adb technical assistance consultant’s report for pak are

Technical Assistance Consultants Report

Project Number: 34339-02 (TA 4881) April 2008

Islamic Republic of Pakistan: Renewable Energy Policy Formulation and Capacity Development of the Alternative Energy Development Board

Prepared by Hagler Bailly Pakistan and Mercados EMI, Spain For Alternative Energy Development Board Islamic Republic of Pakistan

This consultants report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed projects design.

Hagler Bailly PakistanAssociated with PA Consulting Group Technical, Management, and Economic Counsel

Ref:

L9164PRP

April 3, 2009

Mr Arif Alauddin Chief Executive Officer Alternative Energy Development Board (AEDB) 3, Street 8, F 8/3 Islamabad 44000 Subject: ADB TA 4881-PAK: Final Project Reports

Dear Mr Alauddin, It gives us great pleasure to submit the final reports for ADB TA 4881-PAK: Renewable Energy Policy Formulation and Capacity Building of AEDB, for which Hagler Bailly Pakistan and Mercados EMI, Spain were engaged by the Asian Development Bank under Contract No. S/70-128 on June 27, 2007. As you are aware, the draft final reports were submitted on December 20, 2008, and an extended review period was designated for receiving comments and feedback, which concluded on February 28, 2008. We hope the final reportstwo copies of which are enclosed herewith in printed form as well as on a CD, which also contains the RES-E pricing model developed for the studywill meet your requirements. I would also like to take this opportunity to thank you for the keen interest and support extended by AEDB for the completion of this important assignment, and hope that it will prove to be beneficial for the effective development of the renewable energy sector in Pakistan. Sincerely,

Dr Jamil Masud Director/NTL

Hagler Bailly Pakistan (Pvt.) Ltd. 39, Street 3, E7, Islamabad 44000, Pakistan Tel: (92 51) 261 0200-07, Fax: (92 51) 261 0208-09 [email protected], www.haglerbailly.com.pk

Hagler Bailly Pakistan

Encl.: 1. Formulation of Pakistans Renewable Energy Policy for On-grid and Off-grid Areas (R9FR1PRP, dated March 11, 2009) 2. AEDBs Capacity Assessment and Institutional Needs (R9CA1PRP, dated March 11, 2009) 3. Pakistan RES-E Model (ver. 1)

cc: 1. Dr Parvez Butt, Member (Energy), Planning Commission, Government of Pakistan, Islamabad (1 printed copy, 1 CD) 2. Mr Sean O'Sullivan, Director, CWID, Asian Development Bank (ADB), Manila (3 printed copies, 1 CD) 3. Mr Rune Stroem, Country Director, Asian Development Bank (ADB), Islamabad (1 printed copy, 1 CD)

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ADBTA4881PAK: RenewableEnergyPolicyFormulationandCapacityDevelopmentofAEDB

FinalReport

FormulationofPakistans RenewableEnergyPolicy forOngridandOffgridAreas

Hagler Bailly Pakistan and Mercados EMI, Spain

Asian Development Bank Manila

FinalReport

FormulationofPakistans RenewableEnergyPolicy forOngridandOffgridAreasContentsAbbreviationsandAcronyms.......................................................................................iii 1 Introduction.............................................................................................................1 2 ProposalforPakistansMediumTermOnGridRESEPolicy.....................................4 2.1 Background............................................................................................................4 2.2 ExtensionofREShorttermPolicy.........................................................................5 2.3 MediumTermRESEPolicyHighlights...................................................................5 2.3.1 TargetMarkets..........................................................................................5 2.3.2 ImplementationPeriod.............................................................................6 2.3.3 ConsistencyAcrossPolicies.......................................................................6 2.3.4 TariffIncentives.........................................................................................6 2.3.4.1 SelectedApproach....................................................................6 2.3.4.2 StructureofTariffs....................................................................7 2.3.4.3 IndexationforUpfrontTariffs...................................................7 2.3.5 TypeofContracts......................................................................................7 2.3.6 AllocationofNetworkInvestmentCosts ..................................................7 . 2.3.7 MandatoryREPowerPurchasing..............................................................7 2.3.8 DirectSales................................................................................................7 2.3.9 AllocationofCarbonCredits......................................................................7 2.3.10 LandandSiteAccess.................................................................................8 . 2.3.11 IncentivesOtherThanTariffs....................................................................8 2.3.12 RolesofInstitutions...................................................................................8 2.3.13 Institutional,Legal,andRegulatoryConsents...........................................8 2.3.14 ProceduralRequirements..........................................................................8 3 ProposalforPakistansMediumTermOffGridRESEPolicy....................................9 3.1 Background............................................................................................................9

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AsianDevelopmentBank TA4881PAK:FinalReport

FormulationofPakistansMediumTermRenewableEnergyPolicy forOngridandOffgridAreas

3.2 MediumTermOffgridREPolicyRecommendations............................................9 3.2.1 TargetMarkets..........................................................................................9 3.2.2 ImplementationPeriod...........................................................................10 3.2.3 RationaleandInstitutionalOrganization................................................10 3.2.4 TargetsandIncentives ............................................................................13 . 3.2.5 ProjectFunding .......................................................................................13 . 3.2.6 Pricing......................................................................................................13 3.2.7 IncentivesOtherThanTariffs..................................................................14 3.2.8 RolesofInstitutions.................................................................................14 3.2.9 Institutional,LegalandRegulatoryConsents..........................................14 3.2.10 PerformanceMonitoringandEnforcement............................................15 3.2.11 AllocationofCarbonCredits....................................................................15 AnnexI: PolicyforDevelopmentofRenewableEnergyforPowerGenerationin Pakistan(20092014)................................................................................17

AnnexII: AEDBPositionPaper1:ProposalforPakistansMediumTerm OnGridRESEPolicy.................................................................................57 AnnexIII: AEDBPositionPaper2:ProposalforPakistansMediumTerm OffGridRESEPolicy................................................................................67 AnnexIV: WorkingPaper1:RelevantInternationalExperienceinIncentivesfor RenewableEnergy:TheCaseoftheEU25andSelectedCountries...........79 AnnexV: WorkingPaper2:ReviewofPakistansShorttermPolicyfor DevelopmentofRenewableEnergy........................................................153 AnnexVI: WorkingPaper3:PakistansEnergySector:Market,Growthand SupplyOptions.......................................................................................189 AnnexVII: WorkingPaper4:StudyofCostsandPotentialPenetrationof OngridREunderDifferentPolicies........................................................241 AnnexVIII:WorkingPaper5:DevelopmentofOngridREinPakistan: MediumTermPolicyRecommendations................................................301 AnnexIX: WorkingPaper6:MediumtermOffgridRESEPolicyAssessment.........325

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AbbreviationsandAcronymsA AC ACGR ADB AEDB Ah AJK AKRSP API APL ARL bbl Bcfd BOI BOO BOO BP BPL BRIC BST Btu C&F CAA CapEx CBO CCGT CDM CER cf CFL CH4 CHASHNUPP CHP cm2 CNE CNG Ampere Alternatingcurrent Averagecompoundgrowthrate AsianDevelopmentBank AlternativeEnergyDevelopmentBoard Amperehour AzadJammuandKashmir AgaKhanRuralSupportProgramme AmericanPetroleumInstitute AsiaPipelinesLimited AttockRefineryLimited Barrel Billioncubicfeetperday BoardofInvestment Build,own,andoperate BuildOwnOperate Basispoint Basicpovertyline Brazil,Russia,India,andChina Bulksupplytariff Britishthermalunit Carriageandfreight CivilAviationAuthority CapitalExpenditures Communitybasedorganization Combinedcyclegasturbine CleanDevelopmentMechanism CertifiedEmissionsReduction Cubicfeet Compactfluorescentlamp Methane ChashmaNuclearPowerPlant Combinedheatandpower Squarecentimeter ComisinNacionaldeEnerga Compressednaturalgas

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CO2 COD CP CPI CPPA DC DDGS DGG DGM DGO DGPC DISCO DNA DSM DVC E&P E10 EAC EAD ED EDB EHV EIA ENERCON EPA EPC EPD EPE ERTIC EU FATA FBR FEC FFV FIT FO FOB

Carbondioxide Commercialoperationsdate Contractprice ConsumerPriceIndex CentralPowerPurchasingAgency Directcurrent DecentralizedDistributionGenerationSystems DirectorateGeneral,Gas DirectorateGeneral,Mineral DirectorateGeneral,Oil DirectorateGeneral,PetroleumConcessions Distributioncompany Designatednationalagency Demandsidemanagement DamodarValleyCorporation Explorationandproduction 10%ethanolblendedgasoline ElectricityAuthorityofCambodia EconomicAffairsDivision Exciseduty EngineeringDevelopmentBoard Extrahighvoltage Environmentalimpactassessment NationalEnergyConservationCentre EnergyPurchaseAgreement,or EnvironmentalProtectionAgency Engineering,procurement,andconstruction EnvironmentalProtectionDepartment EnergyPolicyforEurope ProgramadeElectrificacinRuralyTecnologasdelaInformaciny Comunicacin EuropeanUnion FederallyAdministeredTribalAreas FederalBoardofRevenue Finalenergyconsumption Flexfuelvehicle Feedintariff Furnaceoil Freightonboard

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FX FY GDP GEF GENCO GES GHG GoP GSA GTZ GW GWh ha HDIP HDR HEB HH HOBC HSD HSE HSFO HV I&P IA ICT IEE IFEM IFI IGCC IIE IPDS IPP IREDA IRR ISCC JP KANUPP kcal

