BMI View : We believe that Pakistan's decision to introduce a solar FiT and reinstate the wind FiT highlights the country's interest in developing renewable energy resources to alleviate a power shortage, and possibly, lower the average cost of electricity within the country. Additionally, we believe that the government's decision to introduce a FiT for solar energy reflects the growing attractiveness of the technology, primarily due to lower solar equipment prices. That said, we continue to see several risks to the Pakistan renewable energy sector. The country will be holding its elections mid this year and its business environment remains poor.
On February 18 2013, Pakistan's National Electric Power Regulatory Authority (NEPRA) has said it would be conducting a hearing on February 27 2013 to determine the upfront feed-in tariff (FiT) for solar and wind power projects. The solar tariff will be determined on the basis of a proposed US$0.233/kWh , as laid down by the country's Alternative Energy Development Board (AEDB). NEPRA also intends to determine a fresh upfront tariff for generation of electricity from wind power, as the most recent tariff expired on 31 December 2012.
We believe that Pakistan's decision to introduce a solar FiT and reinstate the wind FiT represents the country's interest in developing renewable energy resources to alleviate a power shortage. The gap between electricity demand and generation capability in Pakistan has widened over the last decade, with the country experiencing a shortfall of approximately 6,500MW of generation capability in 2012, according to NEPRA. This deficit is caused primarily by a lack of fuel for thermal generation, and realising the country's renewable energy resources (which do not require fuel) would help the country to increase its effective generation capability.
|Growing Electricity Deficit|
|Pakistan - Electricity Demand And Generation Capability, MW|
We highlight that a greater reliance on renewable energy could help the country reduce the share of oil in its electricity mix, thus reducing the average cost of electricity. Pakistan depends heavily on imported oil for electricity generation - 32% of electricity generated in 2011 came from oil-fired plants - which is extremely costly. In 2011, the country imported US$13.8bn of oil, which is approximately 7% of the country's GDP.
|Oil Imports To Weigh Heavily On Pakistan|
|Pakistan - Energy Mix, TWh (LHS); and Energy Imports, US$mn (RHS)|
We note that Pakistan has significant potential for renewable energy generation. A member of the Japan International Corporation Agency said that Pakistan had the world's best insolation with proven power generation of 4-5kWh/metre square and more than 3,000 hours of sunshine throughout the year. A joint study by Pakistan's Meteorological Department, National Renewable Energy Laboratory, and US AID, also estimated that the country had a total wind energy potential of 346GW.
We believe that the government's decision to introduce a FiT for solar energy reflects the growing attractiveness of the technology, primarily due to lower solar equipment prices. Panel prices have decreased significantly over the past two years due to global oversupply, greatly increasing the financial viability of solar energy ( see our online service, October 18 2012, 'Changing Dynamics Of Renewables Manufacturers'). To be sure, the provincial government of Balochistan announced in January 2013 that it had signed a memorandum of understanding (MOU) with the South Korean government for a 300MW solar power plant, with room for an additional 700MW expansion ( see 'Will Systemic Problems Derail Flagship Solar Project?', February 07 2013).
|Prices Falling, Volumes Rising|
|Global Polysilicon Price, US$/kg (LHS) And Total PV Modules Production, MW (RHS)|
We find it likely that the government will adopt the AEDB's proposed solar FiT of US$0.233/kWh. We also find it likely that government will reinstate the FiT for wind energy, though at a slightly lower rate from the previous FiT that expired at the end of 2012. The AEDB's proposed solar FiT is expected to provide an internal rate of return of 17%, which should be sufficiently attractive to investors. We expect the FiT for wind energy to be reduced slightly as a large number of projects were started in 2012, indicating that the previous tariff was relatively generous.
|Sector||Tariff (PKR/KWh)||Payment Period (Years)||Expected Revision||Notes|
|Source: BMI's Feed-In Tariff Database.|
|Wind||13.96||2||Feb-13||For first 2 years of operation; only projects completed before December 31 2012 are eligible.|
|Wind||14.66||3||Feb-13||From the 3rd to the 5th year; only projects completed before December 31 2012 are eligible.|
|Wind||14.47||4||Feb-13||From the 6th to 9th year; only projects completed before December 31 2012 are eligible.|
|Wind||5.735||10||Feb-13||From the 11th year onwards; only projects completed before December 31 2012 are eligible.|
FiTs Will Help, But Numerous Risks Still Present
That said, we highlight that there are numerous risks for investors looking to enter Pakistan's energy or infrastructure market. The country's general elections are scheduled to be held in mid-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, and the public's discontent near all-time high ( s ee '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 any legislation passed on the FiTs.
|Bottom Of The Pack|
|Pakistan - Leadership Favourability, % Responding Favourable|
We also note that the country's poor business environment continues to pose a significant risk to the sector. Corruption still runs rampant in the country, particularly in the power sector. For instance, on January 15 2013, the Supreme Court directed authorities to arrest Prime Minister Raja Pervez Ashraf (and 15 others) during a hearing of the rental power projects case. Nine RPP firms were accused of receiving more than PKR22bn as a mobilisation advance from the government to commission the projects in the case. Ashraf has also been accused of receiving bribes and commission during his tenure as Minister for Water and Power ( see 'PM Arrest Order: Just Another Day In Pakistani Politics?' , January 16 2013 ).