolio organized according to a merit order based solely on a standardized social cost‐benefit analysis of the projects.

• Once a project has been awarded by the AEDB, the relevant provincial government will call for tenders for granting a 10‐year Authorization to develop off‐grid electricity services following technology specifications stated in the electrification project. If convenient (i.e., for proximate villages), several projects may be combined for tendering under a single Authorization.

• The primary criterion for selecting the winning bid for each Authorization will be ‘least subsidy’ demanded for capital investments for electrification/installation.

• All types of stakeholders shall be eligible to participate in the tender process, provided they meet a minimum set of technical qualifications to be defined by provincial REAs with the guidance of the AEDB.

• The AEDB will define the standard Authorization template that the REAs will apply to specific project tenders. The following contents shall be included:

o Schedule for electrification. o Rights and obligations of the parties. o Applicable tariffs or fees. o Milestones for subsidy delivery. o Quality‐of‐service regulation. o Community capacity‐building. o Conditions for termination of the Authorization.



3.2.4 Targets and Incentives We recommend that about 50% (final target to be defined by the GoP) of all off‐grid unelectrified villages currently identified should be electrified by end‐2014. The federal government will provide subsidies for capital investments to the extent of 70% of the total investment required for each RE project.

The AEDB will approve projects based on their respective social cost‐benefit analysis. The standardized social cost‐benefit analysis should consider:

• The subsidy requirement (total, and as a share of total cost). • The population involved. • The economic development benefits accruing from the projects. • The HSE (health, safety, and environment) performance aspects of the projects.

Remaining capital and O&M costs, including replacement costs, would be financed by:

• The respective REAs, employing provincial funds. • The tariffs or fees for the off‐grid services defined by the provincial OGEA,,

taking into account the customers’ ability to pay.

• Community contributions, in the form of sweat equity (labor), land, and/or cash.

• NGO and private contributions. As subsidies are involved, they should be limited to the amounts needed for basic social and human needs, including basic economic activities. Where additional quality and quantity is desired, it must be paid for by the customer.

3.2.5 Project Funding In order to provide funding to off‐grid projects, an Off‐grid Rural Electrification Account (OGEAC) in the budget for the AEDB should be created. This account could be financed by:

• Government budgetary allocations. • Grants and loans by multilateral/bilateral financing and donor agencies. • A levy on grid‐supplied retail electricity tariffs.

The OGEAC settlement is an attribute restricted solely to the AEDB. Once projects have been awarded, tender procedures will direct the transfer to the respective REAs.

3.2.6 Pricing The REAs will define the tariff/fee structure for each Authorization according to the following criteria:

• Tariffs may be technology‐wise differentiated.



• In standalone systems, a one‐part tariff (Rs/customer) should be preferred. • In community (mini‐ and micro‐grids) system, a one‐part tariff based on the

contracted capacity (Rs/kW‐contracted) should be preferred. In these systems, each customer will have a power limiter installed in order to disconnect him/her if the contracted capacity is exceeded.

• A metering device may be installed for customers paying for higher quantity or quality of service.

• Tariffs may be only indexed to local inflation.

3.2.7 Incentives Other Than Tariffs We believe that the current general financial and fiscal incentives, as defined in the 2006 RE Policy, are adequate and should be continued. Additional facilities and incentives may be provided to encourage the local manufacture of RE technologies.

3.2.8 Roles of Institutions The AEDB would play a key role in off‐grid electrification development as it is not only the main coordinator of the process at the national level, but will also be in charge of setting guidelines for project formulation, implementation, and financing. Additionally, the AEDB will elaborate the list of off‐grid villages and scattered population to be supplied by off‐grid RES‐E solutions updated on an annual basis.

We recommend a greater involvement of provincial and local institutions in RES‐E deployment to off‐grid locations. Local stakeholders should also have an active role in the process as a means to enhancing community acceptance and ensuring successful deployment and operation.

The Ministry of Water and power will define the budget request for the OGEAC.

3.2.9 Institutional, Legal and Regulatory Consents Regulatory consents and processing requirements for off‐grid RES‐E services should be simplified to the extent possible, so as to enable and expedite the development of projects. No regulatory or operational consents by NEPRA and NTDC/DISCOs are envisaged for such projects.

For off‐grid electrification, we suggest eliminating the LoI, LoS, and related guarantees required for on‐grid RES‐E projects. The only consent necessary is the Project Information Memorandum (PIM) for each project, which would include all technical and economic features of the project.