Foreignexchange Financialyear Grossdomesticproduct GlobalEnvironmentFacility Generationcompany Growthenvironmentscore Greenhousegas GovernmentofPakistan GasSalesAgreement GesellschaftfrTechnischeZusammenarbeitGmbH Gigawatt Gigawatthour Hectare HydrocarbonDevelopmentInstituteofPakistan Hotdryrock HydroElectricBoard Household Highoctaneblendingcompound Highspeeddiesel Health,safety,andenvironment highsulfurfueloil Highvoltage Irrigationandpower ImplementationAgreement IslamabadCapitalTerritory,or informationandcommunicationtechnology InitialEnvironmentalExamination Inlandfreightequalizationmargin Internationalfinancialinstitution Integratedgasificationcombinedcycle Initialenvironmentalexamination Irrigation&PowerDepartment,Sindh Independentpowerproducer IndianRenewableEnergyDevelopmentAgency Internalrateofreturn IntegratedSolarCombinedCycle Jetpropulsion KarachiNuclearPowerPlant Thousandcalories

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KESC kg kha km kT kV kVArh kW kWe kWh kWp KWSB lb LDO LIBOR LMM LNG LoI LoS LPG LRMC m MC MGCL MMscfd MMTPA MNES MoE MoFR MOGAS MoPNR MoST MoWP MoWP MPC MS MSB

KarachiElectricSupplyCorporation Kilogram Thousandhectares Kilometer Thousandtonnes Kilovolt KilovoltAmperereactivehour Kilowatt Kilowattelectrical Kilowatthour Kilowattpeak KarachiWaterandSewerageBoard Pound Lightdieseloil LondonInterbankOfferedRate Locallymanufacturedmachinery Liquefiednaturalgas LetterofIntent LetterofSupport Liquefiedpetroleumgas Longrunmarginalcost Meter Marginalcost MariGasCompanyLimited Millionstandardcubicfeetperday Milliontonnesperannum MinistryofNonConventionalEnergySources MinistryofEnvironment MinistryofFinanceandRevenue Motorgasoline MinistryofPetroleumandNaturalResources MinistryofScienceandTechnology MinistryofWaterandPower MinistryofWaterandPower Marginalprivatecost Motorspirit Marginalsocialbenefit

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MSC MSW MT MTDF MTOE MW MWe MWh NA NAPWD NARC NEPRA NGO NHA NOx NPO NREL NRL NTDC NTRC NWFP O&M OBA OECD OGDC OGEA OGEAC OGRA OMC OpEx P&D PAEC PakEPA PARC PARCO PASMA PC

Marginalsocialcost,or MediumTermServiceContracts Municipalsolidwaste Metrictonne MediumTermDevelopmentFramework Milliontonnesofoilequivalent Megawatt Megawattelectrical Megawatthour NorthernAreas,or Notapplicable/available NorthernAreasPublicWorksDepartment NationalAgricultureResearchCouncil NationalElectricPowerRegulatoryAuthority Nongovernmentalorganization NationalHighwayAuthority Nitrousoxides NationalProductivityOrganization USNationalRenewableEnergyLaboratory NationalRefineryLimited NationalTransmissionandDispatchCompany NationalTransportResearchCentre NorthwestFrontierProvince Operationsandmaintenance Outputbasedaid OrganizationforEconomicCooperationandDevelopment OilandGasDevelopmentCorporation OffgridElectrificationAgency OffgridElectrificationAccount OilandGasRegulatoryAuthority Oilmarketingcompany Operationalexpenditure PlanningandDevelopment PakistanAtomicEnergyCommission PakistanEnvironmentProtectionAgency PakistanAgricultureResearchCouncil PakArabRefineryCompany PakistanSugarMillsAssociation ProjectCommittee

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PCRET PCSIR PCU PED PEPCO PER PHA PIAC PIB PIDC PLF PMD PNAC PNRA POE PPA PPC PPDB PPDCL PPEPCA PPIB PPL PR PRL PROINFA PSDP PSO PSQA PTC PV PWD R&D R&M RE REC RED REDB REDSIP

PakistanCouncilforRenewableEnergyTechnologies PakistanCouncilforScientificandIndustrialResearch ProjectCoordinationUnit Primaryenergydemand PakistanElectricPowerCompany RuralElectrificationProgram(Chile) PakistanHousingAuthority PakistanInternationalAirlinesCorporation PakistanInvestmentBonds PakistanIndustrialDevelopmentCorporation Plantloadfactor PakistanMeteorologicalDepartment PakistanNationalAccreditationCouncil PakistanNuclearRegulatoryAuthority PanelofExperts PowerPurchaseAgreement PrivatePowerCell PunjabPowerDevelopmentBoard PunjabPowerDevelopmentCompanyLimited PakistanPetroleumExplorationandProductionCompaniesAssociation PrivatePowerandInfrastructureBoard PakistanPetroleumLtd. PakistanRailway PakistanRefineryLimited ProgramadeIncentivosFontesAlternativasdeEnergiaEltrica PublicSectorDevelopmentProgramme PakistanStateOilCompany PakistanStandardsandQualityControlAuthority Productiontaxcredit Photovoltaic PublicWorksDepartment Researchanddevelopment Renovationandmodernization Renewableenergy RuralElectrificationCompanies RenewableEnergyDevelopment RenewableEnergyDistributionBackbone RenewableEnergyDevelopmentSectorInvestmentProgram

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REF RES RESE RET RFP RGGVY ROE RON RoR RoW RPS SAARC SBP SC SCA Scf SEB SECP SERC SHS SHYDO SMEDA SNGPL SO2 SOx SRO SS SSGCL SWERA T&D TA TCE Tcf TPA TRANSCO TWh UNEP US

RuralElectrificationFund Renewableenergysource Renewableenergysourcedelectricity Renewableenergytechnology Requestforproposals RajivGandhiGrameenVidyutikaranYojana Returnonequity Researchoctanenumber Runofriver RightofWay Renewableportfoliostandard SouthAsianAssociationforRegionalCooperation StateBankofPakistan Selfconsumption SindhCoalAuthority Standardcubicfeet StateElectricityBoard SecuritiesandExchangeCommissionofPakistan StateElectricityRegulatoryCommission Solarhomesystem SarhadHydelDevelopmentOrganization SmallandMediumEnterprisesDevelopmentAuthority SuiNorthernGasPipelinesLtd. Sulfurdioxide Oxidesofsulfur Statutoryregulatoryordinance Smallscale SuiSouthernGasCompanyLtd. SolarandWindEnergyResourceAssessment Transmissionanddistribution Technicalassistance TechnicalControlEntity Trillioncubicfeet Tonnesperannum TransmissionCompany Terawatthour UnitedNationsEnvironmentProgramme UnitedStates

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VC VEI W WACC WAPDA WHS WPI WTE WTG WTP

Variablecost VillageElectrificationInfrastructure Watt Weightedaveragecostofcapital WaterandPowerDevelopmentAuthority Windhomesystem WholesalePriceIndex Wastetoenergy Windturbinegenerator Willingnesstopay

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1 IntroductionRenewable energy development in Pakistan has been conceived under a phased, evolutionaryapproachconstitutingastrategicpolicyimplementationroadmapadopted by the Government of Pakistan (GoP). The initial phase (i.e., the shortterm) has involvedlenientpolicymeasuresandstrongincentivesinordertoattractinvestmentin this relatively new business area, remove existing barriers to project implementation, andhandholdreasonablesizedpioneeringprojectsthroughtosuccessfulcommercial operation.1 The goal of this report, the final output under the Asian Development Bank (ADB) TA 4881PAK:RenewableEnergyPolicyFormulationandCapacityDevelopmentofAEDB,is tohelpdesignasoundapproachforthedevelopmentofamediumterm(i.e.,fiveyear) REpolicyforPakistanthatwouldsucceedthecurrentshorttermREpolicyin2009and helpcreateaconduciveenvironmentforthegrowthofthedomesticREindustrytoat least2014,anduponwhichfuturepolicydirectionscouldthenbeevolved. In order to develop the new policy proposal, the TA consultants have completed the followingtasks:

An assessment of key challenges, threats, and opportunities faced by RE and relatedtechnologiesinPakistan.Thisassessmentwascarriedoutbyanalyzing the potential of RE supply by comparison with alternative (conventional) technologies. AreviewoftheexistingREinstitutionalframeworkinPakistan,identifyingthe current and future roles of all stakeholder institutions which could have an importantroleorimpactinREpromotionorregulationinthecountry. A critical review of past and present policies (especially the 2006 RE Policy), strategies, and incentive mechanisms currently in place, and success in promoting renewable energy development in Pakistan achieved thus far. Where problems or bottlenecks were detected or envisaged in this regard, possiblesolutionsoractionstoovercometheseimpedimentswereproposed. A medium term policy package of guidelines, regulations, and incentives for gridconnected2 RE power generation and sale from priority, feasible RE technologies. Policy and action guidelines for the development and implementation of dispersed RE use in standalone or isolated grid configurations, including programmatic,sustainableruralREenergysupplyschemes.

1

Under the GoPs Policy for Development of Renewable Energy for Power Generation, 2006, issued by the AlternativeEnergyDevelopmentBoard(AEDB),hereinafterreferredtoasthe2006REPolicy. ForthepurposesofREpolicyterminology,thetermgridismeanttoimplyeithernationalorregionalelectricity T&DnetworksoperatedbytheNTDC/CPPAand/orDISCOsof11kVorhighervoltage.Isolated,communitybased localdistributionnetworksareconsideredoffgrid.

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AsetofcomparativeeconomicandpricingcriteriafordeterminingoptimumRE ratesforgridconnectedapplications,accountingforexternalitiesandmarginal avoidedcostsofconventionalalternatives. Determination of overall institutional arrangements at the federal, provincial, andlocallevelsrequiredfortheproperimplementationofpolicyandregulatory framework, with welldefined capacity requirements, institutional roles, and proceduralarrangementsthateliminateambiguity,delays,anddiscretionfaced byinvestorsandendusersinroutineREapplicationandoperation.

