The Conference of Parties adopted the Paris Agreement in its twenty-first session (COP21). The agreement recognised climate change as an urgent and potentially irreversible threat requiring an effective and appropriate global response and prescribed various steps and measures to tackle the common concern faced by human societies and planet earth. The reduction in greenhouse gas (GHG) emissions, among others, has been advocated as an appropriate solution to climate change since then.
The energy sector has been a significant contributor to GHG emissions by using hydrocarbons as the primary fuel. It has been estimated that the energy sector contributes approximately 73% to GHG (see figure 1 below). The data also confirms that 84% of energy is being produced from fossil fuel sources. Renewable energy sources have been considered as acceptable substitutes for fossil fuel energy sources.
Most countries shifting to alternative and renewable energy sources are taking policy measures and actions to mitigate GHG emissions and climate change threats. These policy measures, among other issues, can be assessed through a country’s preference for renewable energy projects (REPs) based on their source, incentives and tariffs, connectivity to transmission systems/national grid and the procurement process for public utility.
Figure 1: Sectoral Contribution to GHG
Source: Our World in Data
Being categorised as one of the Next Eleven Countries (N-11), Pakistan is at the energy transition crossroads. Like many other countries, Pakistan has promulgated policy initiatives and actions for renewables to mitigate GHG emissions and climate change threats. It has recently issued a new policy titled the Alternative and Renewable Energy Policy 2019 (ARE 2019). This article is a critical analysis of ARE 2019 based on the following:
- scope of REPs covered by the policy,
- procurement process for public utility,
- other avenues for REPs,
- incentives and benefits, and
- just transition of the workforce from fossil fuel industries to renewables sources.
Overview of Energy and Renewables in Pakistan
The following is a brief overview of the energy sector in Pakistan and the energy transition towards low-carbon through renewables:
1. Generation Capacity
The State of Industry Report issued by the National Electric Power Regulatory Authority (NEPRA) for the year 2020 states that Pakistan has an installed generation capacity of 38,719MW at the close of June 2020. 35,735MW is connected to the NTDC system, whereas 2,984MW is connected to the K-Electric system. The report also states that out of the country’s total generation capacity, 2,147MW is produced by renewable energy sources. Solar power, wind and biogas contributed 0.58%, 2.36%, and 0.46% to the electricity procured by the Central Power Purchasing Agency, Pakistan.
The National Electricity and Power Regulatory Authority (NEPRA) was set up in 1997 to work as a regulator in a liberalised market. The Alternative Energy Development Board (AEDB) was established in 2003 to facilitate and promote alternative and renewable energy in Pakistan. It has also worked as a ‘one-window facilitator’ to approve renewable energy projects under the ARE 2019. However, NEPRA has been vested with the powers to determine tariff for renewables energy projects generating energy for public procurement.
2. GHG Emission Targets
The parties to COP21 agreed upon keeping the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels. The Conference also obligated the parties to submit the nationally determined contributions (NDC) to GHG emissions. Pakistan submitted its NDCs in 2015.
Pakistan’s emissions within the global cumulative CO2 emissions account for less than 0.5%. In 2015, Pakistan estimated its NDCs from the energy sector to be equivalent to 185.7 MT CO2, which forms 46% of Pakistan’s total GHG emissions. It also projected the intended NDCs to GHG emissions from the energy sector for the year 2030 at 898 out of 1603 MT CO2 (56% of the total GHG emissions). ARE 2019 states Pakistan’s ambition to acquire 20% of its electricity generation capacity from renewable sources by 2025 and further enhance it to 30% by 2030.
Pakistan aims to respond to the threats posed by climate change by adopting renewable energy sources as sustainable and clean energy. In addition to the transition to low-carbon, Pakistan has been undergoing liberalisation reforms since 1994. Liberalisation from state monopoly to competitive market has been underway. Renewables as alternative sources of energy were introduced in 2006 in different electricity market conditions. ARE 2019 has been issued to mitigate the effects of CO2 emissions from fossil fuels in the energy sector, asserting transition to renewables as a substitute for fossil fuels/hydrocarbons. The following analysis of ARE 2019 is based on its efficacy and sufficiency for Pakistan’s ambitions towards a low-carbon economy.
1. Scope of Renewables and National Framework
Pakistan’s first renewable energy policy in 2006 was only able to add 1235.20MW capacity through wind power projects and 430MW through solar projects into the system. Significant barriers noted for the policy’s failure included regulatory insufficiency, high upfront cost, lack of proper subsidies and lack of institutional coordination.
