Nepra's State of Industry Report has been published recently and put on its website. It is a regular annual publication that provides authentic data and information about the electricity sector. It should be read by all who have a general or specialist interest in the subject. This year Nepra has made some important observations which should be discussed and widely analyzed in public fora. This article is an attempt in that respect.
An important issue that has been stated is the government's resolve to bring down the cost of generation from the present 12 cents to 10 cents average, as a means to solve the circular debt issue. It is a welcome target and must be pursued. Initiatives on coal, hydro and possibly nuclear are steps in the right direction. However, in the same breath, NEPRA has read Fateha on Renewable Energy. It is a good omen in that a reality and self-guilt has been accepted. NEPRA has been awarding impossible, unrealistic and unaffordable tariffs which could not be termed into firm PPAs due to an already over-burdened cost structure of electricity supplies. It is when you accept a situation that you are able to start a review and search for a new path. It is bad because, despondency seems to have set in, which we would like to remove through this article.
As per Nepra report, 11 parties have got the tariff approved for wind power at exorbitant rates of 15-16 cents. Nepra's own liberal and unrealistic policies are responsible for this. We reproduce a table here detailing the upfront tariff:
One would see readily from the table, a tariff of Rs 21.1 per unit for locally-financed projects for the first ten years, and Rs 7.34 per unit when all debt has been paid off and there is no fuel cost. Where does this money go? To the pockets of the project proponents, needless to say. In case of coal plants, this much amount pays for the coal, its transport and investment costs as well. The problem is not with Wind Energy. It is competitive now, throughout the world including our neighbour India. Wind Tariff is around 8 cents in India which has managed to install 20,000 MW of Wind Power with an inferior quality of Wind Resource in terms of Capacity factor of 25% as opposed to over 30% in Pakistan. In Brazil, these rates have come down to even 4 cents as per the latest results of its wind power auction, although a very good capacity factor(call it utilisation for normal understanding) of 45% or so is responsible for such a low tariff. Over the years, Wind Turbine technology has improved with larger blades and higher towers and better controls, which should be giving even more electricity, say 35% Capacity factor in Pakistan.
The problem is that the cost-plus tariff system rewards the most corrupt and inefficient proponents. The average is computed on the phony cost claims of such parties and becomes the order of the day. In Wind Power, this factor has come to pervade more so than in other cases. As a result, there is a huge difference between Wind Tariff in Pakistan and almost anywhere. In fact, in the meantime, where there were higher rates, these have come down. In Pakistan, wind power tariffs were raised in 2008-9, the year when commodity prices rose very high. Commodity prices have since come down and have stabilised. Pakistan's wind sector is still living in 2008 .NEPRA, unfortunately, does not have recourse to third-party advice. At-least, record does not show, if it has hired independent third-party services. The problem is that local professionals are themselves involved in the scam. Who would hire them, if they do not collaborate in the scam? I had installed a wind speed monitoring system as early as in 1995 and could not get hold of any assignment in this respect. All Nepra relies is on the public -hearing to get free advice. Free advice has its limitations. The latest trend, for example in Canada, public-interest interventionists are paid travelling costs by the regulatory agencies. And in our poor and dear homeland, if anybody has tried to be an interventionist, he would know the bureaucratic process. What happens is that only the vested interest remains in the tariff award process. Third-party comments (interventions minus stamp paper) remain as a free advice to which nobody is obliged to respond.
All IPP proponents have not indulged the kind of cost-booking as has been done in case of Wind Power, wherein the anomaly is almost of 100%. We have hydropower (wherein massive amount of construction has to be done along with erection of turbines and other ancillary equipment) IPPs where average charge rate has been around Rs 5-6 per unit. Wind Power has been plagued by a coalition of parties who thought that they would be able to take the system for a ride, which could not happen due to a variety of reasons and culminated into the Fateha read by Nepra in its 2013 report under discussion.
Who has lost in all this - everybody? The proponents who spent time and money and but for their avarice, could not get a PPA. How could a government that is already besieged by the circular debt problem enter into PPAs for such supplies, no matter a Tariff has been awarded by a regulatory body? The nation, the consumer, the industry, all lost. Renewable Energy, despite its other problems, had a potential of quickly bringing say 1000 MW of Wind Power. A wind power project can be implemented in less than 18 months (field work requires only six months), as opposed to 4-5 years for other projects. Loadshedding could have been reduced; wind blows more when there is higher demand.