Thisreportisorganizedasfollows:

Themainbodyofthereportincludesashortsummaryofthepolicyproposal that was suggested by the consultants, discussed with stakeholders at a national workshop, and presented in detail to the AEDB, which provided its consentintheformoftwopositionpapers. AnnexIcomprisesproposedtextforadraftpolicydocument,forconsideration and approval by the Government of Pakistan as its official mediumterm RE policystatement. AnnexesIIandIIIcontainthepositionpapersissuedbytheAEDB,indicatingits consenttotheproposedpolicyapproach. Annex IV presents the consultants evaluation of the development (and potential) of renewable energy resources in Europe and selected emerging countries (China, India, and Brazil), focusing on current policy schemes for promoting renewable energy sources, specifically for electricity generation. It alsocontainsananalysisofvariousincentivemechanismsandtheirimpacton thedeploymentofdifferentREtechnologies,withaspecialemphasisonwidely developedoptions,suchaswind,hydro,biogasandbiomass,whichcanoperate onagridconnected,commercialscale. AnnexVpresentstheconsultantsevaluationofPakistanscurrent,shortterm RE policy 2006 (applicable over 2007 to 2009) for the development of renewable energy for ongrid power generation, including a comprehensive analysisoftheincentivestructureitcreatesanditsperformanceregardingthe mainREsourcesittargets.ThefocusoftheshorttermpolicyisonREoptions amenabletoimmediatecommercialdevelopment,i.e.,smallhydro,wind,and biomassbased power generation. This phase is marked with beneficial risk sharing and attractive tariffs for developers so as to enable a reasonable generation capacity to be installed as firstofkind RE projects in the private sector,thatcanthenserveassuccessfulbusinessandtechnologyassimilation demonstrators. Annex VI presents an overview of Pakistans energy sector and its organizationalstructure,prospectsforitsgrowthandanticipatedconstraintson primary supplies, and possible future options and strategies that the country may adopt in order to provide for the energy needs of a rapidly developing economy. The purpose of this study is to provide estimates of anticipated

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growthinthecountrysenergydemand,acomparativeevaluationofdifferent conventionalenergysupplyoptionsavailabletoit,andthecircumstancesunder whichsuchneedscanbemet,especiallyintermsofelectricalpower.

AnnexVIIpresentsaneconomicassessmentofrenewableenergydeployment optionsinPakistan,inordertofinetunethetoolsrequiredforthedesignofa successful mediumterm RE policy for the country. More specifically, the objective of this annex is twofold: firstly, to evaluate the cost structures of renewable energy sourcedelectricity (RESE) in Pakistan, classifying different renewablesourcesbythemarginalcostoftappingthem;secondly,toanalyze thesocialandprivatecostsandthepotentialpenetrationofeachtypeofRESE underdifferentpolicyenvironments.Themodelprovidedinthispapershould allow policy makers to move forward on a more sound analytical basis that allowsPakistantosetfeedintariffs,basedonavoidedcostanalysis,forongrid RESE. AnnexVIIIpresentstheconsultantsdraftproposalforthedesignofamedium term policy for the development of ongrid RESE in Pakistan. This proposal takesintoaccounttheanalysespresentedinAnnexesIVtoVII,andhasbeen the basis for stakeholder discussions and development of the AEDB Position PaperonmediumtermongridRESEdevelopment. AnnexIXpresentstheconsultantsassessmentandproposalforthedesignofa medium term policy framework for the development of offgrid RESE in Pakistan.Thisanalysistakesintoaccountsomecriticalissuesregardingoffgrid renewableenergy services, selected relevant international experience, and an assessmentoftheoverallcostsimpliedintheensuingpolicyrecommendations. Thisdocumentpresentsgeneralguidelinesforformulatingadetailedmedium term offgrid RESE policy approach for Pakistan that has been the basis for stakeholder discussions and development of the AEDB Position Paper on mediumtermoffgridREdevelopment




2 ProposalforPakistansMediumTermOnGridRESE Policy2.1 BackgroundOurstudies(seeAnnexVII)showthattheeconomicpenetrationofongridREpowerin Pakistanshouldbearound17TWhperannumby2020.Thiswouldbeapproximately7% of total gridbased electrical power generation expected for that year. Almost 60% of this future RE share would be comprised of hydel plants that are much cheaper than conventional fossil fuelbased generation. The fact that any capacity approaching this shareisnotcurrentlyunderdevelopmentindicatesthatsomestrongbarrierstoRESE investmentmayexistinthecountry,especiallyifweconsiderthatthemarginalcostof RESEisaboutUSD75/MWhwhilethecostofgenerationbasedonFOismorethanUSD 125/MWh. There therefore appears to be a very strong economic signal favoring the development of RE, and it can thus be concluded that some impediments are responsibleforthecurrentlacklusterstateofREdeploymentinthecountry. A national ongrid RESE policy should be based on a social assessment of costs and benefits.Theanalysisofnaturalpenetrationbasedonprivatecostsalonerepresentsa limitedsubsetofsuchananalysis.Marketfailuresappearhamperthedevelopmentof about8TWhperyearofREin2020,andsoaneconomicincentivemechanismneedsto beputinplace(assumingthatallotherbarrierswillhavebeenremovedbythen).Under social cost assessment, hydel, biomass, biogas and wind energy plants are required to generate,inordertoreplaceCCGTsasamatteroffact,allFObasedgenerationwould need to be replaced, as well as around 15% of gasbased generation, by 2020. If the policy to achieve theseresults is properly defined and implemented, the social wealth (totalsurplus)thatmaybecreatedinPakistanwouldbeaboutUSD2.1billionperyear. Several symptoms exist that indicate potential problems in achieving these RE penetration goals unless policy elements are suitably adjusted (see Annex VI). One of the critical issues is the existing dual mechanism offered by the regulator, NEPRA, for settingtariffsforRESEprojectsinPakistan.Intermsofitsformulation,thecurrenttariff system for unsolicited RE proposals is based on a costplus approach. The costplus computation requires a casebycase determination of the applicable tariff for every singleproducer.Fromtheregulatorspointofview,theadvantageofthismethodology is its ability to reduce inframarginal rents (i.e., producers surplus) down to zero and, therefore, maximize the consumers surplus. Nevertheless, this approach presents severalmajorshortcomings,whichcanbesummarizedasfollows:

Investors, taking advantage of asymmetries in projectrelated information access, can game against the mechanism to enhance their inframarginal rents. It decreases the financial incentive to invest in RESE technologies, as developers are explicitly deprived of most of the inframarginal rents (the previouspointnotwithstanding).




It increases in the administrative burden in processing projects and verifying thecoststructuresineachcase.

This approach has been adopted in Pakistan so far in order to help reduce the developers risk, since it guarantees an ROE of at least 15%. While it is true that this methodreducessomeoftheriskstothedeveloper,itisalsotruethatiteliminatesany additionalincentivetodevelopthesetypesofprojectsandcanmaketariffnegotiations protracted and contentiouswhich appears exactly to have happened with respect to theREIPPexperienceinPakistansofar. Additionally, available international evidence shows that feedin (upfront) tariffs are perhaps the most successful incentive mechanism for developing RE capacity. International experience (see Annex IV) also shows that grid access, administrative issues, and uncertainties with respect to the incentive mechanisms are as relevant as tariffsasfarasfosteringREcapacityinstallationisconcerned.Moreover,REtechnology wise feedin tariff would offer the most economical, leastcost power generation mix forthecountryinthemediumtermandbeyond,andwouldmaximizethesocialsurplus created within society through the avoided costs of more expensive alternatives. Such fixed, nonnegotiable tariffs would help circumvent the prolonged rate negotiations, introduce an element of competition and urgency in project implementation, ensure thatallcommerciallyfeasibleREtechnologiesaresimultaneouslydeveloped,providean economicallyviablebasisfortheregulatortodeterminesustainableREpricing,andhelp prioritizeavailableleastcostandbestsiteREdevelopmentonafasttrack.

2.2

ExtensionofREShorttermPolicy

Thisreportrecommendsthattheshorttermongrid2006REPolicyshouldbeofficially extendedto2009fromitsoriginallystipulatedexpirydateofJune31,2008,asappears defactotobethecase.Thisisrequiredinordertoallowprojectsthatarepresentlyat an advanced processing stage to achieve financial closure under existing policy stipulations, as well as to afford a reasonable timeframe for stakeholders to confer about and familiarize themselves with the medium term policy approach proposed herein.