ARE 2019 lists, among other things, alternative renewable energy technologies, such as geothermal energy, hydrogen, synthetic gas (produced from sources other than fossil fuels), solar power and on-shore and off-shore wind energy. The policy also provides for governmental discretion in the form of a different framework for any other renewable technology. The policy’s benefits may be accessed through renewable project models which can be a hybrid of one or two renewable energy technologies as listed by the policy. Storage technologies have also been considered to be at par with other renewables technologies for the applicability of policy incentives.
Nuclear energy and hydropower technologies in Pakistan are not covered by ARE 2019. Nuclear energy technology is operated and controlled by the Pakistan Atomic Energy Commission. However, NEPRA has been setting the nuclear energy tariff and hydropower tariff for public procurement. The Water and Power Development Authority (WAPDA) exercises the control of generation from all hydel projects in the country except where generation capacity is less than 50MW. It has been mentioned in ARE 2019 that another policy is under consideration for small hydro technology.
2. RE Procurement for Public Utility
“Private sponsors and financiers are more than willing to invest in renewable energy based on the well-designed procurement process.”
The procurement process for public utilities is one indicator that may be used to understand the governments’ initiatives for renewables and clean energy.
ARE 2019 states that public utility procurement shall primarily be based on transparent, competitive bidding. The Alternative Energy Development Board (AEDB), an independent, autonomous body to act as a one-window facility to process REPs, is the authorised body to deal with procurement on an annual basis. These auctions must be done at the locations prescribed by the Indicative Generation Capacity Expansion Plan (IGCEP). The national grid company has prepared this plan under its mandate of power system planning based on demand forecast.
The policy also permits procurement through a government-to-government mode and an unsolicited proposal with the condition that the resultant tariff remains below the national average of generation.
The procurement methods defined by these policies and laws seem transparent. However, Pakistan’s primary procurement method for public utility seems to be controlled by output requirements rather than making the market more attractive for investment into renewables. The renewables’ capacity enhancement (even for the displacement of expensive fossil fuel plants) has been subjected to the output requirements of IGCEP. This shift of ARE 2019 for a controlled investment in renewables and the acceptance of an unsolicited proposal on its tariff below the national average generation basket makes the renewables market less appealing for RE investors.
3. Other Avenues for REPs
ARE 2019 also covers projects and activities which are not entirely carried out for public utility. Captive power and off-grid solutions, such as micro-grids and localised energy systems, have been recognised as independent activities under the ARE Policy. However, in the context of Pakistan’s national goals to shift towards clean energy, any generation capacity added through these avenues shall be counted as part of the national goals despite their independence from government regulation and benefits. The policy highlights safety of micro/mini-grids and localised energy systems and suggests safety certifications monitoring by AEDB.
ARE 2019 and the existing legal framework in Pakistan provides for the benefit of net-metering. Net-metering is governed by the NEPRA (Alternative & Renewable Energy) Distributed Generation and Net Metering Regulations, 2015. These regulations regulate the relationship between the distribution company and the consumer for net-metering. However, the framework’s effectiveness and efficacy and its impact on low carbon energy transition require further independent study.
4. Incentives and Benefits
The energy transition towards low carbon is driven by policies to reduce GHG emissions. Therefore, policymakers have been adopting various economic models to incentivise the market for renewables. These policies and tariffs are also incentivised to attract RE investment because the RE cost per unit is expensive than traditional energy production. Feed-in Tariff (FiT), a price set by the government, has been one incentivising tool to attract investment for renewables. FiT generally comprises a fixed price sufficient to cover the investment, guaranteed grid connectivity and a long-term purchase contract.
ARE 2019 does not offer capacity payments or FiT for REPs. It states that there will be no capacity payments for renewables. REPs’ tariff would be determined according to the energy purchase price only. However, NEPRA has been granted the power to allow the cost-plus tariff to prefer technologically induced REP. Data is not publicly available for the development and approval of cost-plus tariff for technologically induced REP. The federal government initially notified FiT for solar projects, a later revision decreased the subsidy and now it has been stopped. The policy provided for fiscal incentives at the time of its issuance, along with protection against tax law changes for REPs.
