BMI View : Pakistan appears keen on working with Japan to develop renewable energy to reduce its reliance on costly fuel imports and alleviate power shortages. The country possesses significant potential for renewable energy generation, but development of the sector has been constrained by many factors, including uncertainty over existing resources. Data collection by a Japanese delegation could thus help to build credibility, unlocking growth potential. We also believe that the Japanese delegation has much to gain from the arrangement, but highlight that political risks and a poor business environment could erode these benefits.
On November 17 2012, a member of the delegation of Japan International Corporation Agency to Pakistan said that the Japanese government was planning to provide Pakistan with grants and loans for undertaking small alternative energy projects. The delegation is currently conducting a data collection survey on renewable energy development in Pakistan, and counts representatives from Mitsubishi and Hitachi among its members. The delegation is also working closely with the provincial government of Sindh to develop renewable resources in the area.
Pakistan appears keen on working with the Japanese government to develop renewable energy as it is seeking to alleviate power shortages and reduce its reliance on costly fuel imports. Oil- and gas-fired generation accounts for over 60% of the country's total electricity mix, and higher fuel import prices have led to fuel shortages and rising costs. According to the government, Pakistan continues to experience an energy shortage of 4,000 megawatts (MW). Nameplate generating capacity in the country currently stands at 20,000MW, but Pakistan's state utility announced that they are only able to supply 13,000MW due to a lack of affordable fuel.
|More Energy Imports Due To Reliance on Oil and Gas|
|Pakistan - Electricity Mix, TWh (LHS); and Energy Imports, US$mn (RHS)|
Renewable energy appears to be an appealing solution. Not only does it not involve costly fuel imports, but the country theoretically has significant potential for renewable energy generation. Tomoyasu Fukuchi, a member of the delegation and the consulting engineer of Nippon Koei, said that Pakistan had the world's best insulation with proven power generation of 4-5 kilowatt hours per metre square and more than 3,000 hours of sunshine throughout the year.
Yet, in our opinion, a lack of official data is one of the main reasons for the slow pace of development in Pakistan's renewable energy resources. Over the past few years, renewable energy investors have displayed interest in Gharo and Jhampir because of the availability of more than three years of wind data. However, interest in the Sindh wind corridor has remained relatively stifled due to a lack of data, according to the Sindh Board of Investment (SBI). A lack of data has also led to delays in several major projects, including the 500MW proposed by Chinese oil and gas company United Energy (See our online service, June 06 2012, 'Chinese Support For Largest Wind Farm?').
We believe the delegation's presence in Pakistan is a positive sign for the sector as data can be collected more extensively and credibly. For instance, the provincial government of Sindh has already asked the JICA to assist it in carrying out a wind assessment study in Islamkot to ascertain the actual potential of the area. The Sindh government currently estimates wind potential of the Sindh wind corridor to be 50,000MW, and a reaffirmation of this potential by an independent study from the JICA could be pivotal in unlocking investor interest in the corridor.
Rewards For The Japanese, But Not Without Risks
In our opinion, the Japanese delegation could stand to benefit from investing in renewable energy in Pakistan. Many members of the delegation represent conglomerates that manufacture renewable energy equipment, and are extremely interested in exporting their products to Pakistan. Japanese service and construction companies could also benefit due to Pakistan's lack of expertise in constructing or operating renewable generating capacity.
That said, we highlight that there are numerous risks for investors looking to enter Pakistan's energy or infrastructure market. Firstly, the country's general elections are scheduled to be held in early 2013, and we believe that the ruling Pakistan People's Party (PPP), which heads the present coalition government, faces an uphill struggle for re-election. The PPP is already facing a tough political environment, with the public's discontent near all-time high ( See 'Pakistan Political Outlook - Q1 2013', October 29 2012). Should the PPP lose the election, the incoming government might be less supportive of renewable energy, and reverse progress made on existing projects.
|Bottom Of The Pack|
|Pakistan - Leadership Favourability, % Responding Favourable|
Additionally, Pakistan's business environment continues to present numerous challenges for private foreign companies. Many processes in the country remain highly bureaucratic and lack transparency, raising the risks of corruption. Pakistan's legal system also continues to be bogged down by a backlog of cases and lengthy court procedures. We had previously highlighted how these factors had adversely affected foreign companies operating in Pakistan (see 'PSA Pull-Out Highlights Risks', September 11 2012), and believe these risks continue to be pertinent for investors looking to enter the market.