2.32.3.1

MediumTermRESEPolicyHighlightsTargetMarkets

The scope of this policy is gridconnected power generation fueled by renewable resources. Ongrid RESE includes the following technologies, for individual installed projectcapacitygreaterthan1MW:

Smallhydroupto50MW PVandsolarthermalenergyforpowergeneration Windpowergeneration MunicipalsolidWTEpower Landfillmethanerecovery,and




2.3.2

Bioenergy, resulting from anaerobic biogas digestors, pyrolytic biomass gasification,cofiring,cogeneration,etc. ImplementationPeriod

ThemediumtermRESEpolicyshouldbeapplicablefrom2009toatleast2014,aswe recognize that incentivesbased policies require at a minimum five years of sustained promotion in order to be successful; policy incentives must remain stable and assured over a reasonably extended period in order for investor confidence to build up, supportive institutional capacity to develop, and implementation bottlenecks to be graduallyandsystematicallyremoved. 2.3.3 ConsistencyAcrossPolicies

An RESE project that achieves financial closure before the onset of the forthcoming mediumtermpolicyphaseshouldcontinuetobeguaranteedalltheincentives,terms, andconditionsdefinedinthepresentlyapplicable2006REPolicyoverthetenureofits respectivePPA.ThisapproachensurestheconsistencyandstabilityofanREdeployment climatefromtheperspectiveofbothinvestorsandpowerpurchasers,aswellasother relevantstakeholders. 2.3.4 TariffIncentives

2.3.4.1 SelectedApproach OurproposalfordeterminingbulkREbasedpowerprocurementtariffsis:

Set upfront tariffs for each RESE technology based on the avoidedcost for thosetechnologieswhosemarginalcostislowerthantheavoidedsocialcost. NEPRA will need to set technologywise feedin tariffs based on the characteristics of the selected RESE technologies (supply curve analysis), bounded by the range obtained from the use of private and social avoided costs.Thismeansforsmallscalehydel,biomass,biogas,andwind,tariffswould rangebetweenapproximateUSD75100/MWh(seeAnnexVII). Setupfronttariffsforeachtechnologybasedonthemarginalcostofproviding thequotasetbytheGoPforthosetechnologieswhosemarginalcostishigher than avoided social cost. An upfront tariff is also proposed to foster the deploymentofanyspecificREtechnologythatpromisesadditionalbenefitsto society;however,agoodpolicyshouldpreventareasonable,justifiabletarget quotaforthem(definedintermsofinstalledMW)frombeingovershot. DiscontinuethepresentsystemofnegotiatedREpowerpurchasetariffs. Thecompetitivebiddingalternative(i.e.,tendering)mustbekeptasanoption for only those technologies whose marginal cost is higher than the avoided socialcost.




2.3.4.2 StructureofTariffs Upfront tariffs should be denominated in Pakistan Rupees/kWh. The upfront tariffs shouldbebasedonaonepartpricingapproach(i.e.,asingleenergycharge).Twopart tariffs (capacity payments plus energy payments) are difficult for most RESE technologies,asmostofthemcannotguaranteecapacityavailability. 2.3.4.3 IndexationforUpfrontTariffs Upfronttariffsmustbeadjustedbasedonlyonlocalcurrencyvariations.Theindexation of tariffs with the US dollar exchange rate should be automatic, carried out on a six monthly basis. Another possibility presently is to use a reference currency basket comprisingofbothUSDollarsandEuros(e.g.,ina50:50ratio). 2.3.5 TypeofContracts

REIPPprojectsforsaleofallpoweroutputtothegridsystemshallbeimplementedon the basis of Build, Own and Operate (BOO) contracts valid for a period not less than 20years. 2.3.6 AllocationofNetworkInvestmentCosts

TheconstructionoftransmissionlinesforevacuationofpowerfromanyREIPPshould be the responsibility of the NTDC, KESC or a DISCO (depending on the location and supplyvoltageoftheproject)ifthelengthoftheconnectionrequiredfromtheprojects outgoingbusbartoexistinggridinstallationsisshorterthan20km,unlesstheIPP,ofits own choice, undertakes to install such infrastructure on a mutually agreed upon transmissionchargewiththeNTDC.TheNTDCshouldbearallexpensesassociatedwith powerbalancingonthegridtoaccommodateprioritydispatch. 2.3.7 MandatoryREPowerPurchasing

As long as the CPPA exists and is carrying out its activities, all contracts for power generation from RE should be signed by the CPPAexcepting direct sales. After the CPPA eventually ceases its activities, neither distributors nor transmission companies should have the right to reject, in part or in entirety, any contract signed previously between the CPPA and an RE power generator. NEPRA should establish a future methodology for compensating those DISCOs/TRANSCOs that are forced to accept contractsatastipulatedRESEfeedintariff. 2.3.8 DirectSales

RE power producers should be allowed to enter into direct (bilateral) sales contracts with eligible enduse customers. In this case, prices should not require approval by NEPRA. 2.3.9 AllocationofCarbonCredits

REinvestorsshouldassumetheentirerisksandbenefitsofqualifyingforandobtaining CERsfortheirRESEprojects.Thecurrentsharedallocationofcarboncreditsunderthe 2006 RE Policy is unnecessarily complicated and was considered necessary under the prevailing costplus tariff methodology. Additionally, the allocation of future CERs toHagler Bailly Pakistan | Mercados EMIR9FR1PRPFINALREPORT:11/03/09 7



theREdeveloperwouldactasastrongerfinancialincentive,especiallyforthoseprojects wherecostsareclosertothefixedfeedintariffsandfinancialreturnsrelativelylower. 2.3.10 LandandSiteAccess Thefederal,provincial,andAJKgovernmentsshallfacilitateinvestorsinacquiringland or RoW for project development, as well as in obtaining site access. However, the primary responsibility for acquiring land and site access should rest with the project sponsors. 2.3.11 IncentivesOtherThanTariffs Weunderstandthatcurrentgeneralincentives,includingsovereignriskguarantee,the financialregime, and the fiscal regime, as defined in the2006 RE Policy,are adequate andshouldbecontinuedintothemediumtermpolicyregimeaswell. 2.3.12 RolesofInstitutions We do not recommend major changes in the roles that each key RE stakeholder institution presently has defined for itself in Pakistan. However, some clarification of AEDBandNEPRArolesmaybetothebenefitofthepolicy. Westronglybelievethatthedevelopmentofcompetentprefeasibilitystudiesiscritical for the development of future RE projects in Pakistan. The cost and complexity of undertakingsuchstudiesiscurrentlyamajorbarriertoseriousinvestorinterestinsuch schemes,andthereforetheAEDBandprovincialgovernmentsmusttakealeadingrole inidentifyinganddevelopingsuchbankablestudies. The proposal requires NEPRA to define feedin tariffs, as well as to approve the applicationofthemtospecificREprojects,andtoadjustgridanddistributioncodesin ordertofacilitateprojectdevelopmentandoperation. 2.3.13 Institutional,Legal,andRegulatoryConsents Wejudgethatthegeneralexistinginstitutional,legal,andregulatoryconsentsrequired prior to the approval and implementation of RE IPP projects need not be changed, except for simplified permitting provisions for smallscale plants (i.e., less than 5 MW capacity). 2.3.14 ProceduralRequirements We believe that the processing schedule foreseen in the 2006 RE Policy is adequate. However, it must be adjusted to the tariff regime that is instituted, and should be reducedinoveralldurationtotheextentreasonablypossible.




3 ProposalforPakistansMediumTermOffGridRESE Policy3.1 BackgroundHistorically,thepredominantmodelforelectrificationindevelopingcountrieshasbeen grid extension and/or conventional energypowered minigrids developed by large, stateowned utilities. Recently, the spectrum of electrification models has widened, includingalonglistofoffgridsolutions,suchasWHSsandSHSs,amongstmanyothers. Annex B of Pakistans 2006 RE Policy provides only a brief set of guidelines for the developmentofsmalloffgridhydelprojects,withsomeprovisionsapplyingtootherRE technologies as well. At present, there is no national policy for offgrid electricity investments. Additionally, the guidelines assign identical roles to the AEDB, provincial, and AJK governments for RESE project implementation, and this overlapping can be confusingandcounterproductive. Several offgrid RE projects have recently been initiated in Pakistanwith varing outcomesand theAEDB has been actively participatingin such efforts. Probably, the most ambitious project has been the Khushaal Pakistan program (2001), which envisaged 100% electricity coverage by the end of 2007, a target which was obvioulsy not accomplished. Currently, the most active project is the Roshan Pakistan program. Theobjectiveistoprovideelectrificationservicesto7,874isolatedvillages.Sofar,400 villageshavebeenelectrifiedthroughthisprograminSindhandBalochistanprovinces. AcriticalissueinthecurrentruralREdeploymentstrategyinPakistanistheabsenceofa clear demarcation of offgrid areas and/or isolated/scattered populations. Such a definition should define the geographical areas for which the grid extension would remain uneconomical into the near future (say, next decade). This is an essential first stepindesigningaruralelectrificationproject,asitprovidesameansforunderstanding keycharacteristicsoftheunelectrifiedvillagestobetargeted.Itwasestimatedthatin 2006,approximately40,000villagesinthecountrylackedelectricityservicesandabout 8,000outofthemcouldonlybeelectrifiedbasedonoffgridsolutions.Despitethelack of proper data, it can be estimated that for electrifying 8,000 villages and scattered populations, USD800 million would be required (see Annex IX); in case some of the villagesplannedtobeelectrifiedbygridextension(around32,000)alsorequireoffgrid solutions,thefinancialcostwouldbeevenhigher.

3.23.2.1

MediumTermOffgridREPolicyRecommendationsTargetMarkets

Thetargetpopulationisthatlivinginoffgridvillages.3Thesevillagescanbesupplied electricity, and eventually drinking water, based on RE generation. The AEDB shall be 3

For purposes of this policy, offgrid settlements are defined as those that are currently unelectrified, are not includedinanynationalorregionalgridexpansionplanforthenexttenyears,andarelocatedmorethan20km fromexistingpowergrid(s).




responsible for elaborating a database of all villages falling under this definition, in collaborationwithprovincialandlocalgovernmentsandelectricityutilities. REtechnologiesincludedinthisportfolioconsistof,ataminimum:

Microorminihydel Hybridsystems,inwhichatleastoneREsourceisemployed SolarPVandthermal Microorminiwindsystems Bioenergyresultingfromanaerobicgasdigestors,pyroliticbiomassgasification, cogeneration,etc.

