Pakistan Looks to Wind Power in a Crisis

Pakistan’s national electric power regulatory authority has proposed a feed-in tariff for wind power projects of 14.66 US cents per kWh to run for 20 years. The tariff will be limited to projects of 5MW to 250MW that achieve financial close before the end of 2012.

A tariff of almost 15 US cents is one of the highest on offer in the world, according to Mr. Akhtar Ali, author of Pakistan’s Energy Development: the Road Ahead and a former Harvard Fellow on energy policy: “In India, the tariff is 3.5 rupees which is about 8 cents. Most tariffs around the world vary between 8 and 12 cents,” he says.

Pakistan first offered a tariff of 9.5 cents per kWh in 2006. No project developer took it up. Pakistan’s only installed wind farm, of 6MW capacity, was built by a Turkish wind farm developer for a tariff of a little under 12 cents. In June this year agreement was reached with FFC Energy for the construction of a 49.5MW on a higher tariff.

Speeding and streamlining the process

The tariff is at the center of a range of initiatives designed to make investment in wind power more attractive to domestic and external investors. There is a scheme to make leasehold land available for the life of projects at just $10 per acre. All electricity produced will be purchased. Help is available with environmental impact assessments and streamlined government permissions. The only contribution to government coffers would be a 7.5% tax on dividends declared during the life of the project and revenues from Certified Emission Reductions would be shared with the government.

The government decided to move away from calculating tariffs on a cost-plus basis for wind projects because the process was so time consuming. They felt it was one of the factors discouraging wind farm development. And the cost-plus approach was resulting in tariff offers of more or less 15 US cents but taking 6 months to do so, says Akhtar Ali. So why not standardise the rate and save time?

The government’s efforts are attracting interest. Recently NBT, a Norwegian power project developer, declared its intention to invest $1 billion to build 500MW of wind projects in Pakistan. They would complete the first 250MW within 18 months of reaching agreement with the government. Other European and Chinese companies are applying for wind power tariffs.

Wind projects can move from the permissions stage to generation in less than two years and that makes them very attractive to the Pakistani government. A mountainous country with considerable coastline, the government estimates that Pakistan possesses wind power generation capacity of over 350 GW. The initial development sites in Sindh State, near to the sea in southern Pakistan, provide excellent conditions combined with easy access and are near to major centers of population.

Energy Crisis

Pakistan is suffering from major power shortages. Electricity demand has doubled every ten years or so. The sector has had difficulty coping. Regular load shedding has led to violent riots followed by high-level government emergency energy summits. At present the country has power generation capacity of a little over 17GW, though actual production ranges between 12GW and 14.5GW according to Pakistan’s Express Tribune newspaper. While the government has been seeking to promote generation from natural gas, the country is highly dependent on oil. Over $10 billion are spent on oil imports each year and much of the oil-based generation is highly inefficient. The oil price rises of 2007-08 virtually wrecked the economy, according to Akhtar Ali.

Estimates of future electricity demand growth vary widely. Pakistan’s Planning Commission projected 135 GW will be needed by 2025. Akhtar Ali believes that 75 GW by 2030 is a more realistic assessment. That kind of generation capacity, together with the infrastructure to support it, will require major capital investment. Were sufficient resource provided, Pakistan has opportunities to expand its hydro power considerably and it has a reserve of low quality ‘Thar coal’ of more than 150 billion tonnes. The problem is that there simply is not sufficient resource. The country has been hit by natural disasters including major flooding and military spending particularly has grown rapidly in recent years.

Subsidy a necessary handicap

Electricity is an additional cost. Retail electricity costs are subsidised by the government to ensure the poor have access. However, the government has at times delayed or failed to pay the subsidy to the power producers. At times, that has left the power producers unable to purchase fuel, resulting in generation close downs. To add to the problems, transport and distribution losses average 25% nationally and collection of retail payments is patchy. The result is termed “circular debts”.

In this context, the government’s desire to offer an attractive tariff for wind power is understandable, but is it sustainable? “I don’t think they would be able to buy more than a few projects at this rate,” says Akhtar Ali. “This will increase the average cost of electricity substantially and there are already problems paying for electricity.”

What is needed, says Akhtar Ali is domestic wind turbine production. That is a theme repeated by Professor Muhammed Aslam Uqaili from the Department of Electrical Engineering at Pakistan’s Mehran University. Local production would help to keep costs down and it would help to cope with the risks of currency fluctuation. The professor believes that local manufacture in partnership with wind turbine technology leaders is the way forward.

The starting point for a healthy electricity system capable of investment in its own development is to eliminate as much of the losses and subsidy as possible. Transmission and distribution losses need to be brought down below 5%. Depending on the oil price level, the value of the losses is at times almost equal to the value of the government’s subsidy. Because of the low incomes of many in the country, all subsidy may not be eliminated, says Akhtar Ali, but there are areas where retail charges could rise. “The industrial tariff, for example, is 30% higher in India on average than in Pakistan.” The government has been making preparations for increases in retail prices. With elections on the horizon, Akhtar Ali does not believe those rises are imminent, but after the elections he expects them. In the meantime, Akhtar Ali expects take-up of the government’s wind tariff rates. “The risk somewhat dilutes the effect of the high tariff rate,” he says. “But on balance, I think there will still be sufficient residual incentive that would bring forward the local and foreign investors.”