The lack of incentives in the ARE Policy 2019 is a significant shift from Pakistan’s earlier policy that offered various incentives to on-grid renewable projects. Along with Pakistan’s one-buyer model, these incentives had ‘protected renewables against commercial risks, and technology obsolescence risks, making them financially viable and hence bankable.’
Compared to its earlier policy, Pakistan has minimised the current policy’s incentives under the garb of cost-effectiveness for REPs. Furthermore, ARE 2019 deviating from Pakistan’s earlier policy has shifted the risk of intermittence (the source risk) entirely to the REP. This transfer of risk to the REP is another detriment to potential investment in REPs.
Pakistan intends to move towards a more competitive market. This intention is also evident from the amendments (in 2018) to the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 and other administrative measures (for instance, proposals to introduce the Competitive Trading Bilateral Contract Market (CTBCM) Model). However, the incentives and benefits required to attract potential investors for the capacity of renewables in the national generation basket are minimal in the current policy. This situation may halt progress towards a low-carbon economy.
5. ‘Just Transition’ Factored in RE Policies of Pakistan, Mexico and Nigeria
The energy transition to a low carbon economy may affect the workforce working in the energy sector in four different ways (see figure 2 below). It raises concerns for the transition of existing labour in a low carbon economy. COP21 has addressed this issue by stating that the energy transition’s social and economic impact on the engaged workforce has to be aligned with human development. Heffron, expounding on the issue of just transition, states that,
“It aims to reduce inequality in a modern society, which it achieves by applying justice in the areas of Climate, Energy and Environment.”
Figure 2: Impact on the employment
The International Labour Organisation (ILO) has also laid out guiding principles for just transition. These principles focus on ‘the need to provide an enabling environment for enterprises, workers, investors and consumers to embrace and drive the transition towards environmentally sustainable and inclusive economies and societies.’
The renewables’ policy in Pakistan, besides falling short on adequately incentivising renewables, also does not sufficiently provide for imperative steps required for the just transition of the workforce from fossil fuel electricity generation to renewable sources. However, these policies and governmental actions do provide sectoral incentives regarding industrial activities within the local frameworks, indirectly impacting the workforce.
For instance, to promote local manufacturing, ARE 2019 has proposed to remove tax exemptions from the import of REP based consumer items. This measure has been taken to promote local offerings in contrast with Pakistan’s earlier import trends. Pakistan imported almost 95% of renewables products, mainly from China, which cost less than what Pakistan manufactured locally. The proposal to remove tax exemptions must be notified after examining the standard of locally produced products and the local production capacity to meet demand. Any arbitrary declaration on removing tax exemptions on the imports of REP may be detrimental to renewable energy growth.
ARE Policy has required the AEDB to set up an institution for training and research relating to renewables. The Pakistan Council of Renewable Energy Technologies has also been established as a statutory body to research and develop renewable energy sources. However, no information regarding human resource training initiatives and skills for renewable industries is publicly available in Pakistan.
The State Bank of Pakistan issued a financing scheme for renewables in 2016 which focused on the financing of renewables at a subsidised interest rate of 6% per annum. The latest statistics on the amount of investment through this scheme are not accessible. Furthermore, the large scale effect of indirect financial incentives and indirect sectoral measures upon the just transition of the workforce is yet to be investigated.
Pakistan has adopted various policies and laws for renewables in the energy sector. Market reforms in the electricity industry have largely influenced the ARE 2019 Policy. However, these measures in their current form are insufficient to respond to climate change issues. The de facto suspension of FiT regulations in Pakistan reflects the seriousness with which the government views such issues.
Besides disincentivising renewable energy, Pakistan has also placed on-grid procurement under the control of the IGCEP. Both disincentivisation and entry control by IGCEP make the sector less attractive for potential investment in renewables. Pakistan’s unresolved commercial issues also seem to be act as barrier to the successful harnessing of renewables.
Issues concerning system constraints for transmission in Pakistan and other issues relating to implementation will also be significant in considering any measures concerning renewables. Pakistan’s current position on renewables and its prevalent energy mix require substantial efforts to meet its CO2 targets.
ARE 2019 also fails to provide a clear perspective on dealing with a just transition of the workforce engaged in the current economy, as highlighted by COP21. The policy does not mention any clear principles and guidelines for just transition proposed by the International Labour Organisation. Official data concerning other steps (if any) for the training, reskilling and upskilling of the workforce in the fossil fuel sector is publicly inaccessible to accurately determine the impact of the policies on energy transition based on renewables.
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