And now solar power has become closer to competitiveness'. In India, recent round of wind power auctions have yielded a solar power tariff of 10 cents down from 12 cents in earlier rounds. These are neither exceptions nor accidental developments. These prices are almost exactly according to earlier predictions and targets of the solar industry. Even for Pakistan, similar offers have been received by the Government of Punjab which is in the market for installing a 100 MW Solar PV plant in Bahawalpur. Let me reproduce some data on solar power cost-tariff in various regions of the world:
Italy, South of Rome - $1.20/W and 10-11¢/kWh (Utility)
UK-EU around 1.5 USD/W (Utility)
Australia - Solar Residential _1.90 USD/W
US - $2.00/W =11.4¢ per kWh in Zone 5; 9.9¢ per kWh in Zone 2 (Residential)
Germany - Residential = 2.00 USD/W
India - 1.00 USD/W; 10 cents/kWh (Utility auction March 2014)
Brazil - 10 cents/kWh (Utility auctions Jan-2014)
It is possible that Pakistan may get slightly higher offer say at 12 cents to account for a variety of possible factors, it should be worth pursuing. After all, there may be a maximum of 500 MW of solar input initially which may not cause a big impact on the average cost of electricity supplies.
You can today order a container of Solar panels from China at a rate of 0.5-0.6 USD per Watt (FOB). Of course, there are other costs, at a minimum of 100% or more. Residential systems cost more due to lesser volumes and storage requirements; sun shines in the day and homes require electricity in the night mostly, although in summers there is the requirement of running fans etc. Storage makes solar power for homes rather expensive. However, commercial and industrial users require power mostly in the day and do not require expensive battery storage. Therefore, we already see solar applications coming up in diesel replacing commercial and tube well applications. NEPRA has issued a solar PV tariff of 16-17 cents against pressures and claims of higher tariff ala-Wind. The new leadership appears to be more aware of the game that is played than the earlier one. Nobody is against a fair profit or even slightly more. But if one is after wind falls on no investments (somebody said so aptly; Wind Fall from Wind not Power), I am afraid, the time is gone for this kind of bounty as the case of non-implementation of Wind power projects has shown. Nobody is ready to risk such a coalition in these days of NAB and judicial activism.
I am afraid that we may lose or delay the solar bus or boat, as we seem to have almost lost the Wind Power. Solar, if not wind, is the future of energy. Solar power is far more useful and versatile than wind. Sun is available everywhere, as opposed to Wind which is localised in pockets and there are now provincial issues in the wake of the 18th Amendment and its rather reckless implementation and apathy. Thus NEPRA's Fateha is premature. Things can be salvaged, at least partly. NEPRA cannot control avarice but can bring out changes in structure which dilute the role and scope and impact of avarice.
As is apparent from the data presented, it has now become possible to get solar power for utilities at 10 cents. It would be more so as the days go by. However, it would not be possible under cost-plus or upfront tariff process pursued by local investor. Local investor does not have credibility, experience and reliability. He gets expensive financing from international sources. In fact, his balance sheet is too small and accounting system so unreliable, that he cannot get any foreign financing at all at reasonable terms. That is why most local wind power proponents have gone for local financing. No power project can be viable under high interest local financing. Local financing should be limited to a maximum of 20% for local expenses.
All over the world utility investments are considered robust and relatively less risky and thus there are lower rates of return commensurate with the lower risk. In Pakistan cost-plus regime and where there is an assured single buyer (government-company) and PPAs backed by sovereign guarantees, the investments are even more secure. Yet the local investors lobby for unduly high returns and do not make a distinction between a textile industry and a utility nor IPP. In case of textiles, there are so many uncertainties and variations. One does not know, if his customer would buy tomorrow. Here, you have guaranteed sales for 25-30 years at agreed prices with every variable secured. Even Engro, a so-called professionally managed company, managed to get a 20.5% RoE approved through backdoor channels in the previous government and consequently started lobbying for 12-13 cents for Thar coal based electricity. I do not know the full inside story but the ambitious coalition of interest could not sustain itself and the project was shelved. This time with no back door access, they are in for more modest aims both in terms of the project size and as well as the profits and there is a new tariff request from the same group of a more realistic and competitive tariff of 8 cents. However, they continue to lobby for a 20.5% RoE hiding behind a highly controversial ECC decision (when Sayyan was Kotwal). I wish they had not asked for it again for their own presumptions of integrity and having started with a new slate. Hydro Power is getting a RoE of 17% which is a local resource and has additional benign properties. There is no justification for this kind of unreasonable RoE. Nepra is seized of the matter and I hope they would strike it down.