Grid expansion is outside the scope of this policy, as is any RE project that plans to electrifyavillagewithaninstalledgenerationcapacitylargerthan1MW. 3.2.2 ImplementationPeriod

Theimplementationperiodofthispolicyshallbe2009to2014. 3.2.3 RationaleandInstitutionalOrganization

OffgridRESEbasedelectrificationcanbedevelopedeither:

Directly by provincial and/or local governments on a voluntary basis and/or drivenbysocialplayerswithoutrecoursetonationalsubsidies,or Via nationalprovincial coordination, in which provincial governments4 competeforfederalgovernmentassistancetofinancetheiroffgridprojects.

Under the first mechanism, provincial governments would be fully in charge of developing the electrification projects within their respective territorial jurisdictions using their own funds, or contributions and investments from the private sector, civil society,and/orthetargetcommunities. Underthesecondalternative,acoordinatednationalplanwouldtobesetuptoassign competencestothedifferentpartiesinvolvedinitsexecution,inordertomaximizetheir operational potential and capabilities for achieving effective and efficient offgrid electrification. The main characteristics and tasks for stakeholders in this respect are summarizedinExhibit1.

4

For the remainder of the document, the term provincial shall refer to all distinct administrative regions of the country, including the Punjab, Sindh, Northwest Frontier Province (NWFP), Balochistan, Northern Areas (NA), IslamabadCapitalTerritory(ICT),FederallyAdministeredTribalAreas(FATA),andAzadJammuandKashmir(AJK).




Exhibit1:ProposedFederallyAssistedOffgridRESEDeploymentApproachState-owned banks Ministry of Water and PowerSoft loans

OGREA budget request OGREA

AEDB

Assessment Off-grid Villages and scattered population

National off-grid project Portfolio Management

Guidelines for Authorizations

OGREA settlement

Provincial Governments (REAs) in coordination with local governments

Project Proposals

Awarded Projects

Tendering Procedure

Authorization issuance and set tariffs

Performance monitoring

Developers and operators

Priv. Investors NGOs Cooperatives Individuals Others

Project Execution

IFIs and donors

Financial and technical assistance

Themainfeaturesoftheregulationproposedareasfollows:

The AEDB will act as the national offgrid RESE program coordinator and will decide the allocation of national funds to different offgrid electrification projectsbasedonrulespreviouslydefinedbytheGovernmentofPakistanand agreeduponbyallprovinces/units; TheAEDBwillcreateandupdate,withtheassistanceofthepowerutilitiesand provincialgovernments,acompleteassessmentoftheunelectrifiedvillagesand scatteredcommunitiesabletobesuppliedbyRESEtechnologieswhichshallbe approvedastheoffgridelectrificationtargetpopulationforthemediumterm (20102014)bytheFederalCabinet;5 Provincial governmentsthrough their respective Offgrid Electrification Agency (OGEA)6will be the key stakeholders for promoting offgrid rural electrificationwithintheirprovincialborders.Basedonthelistofannualtarget villages/populations developed by them in collaboration with the AEDB and approved by the latter, each OGEA will prepare and submit to the AEDB a

5

Any village and/or scattered population not included in the approved list finalized by the AEDB will be excluded fromtheoffgridelectrificationprogramandnotbeeligiblefortheprovisionsofthepresentpolicy. Oranyrelatedagency/departmentdesignatedassuchbytheprovincialgovernmentorregionaladministrationfor thedevelopmentofalloffgridruralelectrificationprojectsinitsterritorialjurisdiction.

6




villagespecific electrification project in which, at least, the following aspects shallbecovered: o Socioeconomiccharacteristicsoftargetvillage/scatteredpopulation. o Studyonpowerdemandpotentialandprojectedsupply. o Generationtechnology/iestobedeployed. o Numberofhouseholdstobeconnected. o Implementationperiod. o Totalcostoftheproject,segregatedbetweenCapExandOpEx. o Detailedcashflowprojectionsfortheproject. o Socialbenefitsduetoprojectimplementation. o Qualityofservicecharacteristics.

Projects should include, to the extent feasible, domestic equipment, water installations,oranyotherfacilitythatcouldexpeditesocialdevelopment. ProjectsmuststrictlyfulfilltheAEDBsguidelinesforproperbenchmarking,and analysis. The AEDB will document simplified procedures for project approval, includingcriteriaforrankingtheprojectsandthedefinitionoftheparameters needed. Basedontheabove,theAEDBwillcreateanannualprojectportfolioorganized according to a merit order based solely on a standardized social costbenefit analysisoftheprojects. Once a project has been awarded by the AEDB, the relevant provincial governmentwillcallfortendersforgrantinga10yearAuthorizationtodevelop offgrid electricity services following technology specifications stated in the electrification project. If convenient (i.e., for proximate villages), several projectsmaybecombinedfortenderingunderasingleAuthorization. The primary criterion for selecting the winning bid for each Authorization will be least subsidy demanded for capital investments for electrification/installation. All types of stakeholders shall be eligible to participate in the tender process, providedtheymeetaminimumsetoftechnicalqualificationstobedefinedby provincialREAswiththeguidanceoftheAEDB. The AEDB will define the standard Authorization template that the REAs will applytospecificprojecttenders.Thefollowingcontentsshallbeincluded: o Scheduleforelectrification. o Rightsandobligationsoftheparties. o Applicabletariffsorfees. o Milestonesforsubsidydelivery. o Qualityofserviceregulation. o Communitycapacitybuilding. o ConditionsforterminationoftheAuthorization.




3.2.4

TargetsandIncentives

We recommend that about 50% (final target to be defined by the GoP) of all offgrid unelectrifiedvillagescurrentlyidentifiedshouldbeelectrifiedbyend2014.Thefederal government will provide subsidies for capital investments to the extent of 70% of the totalinvestmentrequiredforeachREproject. The AEDB will approve projects based on their respective social costbenefit analysis. Thestandardizedsocialcostbenefitanalysisshouldconsider:

Thesubsidyrequirement(total,andasashareoftotalcost). Thepopulationinvolved. Theeconomicdevelopmentbenefitsaccruingfromtheprojects. TheHSE(health,safety,andenvironment)performanceaspectsoftheprojects.

RemainingcapitalandO&Mcosts,includingreplacementcosts,wouldbefinancedby: TherespectiveREAs,employingprovincialfunds. The tariffs or fees for the offgrid services defined by the provincial OGEA,, takingintoaccountthecustomersabilitytopay. Community contributions, in the form of sweat equity (labor), land, and/or cash. NGOandprivatecontributions.

Assubsidiesareinvolved,theyshouldbelimitedtotheamountsneededforbasicsocial and human needs, including basic economic activities. Where additional quality and quantityisdesired,itmustbepaidforbythecustomer. 3.2.5 ProjectFunding

Inordertoprovidefundingtooffgridprojects,anOffgridRuralElectrificationAccount (OGEAC)inthebudgetfortheAEDBshouldbecreated.Thisaccountcouldbefinanced by:

Governmentbudgetaryallocations. Grantsandloansbymultilateral/bilateralfinancinganddonoragencies. Alevyongridsuppliedretailelectricitytariffs.

TheOGEACsettlementisanattributerestrictedsolelytotheAEDB.Onceprojectshave beenawarded,tenderprocedureswilldirectthetransfertotherespectiveREAs. 3.2.6 Pricing

The REAs will define the tariff/fee structure for each Authorization according to the followingcriteria:

Tariffsmaybetechnologywisedifferentiated.




Instandalonesystems,aoneparttariff(Rs/customer)shouldbepreferred. In community (mini and microgrids) system, a onepart tariff based on the contractedcapacity(Rs/kWcontracted)shouldbepreferred.Inthesesystems, each customer will have a power limiter installed in order to disconnect him/herifthecontractedcapacityisexceeded. Ameteringdevicemaybeinstalledforcustomerspayingforhigherquantityor qualityofservice. Tariffsmaybeonlyindexedtolocalinflation. IncentivesOtherThanTariffs

3.2.7

Webelievethatthecurrentgeneralfinancialandfiscalincentives,asdefinedinthe2006 RE Policy, are adequate and should be continued. Additional facilities and incentives maybeprovidedtoencouragethelocalmanufactureofREtechnologies. 3.2.8 RolesofInstitutions

TheAEDBwouldplayakeyroleinoffgridelectrificationdevelopmentasitisnotonly themaincoordinatoroftheprocessatthenationallevel,butwillalso beinchargeof setting guidelines for project formulation, implementation, and financing. Additionally, the AEDB will elaborate the list of offgrid villages and scattered population to be suppliedbyoffgridRESEsolutionsupdatedonanannualbasis. We recommend a greater involvement of provincial and local institutions in RESE deployment to offgrid locations. Local stakeholders should also have an active role in the process as a means to enhancing community acceptance and ensuring successful deploymentandoperation. TheMinistryofWaterandpowerwilldefinethebudgetrequestfortheOGEAC. 3.2.9 Institutional,LegalandRegulatoryConsents

RegulatoryconsentsandprocessingrequirementsforoffgridRESEservicesshouldbe simplified to the extent possible, so as to enable and expedite the development of projects. No regulatory or operational consents by NEPRA and NTDC/DISCOs are envisagedforsuchprojects. For offgrid electrification, we suggest eliminating the LoI,LoS, and related guarantees required for ongrid RESE projects. The only consent necessary is the Project InformationMemorandum(PIM)foreachproject,whichwouldincludealltechnicaland economicfeaturesoftheproject. Concerning environmental issues, the AEDB proposes that the federal and provincial EPAsremovetherequirementofanInitialEnvironmentalExamination(IEE)foroffgrid RE projectsof up to 1 MW capacity. However, a basicenvironmental compliance and impactchecklistshouldbedevelopedbytheEPAsandrequiredtobecompletedforall projects,primarilytoensurethatwaterrights,flows,andcommunityinterestsarenot unduly infringed upon. Additionally, the project developer should certify how proper




design,engineering,construction,andsafetycriteriawillbeaddressedintheexecution oftheproject. ThemostimportantconsentthatwouldberequiredistheAuthorizationissuedbythe REAsonbehalfofprovincialgovernments. 3.2.10 PerformanceMonitoringandEnforcement Projectperformancemustbemonitored,butinalighthandedmannerinordertoavoid hugeregulationcosts.Themonitoringprocesswillhavetwomainparts:

Investmentplanmonitoring:involvesverificationoftheinvestmentmilestones definedintheAuthorizationbeingreached,asatriggerforsubsidypayments. Ongoing performance monitoring for the duration of the Authorization: This involves monitoring that quality standards are met throughout its period of validity. The regulator will establish standards for product quality, service quality, and commercial quality. It should be noted that fewer standards that canbeeffectivelymonitoredarepreferabletomanystandardsthatarepoorly monitored.