Concerning environmental issues, the AEDB proposes that the federal and provincial EPAs remove the requirement of an Initial Environmental Examination (IEE) for off‐grid RE projects of up to 1 MW capacity. However, a basic environmental compliance and impact checklist should be developed by the EPAs and required to be completed for all projects, primarily to ensure that water rights, flows, and community interests are not unduly infringed upon. Additionally, the project developer should certify how proper



design, engineering, construction, and safety criteria will be addressed in the execution of the project.

The most important consent that would be required is the Authorization issued by the REAs on behalf of provincial governments.

3.2.10 Performance Monitoring and Enforcement Project performance must be monitored, but in a light‐handed manner in order to avoid huge regulation costs. The monitoring process will have two main parts:

• Investment plan monitoring: involves verification of the investment milestones defined in the Authorization being reached, as a trigger for subsidy payments.

• Ongoing performance monitoring for the duration of the Authorization: This involves monitoring that quality standards are met throughout its period of validity. The regulator will establish standards for product quality, service quality, and commercial quality. It should be noted that fewer standards that can be effectively monitored are preferable to many standards that are poorly monitored.

Performance monitoring and enforcement will be the responsibility of the provincial and or local governments. The REAs should develop a program of awareness amongst their customers and other community stakeholders to foster the direct monitoring of the service provider.

3.2.11 Allocation of Carbon Credits We consider logical and administratively simpler, for RE investors to assume the risks and benefits of qualifying for and obtaining CERs, along with the potential revenues associated with them. However, the AEDB would assist project developers applying for CDM registration through programmatic or clustered, single‐umbrella application cover. In such cases, CDM registration, validation, and verification costs and CER revenue sharing arrangements shall be developed subsequently, as necessary.



Annex I: Policy for Development of Renewable Energy for Power Generation in Pakistan (20092014)

Policy for

Development of Renewable Energy for Power Generation in Pakistan

20092014

DRAFT

Government of Pakistan [Date]



Contents

1 Introduction ........................................................................................................... 25

2 Background ............................................................................................................ 25

3 Strategic Policy Objectives, Goals, and Development Strategy ............................... 26

3.1 Energy Security .................................................................................................... 26 3.2 Economic Benefits ............................................................................................... 26 3.3 Social Equity .......................................................................................................... 27 3.4 Environmental Protection ..................................................................................... 27

4 Medium Term On‐grid RES‐E Policy ........................................................................ 27

4.1 Scope of Policy ...................................................................................................... 27 4.2 Implementation Period ....................................................................................... 28 4.3 Consistency Across Policies ................................................................................. 28 4.4 Private Sector Participation ................................................................................. 28 4.5 Financial and Fiscal Incentives ............................................................................ 29

4.5.1 Fiscal Incentives ....................................................................................... 29

4.5.2 Financial Incentives ................................................................................. 29

4.6 General Incentives for RE‐Based Power Generators ........................................... 30

4.6.1 Guaranteed Market: Mandatory Purchase of Electricity ........................ 30

4.6.2 Grid Connection, Off‐take Voltage, and Interface .................................. 30

4.6.3 Wheeling .................................................................................................. 30

4.7 Specific Incentives for Grid‐Connected RE IPPs ................................................... 31

4.7.1 Carbon Credits ......................................................................................... 31

4.7.2 Security Package ...................................................................................... 31

4.7.3 Land and Site Access ................................................................................ 31

4.8 Facilities for Captive and Grid Spillover Projects ................................................. 32

4.8.1 Net Purchase and Sales ........................................................................... 32

4.8.2 Net Metering ........................................................................................... 32

4.8.3 Banking .................................................................................................... 33

4.8.4 Projects with Capacity Larger Than 10 MW ............................................ 33

4.9 Tariffs and Quotas for Grid‐Connected RE IPPs ................................................... 33

4.9.1 Categorization of Grid‐Connected RE IPPs Projects ................................ 33

4.9.2 Determination of Long Run Private Avoided Costs ................................. 34

4.9.2.1 Determination of the Conventional Supply Curve .................. 34

4.9.2.2 Determination of the RES‐E Supply Curve .............................. 35

4.9.2.3 Determination of Avoided Cost .............................................. 35

4.9.3 Determination of Long Run Social Avoided Cost..................................... 36

4.9.4 Quotas and Premiums for RES‐E Projects ............................................... 36



4.9.5 Calculation and Communication of Avoided Costs, Premiums, and Quotas ..................................................................................................... 37

