Debating solar tariff written by Khurram Husain

Khurram Husain

LAST week I looked into the details of one Chinese solar power project that is struggling to be born in the Quaid-i-Azam Solar Park in Bahawalpur because at the last minute, Nepra, the power regulator and tariff-setting body, wanted to renegotiate the tariff downward. One third of the project is up and running while the remaining went into litigation and today awaits a second round of hearings to set its tariff.

I mentioned that the upfront solar tariff originally set in Pakistan was Rs17 per unit, later revised down to Rs11. I mentioned that the average tariff

around the world is closer to Rs4 these days. A lot of the feedback revolved around this large difference, between what we are offering to investors versus what they are able to get in other countries. So let me explain a little further.

Some people wrote in to say that I am citing the tariff as applicable in the first 10 years of the project’s life. After the first 10 years, the tariff drops to Rs8 for the remaining 15 years, meaning the average tariff for the project life, or the levelised tariff in the language of the power sector, is closer to Rs15.

Fine, but this distinction matters only to the investor and the government and is largely immaterial to the consumer. From the point of the view of the power consumer, the tariff in the first 10 years is what matters because, to put it simply, who cares what happens after a decade?

Tariffs for renewable energy are difficult to compare from one country to the next. There are various reasons for this.

Another set of responses revolved around my comparison with other countries. Tariffs for renewable energy are difficult to compare from one country to the next. There are various reasons for this. One is that renewable energy tariffs, like solar and wind, are dependent on natural conditions in any part of the world, which vary greatly. So in the case of solar, the irradiance levels or ambient temperatures will be different from one country to the next, which will impact how much electricity the same panels can generate.

Therefore, the tariff that the investor will expect will also be different depending on these conditions. This is not the case with thermal tariffs, those that use gas or oil to generate electricity. These are largely dependent on the cost of fuel, which is easily comparable from one country to the other because oil and gas have highly developed global markets where their prices are set.

Second, and perhaps more importantly, there are at least three different tariff regimes in renewable energy. There are upfront tariffs, feed-in tariffs, and tariffs derived from competitive bidding or on a cost-plus basis. It is difficult to compare these with each other, although one can look at the differences between each and then decide which path is best for any given country to induct renewables into its energy mix.

Upfront tariffs are what we use in Pakistan. The tariff-setting body basically announces an upfront tariff, saying whoever sets up a plant and provides electricity to the national grid will be paid this amount. In the case of the first solar upfront tariff, the amount was Rs17 (yes, for the first 10 years of the project’s life).

In the same year, Bangladesh announced an upfront solar tariff of Rs17 as well for a 200MW project. The Philippines has offered Rs20 as a solar feed-in tariff this year for a large number of projects totalling 526MW, although regulatory approval for them needs to be obtained, and this rate was on offer since 2012. There are a few other examples of higher tariffs offered around the world so the Pakistani offer was not unprecedented but nevertheless on the higher side.

Competitive tariffs are where the excitement is these days, where tariff bids are invited from investors and the lowest bidder wins. In India, they are getting bids at less than Rs7 (Pakistani) these days through this process, and Abu Dhabi and Chile have seen bids as low as Rs3. But Pakistan has had a bad experience with competitive bidding when it was tried in the early Shaukat Aziz years for thermal projects. There is a simple reason: people aren’t exactly clamouring to come invest in Pakistan.

Nevertheless, it is a fact that prices of solar power are dropping rapidly around the world. If you’re relying on competitive bids to attract investment in renewable energy, then you can easily take advantage of this trend. Feed-in tariffs for solar rooftop can also be modified with relative ease depending on the nature of the contract the utility has given to homeowners.

But upfront tariffs present a challenge under these conditions because, once issued, letters of interest come pouring in, and by the time the project nears completion the tariff has fallen. This puts the tariff-setting body in a bit of a conundrum: should they impose a revised tariff on all investors who are already in the pipeline based on the announced upfront tariff, or should they go ahead and honour their commitment to these investors, thereby burdening consumers with the abnormally high tariffs for more than a decade to come?

It’s not an easy choice, because if you scare away investors today by revising their tariffs midstream, it will be harder to find new quality investors on the revised tariff. People are liable to say that you are a risky party to deal with because you change your mind midcourse, once large costs have already been incurred.

So Pakistan’s entry into renewable energy has stumbled at the outset. According to one industry insider who wrote in, “[a]t one point there were as many as 3,000MW of letters of interest pending with AEDB but many of those developers have since lost interest and moved on. [Others] are stuck at various points in the pipeline. Currently, there are only four projects that have achieved financial close and two of those are QA Solar Park and Zonergy.”

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