Performancemonitoringandenforcementwillbetheresponsibilityoftheprovincialand orlocalgovernments.TheREAsshoulddevelopaprogramofawarenessamongsttheir customers and other community stakeholders to foster the direct monitoring of the serviceprovider. 3.2.11 AllocationofCarbonCredits We consider logical and administratively simpler, for RE investors to assume the risks and benefits of qualifying for and obtaining CERs, along with the potential revenues associatedwiththem.However,theAEDBwouldassistprojectdevelopersapplyingfor CDMregistrationthroughprogrammaticorclustered,singleumbrellaapplicationcover. In such cases, CDM registration, validation, and verification costs and CER revenue sharingarrangementsshallbedevelopedsubsequently,asnecessary.




AnnexI:

PolicyforDevelopmentofRenewableEnergy forPowerGenerationinPakistan (20092014)


Policyfor

DevelopmentofRenewableEnergy forPowerGenerationinPakistan20092014

DRAFT

Government of Pakistan [Date]



Contents1 Introduction...........................................................................................................25 2 Background............................................................................................................25 3 StrategicPolicyObjectives,Goals,andDevelopmentStrategy...............................26 3.1 EnergySecurity....................................................................................................26 3.2 EconomicBenefits...............................................................................................26 3.3 SocialEquity ......................................................................................................... 7 . 2 3.4 EnvironmentalProtection .................................................................................... 7 . 2 4 MediumTermOngridRESEPolicy........................................................................27 4.1 ScopeofPolicy...................................................................................................... 7 2 4.2 ImplementationPeriod.......................................................................................28 4.3 ConsistencyAcrossPolicies.................................................................................28 4.4 PrivateSectorParticipation.................................................................................28 4.5 FinancialandFiscalIncentives............................................................................29 4.5.1 FiscalIncentives.......................................................................................29 4.5.2 FinancialIncentives.................................................................................29 4.6 GeneralIncentivesforREBasedPowerGenerators...........................................30 4.6.1 GuaranteedMarket:MandatoryPurchaseofElectricity........................30 4.6.2 GridConnection,OfftakeVoltage,andInterface..................................30 4.6.3 Wheeling .................................................................................................30 . 4.7 SpecificIncentivesforGridConnectedREIPPs...................................................31 4.7.1 CarbonCredits.........................................................................................31 4.7.2 SecurityPackage......................................................................................31 4.7.3 LandandSiteAccess...............................................................................31 . 4.8 FacilitiesforCaptiveandGridSpilloverProjects.................................................32 4.8.1 NetPurchaseandSales...........................................................................32 4.8.2 NetMetering...........................................................................................32 4.8.3 Banking....................................................................................................33 4.8.4 ProjectswithCapacityLargerThan10MW............................................33 4.9 TariffsandQuotasforGridConnectedREIPPs...................................................33 4.9.1 CategorizationofGridConnectedREIPPsProjects................................33 4.9.2 DeterminationofLongRunPrivateAvoidedCosts.................................34 4.9.2.1 DeterminationoftheConventionalSupplyCurve..................34 4.9.2.2 DeterminationoftheRESESupplyCurve..............................35 4.9.2.3 DeterminationofAvoidedCost..............................................35 4.9.3 DeterminationofLongRunSocialAvoidedCost.....................................36 4.9.4 QuotasandPremiumsforRESEProjects...............................................36




4.9.5 CalculationandCommunicationofAvoidedCosts,Premiums,and Quotas.....................................................................................................37 4.9.6 DeterminationofTechnologywiseUpfrontTariffs(GroupsAandC)....37 4.9.6.1 GroupAProjects.....................................................................37 4.9.6.2 GroupCProjects.....................................................................37 4.9.6.3 UpfrontTariffDetermination(GroupsA&C)........................38 4.9.6.4 IPPTariffDetermination(GroupsA&C)................................38 4.9.7 DeterminationofIndividualTariffs(GroupB) ........................................38 . 4.9.7.1 TechnicalParameters .............................................................38 . 4.9.7.2 FinancialParameters..............................................................38 . 4.9.7.3 InterestonLoans....................................................................39 4.9.7.4 CapitalCost.............................................................................40 4.9.7.5 O&MCost................................................................................40 4.9.7.6 OtherIncentives .....................................................................40 . 4.10 IndexationforUpfrontTariffs..............................................................................40 4.10.1 GroupAandCProjects...........................................................................40 . 4.10.2 GroupBProjects......................................................................................40 4.11 WindandHydrologicalRisks...............................................................................40 4.12 SpecialRequirementsforHydroelectricProjects................................................40 4.13 TransparencyandVisibilityofCalculationofTariff.............................................41 4.14 CompliancewithGoPPolicies.............................................................................41 4.15 ProcedureforEstablishingREIPPsforSaleofAllPowertotheGrid..................41 4.15.1 ProcessforREIPPProposals...................................................................41 4.15.1.1 SubmissionofProposals.........................................................42 4.15.1.2 EvaluationofProposalsandIssuanceofLetterofIntent.......42 4.15.1.3 FeasibilityStudy......................................................................42 4.15.1.4 BankGuaranteeandValidityPeriodofLetterofIntent.........43 4.15.1.5 RequestforLicensingandTariffDetermination.....................43 4.15.1.6 RequestforPSECCertificate...................................................44 4.15.1.7 PerformanceGuaranteeandLetterofSupport.....................44 4.15.2 ProcessSubsequenttoIssuanceofLoS ..................................................45 . 4.16 SecurityPackageandRiskCover.........................................................................45 4.17 Corporate,Fee,andContractualArrangements.................................................46 4.17.1 FeeStructure...........................................................................................46 4.17.2 EnterpriseStructureandLicensingRequirements..................................47 4.17.3 LockinPeriod..........................................................................................48 4.17.4 TypeofContracts....................................................................................48 4.17.5 NatureofEquipment...............................................................................48




5 MediumTermOffgridRESEPolicy........................................................................48 5.1 ScopeofPolicy.....................................................................................................48 5.2 AssessmentofTargetPopulations.......................................................................49 5.3 MediumTermElectrificationTargets...................................................................49 5.4 MultipleDeploymentApproach..........................................................................49 5.5 CoordinationAmongstNationalandProvincialAuthorities...............................50 5.5.1 OffgridElectrificationAgencies..............................................................50 5.5.2 ProjectSelection......................................................................................50 5.5.3 SocialCostBenefitAnalysis.....................................................................51 5.5.4 ProjectImplementation..........................................................................51 5.6 Subsidies..............................................................................................................52 5.7 OffgridElectrificationAccount...........................................................................53 5.8 FeeStructure.......................................................................................................53 5.9 FinancialandFiscalIncentives............................................................................54 5.10 AllocationofCarbonCredits................................................................................54 5.11 SecurityPackageandRiskCover.........................................................................54 5.12 Institutional,Legal,andRegulatoryConsents.....................................................54 5.13 PerformanceMonitoringandEnforcement........................................................55




ExhibitsExhibit1:ExampleofConventionalElectricitySupplyCurve........................................................35 Exhibit2:ExampleofRESESupplyCurve .....................................................................................35 . Exhibit3:ExampleofAvoidedCostDetermination.......................................................................36 Exhibit4:ProcessingScheduleforGridConnectedREIPPs..........................................................41 Exhibit5:FeeandFinancialChargesforGridConnectedREIPPs.................................................47




1 IntroductionWith a large population of over 150 million and a rapidly developing economy, Pakistans energy needs are potentially huge. The country, historically a net energy importer, is confronting serious imminent energy shortages as its economy and population grow while global fossil fuel prices remain highly volatile. Thus, Pakistan needs to initiate a sustained, longterm transition towards greater use of renewable energy(RE)anindigenous,clean,andabundantresourcewhoseconsiderablepotential thecountryhasyettotapmeaningfully. TheGovernmentofPakistan(GoP)intendstopursuethisobjectiveofharnessingpower from renewable resources with the full participation and collaboration of the private sector. This document sets out policies and strategies to exploit such resources and attract investments in electricity generation projects utilizing hydro (up to 50MW capacity),wind,solar,andbiomassderivedpower(ofallcapacities).Forhydroelectricity (hydel)projectsofcapacitygreaterthan50MW,theapplicablepoliciesaredescribedin theGoPsPolicyforPowerGenerationProjects,2002.Additionalpolicyguidelinesshall beissuedinthefutureconcerningotherREtechnologies, aswellasfornonpowerRE applications,asthesectorgrowsandtechnologyadvancestakeplace.