It is the international investor and PV companies which are hungry for projects, markets and sales to get rid of inventories and get a share in the expanding markets in the developing world. Foreign investor gets project loans at better terms and is content with equity RoR of 10-12 % and does not inflate the CAPEX. Combine this all, you have all the arithmetic for cost reduction. That is how wind and solar power auctions have been so successful in Brazil and Turkey and solar power ones in India. In India local wind turbine industry has been so competitive that foreign competition or auctions were not required. However, most solar projects have been primarily foreign investor based. PML (N) is rightly looking for foreign investors or government's own investment. They know their own community too well. They want to reduce the cost of electricity to get rid of the subsidies and the circular debt. They would be fools to listen to this kind of rent-seeking.
To be fair and to tell the whole story, cost-plus and upfront tariffs have been traditionally higher elsewhere as well and that this factor has not been peculiar to Pakistan, although the margins of difference are higher here. In all cases of Solar and wind power auctions in Brazil, Turkey, India and others, significant price advantage has been obtained over the cost-plus tariff. Reasons have been almost the same as mentioned earlier. And finally, true market price is only discovered by competition and not by assumptions.
Organising Solar or renewable auctions is not easy although not impossibly difficult. NEPRA and other relevant officials from PPIB, AEDB and Ministry of Water and Power would be doing well to visit Brazil and India to get a first hand exposure to the success that has been achieved by these countries in the area of Reverse Auction Mechanism (RAM) and getting solar and wind power and investments at lowest possible costs. Additionally, a foreign consultant (nobody listens to local consultant in this country) may be hired to develop a policy in this respect keeping in view Pakistan's needs and objective conditions.
Before closing, let us explore some strategy issues as well. There are two strategy options; a) gradual and modest solar induction at relatively higher prices than a cruel competition would afford under a local manufacturing programme ala- deletion programme of auto and engineering industry; b) a large scale induction at cheapest possible rates afforded under auctions. Both the strategies have consequences. I would suggest trying strategy (b) initially, if it does not give desired results than one should go for (a). If time and opportunity is wasted due to constraints, it better yield other results of technology development.
Apart from diesel replacing commercial and tube-well applications, there are other areas as well that should receive attention, prime among those are remote off-grid communities which may never get electricity or may involve very high transmission expenditure. Such communities are generally poorer as well. Also in urban areas, the concept of multi-site IPP may be promoted. There are large industrial roofs municipal buildings, car parks, school and hospital tops etc which can be leased by an IPP under a co-production and ownership programme. An IPP or let us say a utility like KE could launch a 5-25 MW IPP or self-generation project by a composite site aggregation on the lines of the aforementioned. The Land or roof lessor gets the benefit of lesser or no load-shedding, without making any investment.
I have been espousing these ideas for the last two years. However, the time for their implementation has come now. Firstly, NEPRA has admitted finally that under the tariffs approved by it and proposed by the proponents, wind and solar do not have much of a scope or role. However, we cannot dump the renewable option altogether. Let us change our ways and tread a new path of fairness and competition. It is hoped that the new government leaders would also heed to these proposals before getting too settled in conventional ways and processes. Let it be a Fateha for a new beginning and not for the end.
======= NIEPRA Wind Power Tariff - upfront ======================
With 100% Foreign Debt With 100% Local Debt
Years Tariff Tariff Tariff Tariff(Rs/kWh) (US cents/kWh) (Rs/kWh) (US cents/kWh)
I to 10 14.8122 17.2235 21.1036 24.5391
II to 20 6.8977 8.0206 7.3465 8.5424 Levelized 12.6100 14.6628 17.2755 20.0878