4.9.6 Determination of Technology‐wise Upfront Tariffs (Groups A and C) .... 37

4.9.6.1 Group A Projects ..................................................................... 37

4.9.6.2 Group C Projects ..................................................................... 37

4.9.6.3 Upfront Tariff Determination (Groups A & C) ........................ 38

4.9.6.4 IPP Tariff Determination (Groups A & C) ................................ 38

4.9.7 Determination of Individual Tariffs (Group B) ......................................... 38

4.9.7.1 Technical Parameters .............................................................. 38

4.9.7.2 Financial Parameters ............................................................... 38

4.9.7.3 Interest on Loans .................................................................... 39

4.9.7.4 Capital Cost ............................................................................. 40

4.9.7.5 O&M Cost ................................................................................ 40

4.9.7.6 Other Incentives ...................................................................... 40

4.10 Indexation for Upfront Tariffs .............................................................................. 40

4.10.1 Group A and C Projects ............................................................................ 40

4.10.2 Group B Projects ...................................................................................... 40

4.11 Wind and Hydrological Risks ............................................................................... 40 4.12 Special Requirements for Hydroelectric Projects ................................................ 40 4.13 Transparency and Visibility of Calculation of Tariff ............................................. 41 4.14 Compliance with GoP Policies ............................................................................. 41 4.15 Procedure for Establishing RE IPPs for Sale of All Power to the Grid .................. 41

4.15.1 Process for RE IPP Proposals ................................................................... 41

4.15.1.1 Submission of Proposals ......................................................... 42

4.15.1.2 Evaluation of Proposals and Issuance of Letter of Intent ....... 42

4.15.1.3 Feasibility Study ...................................................................... 42

4.15.1.4 Bank Guarantee and Validity Period of Letter of Intent ......... 43

4.15.1.5 Request for Licensing and Tariff Determination ..................... 43

4.15.1.6 Request for PSEC Certificate ................................................... 44

4.15.1.7 Performance Guarantee and Letter of Support ..................... 44

4.15.2 Process Subsequent to Issuance of LoS ................................................... 45

4.16 Security Package and Risk Cover ......................................................................... 45 4.17 Corporate, Fee, and Contractual Arrangements ................................................. 46

4.17.1 Fee Structure ........................................................................................... 46

4.17.2 Enterprise Structure and Licensing Requirements .................................. 47

4.17.3 Lock‐in Period .......................................................................................... 48

4.17.4 Type of Contracts .................................................................................... 48

4.17.5 Nature of Equipment ............................................................................... 48



5 Medium Term Off‐grid RES‐E Policy ........................................................................ 48

5.1 Scope of Policy ..................................................................................................... 48 5.2 Assessment of Target Populations ....................................................................... 49 5.3 Medium Term Electrification Targets................................................................... 49 5.4 Multiple Deployment Approach .......................................................................... 49 5.5 Coordination Amongst National and Provincial Authorities ............................... 50

5.5.1 Off‐grid Electrification Agencies .............................................................. 50

5.5.2 Project Selection ...................................................................................... 50

5.5.3 Social Cost‐Benefit Analysis ..................................................................... 51

5.5.4 Project Implementation .......................................................................... 51

5.6 Subsidies .............................................................................................................. 52 5.7 Off‐grid Electrification Account ........................................................................... 53 5.8 Fee Structure ....................................................................................................... 53 5.9 Financial and Fiscal Incentives ............................................................................ 54 5.10 Allocation of Carbon Credits ................................................................................ 54 5.11 Security Package and Risk Cover ......................................................................... 54 5.12 Institutional, Legal, and Regulatory Consents ..................................................... 54 5.13 Performance Monitoring and Enforcement ........................................................ 55



Exhibits

Exhibit 1: Example of Conventional Electricity Supply Curve ........................................................ 35

Exhibit 2: Example of RES‐E Supply Curve ...................................................................................... 35

Exhibit 3: Example of Avoided Cost Determination ....................................................................... 36

Exhibit 4: Processing Schedule for Grid‐Connected RE IPPs .......................................................... 41

Exhibit 5: Fee and Financial Charges for Grid‐Connected RE IPPs ................................................. 47



1 Introduction With a large population of over 150 million and a rapidly developing economy, Pakistan’s energy needs are potentially huge. The country, historically a net energy importer, is confronting serious imminent energy shortages as its economy and population grow while global fossil fuel prices remain highly volatile. Thus, Pakistan needs to initiate a sustained, long‐term transition towards greater use of renewable energy (RE)—an indigenous, clean, and abundant resource whose considerable potential the country has yet to tap meaningfully.

The Government of Pakistan (GoP) intends to pursue this objective of harnessing power from renewable resources with the full participation and collaboration of the private sector. This document sets out policies and strategies to exploit such resources and attract investments in electricity generation projects utilizing hydro (up to 50 MW capacity), wind, solar, and biomass‐derived po

technical assistance consultant’s reportassociated with technical, management, and economic...

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