2 BackgroundRecentstudiesshowthatthenaturalpenetrationofongridrenewableenergypowerin Pakistan,basedonprivatecostanalysis,couldreach17TWh/yearby2020.Thisfigure represents around 7% of total gridbased electrical power generation expected in that year.Almost60%ofthisprojectedREsharewouldbecomprisedofhydelplantsthatare muchcheaperthancombinedcyclegasturbines(CCGT)runningonfueloil(FO),whichin turn defines the price of avoided generation on the national grid. Other renewable energy sourced electricity (RESE) technologies that should be naturally developed in Pakistan include bagassebased combined heat and power (CHP) and other types of biomassconversion. ThesamestudieshaveobservedthattheoptimalpenetrationofREgenerationwhen socialcostsarealsotakenintoconsiderationshouldincreasetoaround25TWhin2020, whichisaround10.3%oftotalongridpowergenerationexpectedinthatyear.Market failure(i.e.,externalitiesnotproperlybeinginternalized)wouldthusappearhamperthe developmentofabout8TWh/yearofREgeneration,andsothataneconomicincentive mechanism needs to be put in place to realize this potential, assuming that all other barriers that block the development of natural penetration of RE have also been removed(gridaccess,difficulttosignsalescontracts,etc.)bythen. Undersocialcostassessment,notonlyhydelandbiomassplants,butalsobiogas(from farm slurries, sewage, landfills, etc.) and wind energy plants would be required to replaceCCGTsrunningonFOandnaturalgasasamatteroffact,thestudiesshowthat allFObasedgenerationwouldneedtobereplaced,aswellasaround15%ofgasbased generationin2020,becausethemarginalcostofREforsupplyingthisquotaisaround USD 100/MWh. If the policy to achieve these results is properly defined and




implemented,thesocialwealth(totalsurplus)thatmaybecreatedinPakistanasaresult wouldbeaboutUSD2,100millionperyear. Lessons learnt from the implementation of the short term 2006 RE Policy7 have indicated potential problems in achieving the aforementioned RE penetration goals, unlesspolicyelementsarepromptlyandsuitablyadjusted.Thisisespeciallyimportant considering that the marginal cost of some RESE technologies is in the order of USD 75/MWh, while the cost of generation based on FO has recently exceeded USD 125/MWh. The2009MediumTermOngridRESEPolicycontainedinthisdocument(seeSection4) isbasedonasocialassessmentofcostandbenefits.Theanalysisofnaturalpenetration basedonprivatecostsalonedoesnotconsiderexternalities,andthereforerepresentsa limitedsubsetofsuchananalysis.Availableinternationalevidenceshowsthatfeedin (upfront)tariffsarethebestincentivemechanismfordevelopingREcapacity,ascanbe observed in the cases of Europe and some BRIC (Brazil, Russia, India and China) countries.Internationalexperiencealsoshowsthatanappropriatetariffmechanismisa necessary but not a sufficient condition for developing RE energy; grid access, administrative issues (contracts, licenses, permits, procedural requirements, etc.), and stability of the incentive mechanism are equally relevant for fostering the accelerated developmentofrenewableenergy. Similarly, the 2009 Medium Term Offgrid RESE Policy described in this document (Section 5) will try to create a sustainable environment where federal and provincial institutions, donors and NGOs can efficiently collaborate with the objective of rapid electrificationofremotevillagesandpopulationsettlements.

3 StrategicPolicyObjectives,Goals,andDevelopment StrategyThestrategicobjectivesoftheGovernmentofPakistanfordevelopingrenewableenergy resourcesareaimedatenhancingthefollowingparameters:

3.1

EnergySecurity

Mainstreaming of renewable energy and greater use of indigenous resources can help diversify Pakistans energy mix and reduce the countrys dependence on any single source, particularly imported fossil fuels, thereby mitigating against supply disruptions and price fluctuation risks. Additional costs and risks relating to fuel stocking, transportation, and temporary substitute arrangements are also irrelevant for RE systems,exceptforbackuppurposes.

3.2

EconomicBenefits

When properly assessed for their externalities, renewable energy options can become economically competitive with conventional supplies on a leastcost basis. This is 7

Government of Pakistan, Policy for Development of Renewable Energy for Power Generation, 2006, Alternative EnergyDevelopmentBoard(AEDB),MinistryofWaterandPower,Islamabad:December2006.




particularlytrueforthemoredifficult,remote,andunderdevelopedareas,whereREcan alsohavethegreatestimpactandtheavoidedcostsofconventionalenergysuppliescan be significant. RE can thus supplement the pool of national energy supply options in Pakistan, expediting economic empowerment, improving productivity, and enhancing incomegeneratingopportunitiesespeciallyforcurrentlymarginalizedsegmentsofthe population. Decentralized RE systems can also help reduce energy distribution losses and result in systemwide and national efficiency gains (e.g., as measured by energy intensity, or energy use per unit of GDP). A growing renewable energy industry can afford new prospects for employment and business opportunities amongst local manufacturersandserviceproviders.

3.3

SocialEquity

Pakistans present low percapita consumption of energy can be elevated through greaterREuse.Issuesrelatingtosocialequitysuchasequalrightsandaccessforall citizens to modern energy supplies, improved human development indicators, poverty alleviation,andreducedburdenonruralwomenforbiomassfuelcollectionanduse can also be addressed to a significant extent through widespread renewable energy deployment. RE can thus facilitate social service delivery and help improve the well being of the countrys poorest, which presently have little or no access to modern energyservices.

3.4

EnvironmentalProtection

Local environmental and health impacts of unsustainable and inefficient traditional biomassfuelsandfossilfuelpoweredelectricitygenerationcanlargelybecircumvented through clean, renewable energy alternatives. Similarly, displaced greenhouse gas emissions carry significant global climate change benefits, towards which Pakistan has pledgedactionundertheUNFrameworkConventiononClimateChange.

4 MediumTermOngridRESEPolicy4.1 ScopeofPolicyTheMediumTermOngridRESEPolicyisaimedtoprovideelectricityservicesutilizing renewable technologies to consumers through connection to the power grid.8 This includesRESEgeneratorsinstalledforsaleofallorpartoftheirpoweroutputtoorvia thegridnetwork. Forthepurposesofthispolicystatement,renewableenergysourcedelectricityincludes thefollowingtechnologies:

8

ForthepurposesofREpolicyterminology,thetermgridismeanttoimplyeithernationalorregionalelectricity T&DnetworksoperatedbytheNTDC/CPPAand/orDISCOsof11kVorhighervoltage.Isolated,communitybased localdistributionnetworksareconsideredoffgrid.




Smallhydroof50MWorlessgenerationcapacity9 Solarphotovoltaic(PV)andthermalenergyforpowergeneration Windpowergeneration Bagassebasedgeneration Nonbagassebiomassbasedgeneration Biogasbasedgeneration Generationbasedonlandfillmethanerecovery Generationbasedonsewagegasrecovery Municipalorindustrialwastetoenergygeneration.

Other RE technologiessuch as biofuels, wave, tidal, geothermal energy, and fuel cellsare also relevant to current and future renewable energy use in Pakistan. However,thesearenotdealtwithunderthispolicy,althoughsimilarincentivescouldbe extendedtothemonacasebycasebasis.

4.2

ImplementationPeriod

This medium-term RESE policy will apply for the period starting from [date to be defined]anditwillcontinueuntilatleast[datetobedefined]2014,oraminimumof fivecalendaryears.

4.3

ConsistencyAcrossPolicies

InordertoensuretheconsistencyandstabilityoftheREdeploymentclimate,bothfrom theperspectiveofinvestorsandpowerpurchasers,anREprojectthatachievesfinancial closure before the onset of a subsequent policy phase (i.e., from [date to be defined] onwards) will continue to be guaranteed all the incentives, terms, and conditions definedinthe2009MediumTermREPolicyoverthetenureofitsPPA/EPA.

4.4

PrivateSectorParticipation

The private sector would be welcome to undertake projects falling in any of the followingcategories:

Independent power projects (IPPs) based on new plants (for sale of power to thegridonly) Captiveandgridspilloverpowerprojects(i.e.,selfuseandsaletoutility) Captivepowerprojects(i.e.,forselfordedicateduse).

9

Eachcountryhasitsowndefinitionofhydelplantsizes.Forthepurposeofthisdocument,smallhydroisusedto collectively refer to hydel capacity of less than 50MW, consisting of micro hydels (units of less than 150 kW installedcapacity),minihydels(150kWto5MW),andsmallhydels(between5MWto50MW).




4.5

FinancialandFiscalIncentives

Allrenewableenergybasedpowerprojects(private,publicprivate,orpublicsector)will continue enjoying the same fiscal and financial incentives prescribed in the 2006 RE Policy.Theseareenumeratedbelow. 4.5.1 FiscalIncentives No customs duty or sale tax for machinery equipment and spares (including construction machinery, equipment, and specialized vehicles imported on temporary basis) meant for the initial installation or for balancing, modernization, maintenance, replacement, or expansion after commissioning ofprojectsforpowergenerationutilizingrenewableenergyresources,subject tofulfillmentofconditionsundertherelevantSRO.10 Exemptionfromincometax,includingturnoverratetaxandwithholdingtaxon imports. Repatriationofequityalongwithdividendsfreelyallowed,subjecttorulesand regulationsprescribedbytheStateBankofPakistan. Parties may raise local and foreign finance in accordance with regulations applicabletoindustryingeneral.GoPapprovalmayberequiredinaccordance withsuchregulations. NonMuslimsandnonresidentsshallbeexemptedfrompaymentofZakaton dividendspaidbythecompany. FinancialIncentives Permission for power generation companies to issue corporate registered bonds. Permissiontoissuesharesatdiscountedpricestoenableventurecapitaliststo beprovidedhigherratesofreturnproportionatetotherisk. Permission for foreign banks to underwrite the issue of shares and bonds by private power companies (IPPs) to the extent allowed under the laws of Pakistan. Nonresidents allowed purchase of securities issued by Pakistani companies without State Bank of Pakistans permission, subject to prescribed rules and regulations.

4.5.2

10

AsperSRO(1)/2005issuedbytheMinistryofFinance,RevenueandEconomicAffairsonJune6,2005,specifying zerocustomsdutyandsalestaxon: Machinery,equipmentandspares(includingconstructionmachinery,equipmentandspecialized vehicles imported on temporary basis) meant for initial installation, balancing, modernization, replacementorexpansionofprojectsforpowergenerationthroughnuclearandrenewableenergy sourceslikesolar,wind,microhydelbioenergy,ocean,wastetoenergyandhydrogencell,etc. Sparesandmaintenancepartsrequiredfortheaboveprojectaftercommissioning.




4.6

IndependentratingagenciesinPakistantofacilitateinformeddecisionmaking byinvestorsabouttheriskandprofitabilityofprojectcompanysbonds/TFCs.

GeneralIncentivesforREBasedPowerGenerators

Theprovisionsstatedbelowshallbemadeavailabletoallqualifyingrenewableenergy basedpowerprojectsfallingunderanyofthecategoriesdefinedinSection4.4above. 4.6.1 GuaranteedMarket:MandatoryPurchaseofElectricity

It shall be mandatory for the CPPA or the power distribution utilities to purchase all electricityofferedtothembyREprojectsestablishedinaccordancewiththeprovisions giveninSection4.6.2.AnEPAcontractwillbeconcludedbetweentheprojectsponsor andtheCPPAor,eventually,betweentheprojectsponsorandthedistributioncompany in whose service territory the project may be located, except for those cases in which thesponsoroptsforadirectsaletoabulkconsumer.AftertheCPPAceasestoexist, neitherdistributorsnortransmissioncompanieswillhavetherighttoreject,inpartorin entirety, any contract signed previously between the CPPA and an REbased power generator. NEPRA will establish a suitable methodology for compensating those DISCOs/TRANSCOs that are forced,under this 2009 Medium TermREPolicy, to accept contractswithNEPRAmandatedfeedintariff. RE power producers are allowed to enter into direct (bilateral) sales contracts with eligible enduse customers. In this case, electricity sale prices will not require prior approvalbyNEPRA. 4.6.2 GridConnection,OfftakeVoltage,andInterface

ElectricityshallbepurchasedfromREpowerproducersatavoltageof:

220kV at the outgoing bus bar of the power station if the power station is locatedwithin70kmofanexisting220kVtransmissionline 132kVifitiswithin50kmofanexisting132kVtransmissionline 11kVifitiswithin5kmofanexisting11kVtransmissionline 400Vifitiswithin1kmofa400Vdistributionfeeder.

The minimum average power to be supplied in each case would be 1,250 kW/km, 250kW/km,100kW/km,and20kW/km,respectively. Theproducermayalsoundertaketolayanewtransmissionlineforconnectionwiththe main electricity grid. The power purchase tariff determination will be adjusted accordinglyforeachoftheseoptions. 4.6.3 Wheeling

REpowerproducersshallalsobeallowedtoenterintodirect(bilateral)salescontracts withendusecustomers.Underthisarrangement,theywouldbeallowedtosellallora part of the power generated by them directly to their customers, and the rest to the utilityforgeneraldistribution.Fordirectsales,theyshallberequiredtopaywheeling




charges for the use of the transmission and/or distribution grid network employed to transportpowerfromtheplanttothepurchaser.Inpracticalterms,theIPPshallinject electricityintothegridsystematonepoint(subjecttotheprovisionsinSection4.6.2) andwouldbeentitledtoreceivethesameamountatanyotherlocationuponpayment ofacorrespondingwheelingcharge,tobedeterminedbyNEPRA.Thiswheelingcharge will reflect the cost of providing and maintaining the transmission interconnection, including the energy losses suffered en route, calculated on a utilitywide basis by NEPRA.

4.7

SpecificIncentivesforGridConnectedREIPPs

Additionally, specific incentives are provided under this policy to renewable energy based independent power producers (IPPs) selling all generated electricity (minus auxiliaryconsumption)tothegridasdescribedbelow. 4.7.1 CarbonCredits

All qualifying RE power projects eligible for financing under the Clean Development Mechanism(CDM)shallbeencouragedtoregisterforCertifiedEmissionReduction(CER) credits with the CDM Executive Board, either collectively or individually. The Governmentshallalsostrive,incollaborationwithinternationaldevelopmentagencies and to the extent possible, to facilitate project applications for such carbon credits in ordertoreducetheassociatedinitialtransactioncostsforprojectsponsors. The annual carbon revenues eventually obtained shall be allocated to the project sponsor, who shall be free to negotiate CER sales to third parties in any manner it considersappropriate. 4.7.2 SecurityPackage

ThepowerpurchasershallenterintoaspecificEnergyPurchaseAgreement(EPA),based on a standard model agreement, with the RE power producer. The Government of Pakistan shall also enter into an Implementation Agreement (IA) which will guarantee thepaymentobligationofthepublicsectorpowerpurchaserforpowersalesextending over the term of the PPA. The EPAs will be much simpler than those currently prescribedforforthermalorlargehydroIPPs,andshallbebasedonthepurchaseofall theenergygeneratedataperkWhrate. 4.7.3 LandandSiteAccess

The federal and provincial11 governments shall facilitate investors in acquiring land or rightsofway(RoWs)forprojectdevelopment,aswellasprovidingsiteaccessonacase tocase basis by leasing, acquisition of RoW, and/or construction of road linkages. However,theprimaryresponsibilityforacquiringlandandsiteaccesswillrestwiththe projectsponsors. 11

Forthepurposesofthispolicydocument,thetermprovincialshallhereinafterrefertoalldistinctadministrative regions of the country, including the Punjab, Sindh, Northwest Frontier Province (NWFP), Balochistan, Northern Areas (NA), Islamabad Capital Territory (ICT), Federally Administered Tribal Areas (FATA), and Azad Jammu and Kashmir(AJK).




4.8

FacilitiesforCaptiveandGridSpilloverProjects

For other categories of RE power generators (captive and grid spillover RE power projects),wishingtosellsurpluspowertotheutilitygrid,thefollowingfacilitiesshallbe madeavailable: 4.8.1 NetPurchaseandSales

AnREpowerproject,withacapacitylargerthan1MWandlessthan10MW,setupfor self(captive)ordedicateduse,maysupplysurpluselectricitytothepowerutility(grid spillover),whileatothertimesdrawingelectricityfromtheutilitytosupplementitsown productionorlocaluse,subjecttotheprovisionsinSection4.6.2.Insuchcases,thenet electricity

suppliedbythepowerproducertotheutilityinamonth(i.e.,unitssuppliedby theproducerminusunitsreceivedbytheproducer,ifgreaterthanzero),shall bepaidforbytheutilityatatariffequaltotheaverageenergycostperkWhfor oilbasedpowergeneration(asdeterminedbyNEPRAforGENCOs/IPPsoverthe applicablequarteroftheyear)less10%,or suppliedbytheutilitytothepowerproducerinamonth,(i.e.,unitsreceivedby theproducerminusunitssuppliedbytheproducer,ifgreaterthanzero),shall be paid for by the producer at the applicable retail tariff (e.g., industrial or commercialrates,dependinguponthetypeofuserconnection).

Suchnetpurchaseandsalesornetbillingarrangementswillinvolvemeasurement oftheelectricityreceivedandsuppliedtotheutilitybythepowerproducerusingtwo separatesetsofunidirectionalmeters. 4.8.2 NetMetering

AnREpowerprojectofcapacityupto1MWsetupforself(captive)ordedicateduse may also supply surplus electricity to the power utility while at other times drawing electricity from the utility to supplement its own production for local use, subject to provisionsinSection4.6.2.Insuchcases,thenetelectricity

suppliedbythepowerproducertotheutilityinamonth,i.e.,unitssuppliedby theproducerminusunitsreceivedbytheproducer,ifgreaterthanzero,or suppliedbytheutilitytothepowerproducerinamonth,i.e.,unitsreceivedby theproducerminusunitssuppliedbytheproducer,ifgreaterthanzero,

shallbepaidforbytheutilityortheproducer,respectively,attheapplicableretailtariff (e.g.,industrial,commercial,orresidentialrates). Suchnetmeteringarrangementsmayinvolveseparatesetsofunidirectionalmetersfor recordingtheelectricityreceivedandsuppliedtotheutilitybythepowerproducer,or special bidirectional meters capable of instantaneously recording net power transfers. This facility would be particularly suitable for incentivizing dispersed smallscale RE generation, such as rooftop PV panels, helping optimize their utilization and payback ratesandobviatingtheneedforexpensiveonsitestoragebatteries.




4.8.3

Banking

For net billing purposes, a rolling account of energy units will be maintained on the pattern of a bank account (i.e., debit or credit basis). Such banking accounts of net energyunitsshallbemaintainedonamonthlybasisandfinalbalanceswillbereconciled at the end of the year at the rates given in Section 4.8.1. Under this arrangement, a producer may generate and supply power to the grid at one location and receive an equivalent number of units for self use (say, at a factory) at a different or physically distantlocationonthegridatadifferenttimewithoutpayinganywheelingcharges,but subjecttothedistancelimitsforpowerinputandofftakeasnotedinSection4.6.2.Any additional(net)unitsconsumedbytheproducer(beyondthosesuppliedtotheutilityat the plant location) in a given month shall be billed by the utility at the retail tariff applicable to the type of electricity connection obtaining at the consumers premises. Any excess (net) units supplied by the producers plant in a given month shall be creditedtotheproduceronarollingmonthlybasis(i.e.,deductedfromthenextmonths

adb technical assistance consultant’s report for pak are

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