Published in Mar-Apr 2022
The numbers are convincing. And misleading. If this was a comic book, a superhero (or villain) would have found a way to harness Pakistan’s solar power into a suit that would put Iron Man to shame. Or at least solved the problems of sweltering nights and scorching days when the power goes off.
At one point, MIT, Stanford University and the University of California researched an atmosphere/energy programme that analysed the future energy demand of 139 countries, comparing their solar, wind and hydroelectric potential. The research indicated that Pakistan has the potential of producing a whopping 92% of its electricity requirements from solar energy; this rate is among the highest in the world. Another study conducted by the World Bank found that Pakistan has tremendous potential to generate solar power and that just utilising 0.071% of the country’s area for solar photovoltaic (PV) power generation would meet its current electricity demand. The keyword here is ‘potential’, which is based on studies that tabulate complicated formulae on paper and not reality.
The reality is that although the sun may shine all day long, solar energy plays a rather humble role in Pakistan’s energy makeup. According to the National Electric Power Regulatory Authority’s (NEPRA) State of the Industry Report 2021, at 530 MW, solar constitutes less than two percent of the total installed electricity generation capacity and the amount of solar deployed in the energy mix is mostly stagnant; it increased by a measly 0.94% in FY 2020-21 compared to FY 2019-20. Currently, all solar power projects are small-scale, with individual installed capacities of 100 MW or less. While the Alternative Energy Development Board (AEDB) is pursuing 22 solar photovoltaic power projects, their combined cumulative capacity is 890.80 MW – for context, Pakistan’s country-wide government efforts that are in the pipeline would power (at most and only if materialised completely) about a third of Karachi’s needs in summer.
So why, despite the promising numbers, has solar such a humble position in Pakistan’s energy mix? For one thing, it makes less economic sense compared to its competitors. According to energy expert Farrukh Mahmood Mian, initially, even nuclear, the most expensive of renewable options, was cheaper than solar. Another reason is that Pakistan has coal reserves, which although are neither clean nor green, offer several plus points. By one estimate, Pakistan’s coal reserves amount to 3,377 million tons, equivalent to over 300 times the annual consumption. Coal is (relatively) cheap, there is a lot of it and it provides employment; consequently, 74% of coal consumption is used for electricity generation. Despite this, consumers, residential and commercial, endure frequent load shedding as well as increasing electricity tariffs. It is not like one can mine coal oneself, set up a nuclear plant or a dam to power a household. However, installing solar panels is possible and highly doable.
Therefore, while the government ignores solar power, the private sector has been quietly embracing it. According to Reon Energy, a business vertical of Dawood Hercules, the solar market potential is estimated to be 4,000 MW to 4,500 MW, which is why the private sector sees a market that is five times bigger than the PTI’s Government’s plans envisaged. Furthermore, solar is among the cheapest options available, as without using batteries, the levelised cost of energy (over 25 years) for a unit of solar electricity is about seven rupees compared to the grid tariff, which can be as high as Rs 24 (inclusive of tax). Factoring in batteries, the cost of solar increases by roughly five rupees to a ballpark figure of Rs 11.
In this situation, Reon Energy expect the commercial and industrial market to reach approximately 3.2 GW (3,200 MW) by 2025. Pakistan’s residential net metering renewable market has grown at a compound annual growth rate (CAGR) of 164% over the last five years (net metering takes into account the units supplied to the grid and for which the owner is compensated – and as per NEPRA’s State of Industry Report 2021, the total installed capacity of net-metering consumers at the end of the last fiscal year was approximately 232 MW), while the commercial and industrial Tier 1 market grew at a steep CAGR of 97% compared to the previous government’s efforts of less than one percent growth.
Residential Benefits It makes sense for homeowners to switch to a hybrid solution of on-grid and solar power. The sun powers the household when it shines and grid electricity steps in when it does not (cloudy weather and at night). This is borne out by Ali Karimjee, a resident of DHA, Karachi, who installed an 11 KW system solar system in 2018. “In the cooler months, I don’t pay an electricity bill. In fact, I get extra credit that is adjusted during the coming months.” The solution cost him about Rs 1.1 million in 2018. He adds that even in the peak of summer, his bills do not exceed Rs 7,000 or 8,000 per month, despite running three ACs and an assortment of household appliances. Given the cost savings, he has recouped 75% of his investment to date.
Commercial Interests Commercial tariffs are considerably higher than residential tariffs in terms of on-grid electricity and are set to spiral given the fiscal crunch. ‘Green’ and ‘sustainability’ have become corporate buzzwords and many companies are pledging their contribution towards a cleaner environment, and solar panels are a happy combination of environmental responsibility and fiscal prudence. As Mujtaba Raza, CEO, Solar Citizen, says, “The reason businesses opt for solar is predominantly the financial payoff. Compared to other countries, Pakistan’s solar costs are lower because of higher energy tariffs and lower labour costs.” He points out that Karachi University installed a 65 KW system in one of their buildings, a solar solution that will save them Rs 250,000 a month and “as they pay high commercial rates, their ROI will be under two years. However, he adds, “regardless of the savings, the upfront cost can be very exorbitant for some consumers, as it can range from anything from one and a half to three million rupees; rather like buying a new car.”
Borderline Affordability Clearly, solar solutions are not within everyone’s budget. According to Musa Khan Durrani, Head of Business & Planning, SkyElectric, it costs about Rs 150,000 per KW (roughly Rs 150 per watt), with installations coming in at multiples of 5 KW. Battery storage adds a further Rs 250,000 per KW for a home solution from a reputable company. He adds that Pakistan is the only country in the world where solar installations are taxed at 17% GST and the entire industry has been derailed since the last mini-budget, added to which the global shortage of semiconductors has impacted the industry as solar solutions require a lot of chips and deliveries that took about four weeks now take 12 weeks.
“Container shipping prices have gone up seven times in the last year, and we expect this to be compounded because of the Ukraine-Russia war. The free fall of the rupee has not helped given the number of imported components in a solar solution. Thus, overall, the price of solar solutions has increased by 40 to 50%, he concludes.
Financing Green Portfolios Financing is another challenge. The State Bank of Pakistan has provided a renewable energy financing facility to encourage banks to increase their green financing portfolios, with a maximum annual mark-up rate of six percent. According to Reon Energy, this facility has been instrumental in supporting the uptake of solar by the private sector. “The market has just started to fully comprehend the benefits of this scheme and is keen to switch to renewable power. However, this facility may expire on June 30, 2022 and taking the growth forecast into account, the scheme needs to be extended for a further three years.”
In Durrani’s opinion, the benefits of solar are a catch-22 situation for the government. “Increasing solar generation in the overall grid will, in one way, increase the Circular Debt because surplus power is one of the core reasons behind it. Tariffs are high because of surplus power. Since tariffs are high, people switch to solar. As they switch to solar, the surplus of power increases pushing tariffs higher. And the circle continues.”
Transmission Conundrum Solar energy, or any other form of renewable energy, will not solve the current transmission challenges. For clarity, the transfer of electricity to the grid system comes under transmission, and transfer from the grid system to the end consumer comes under distribution. The weakness in the system (and which causes loadshedding) is the distribution, where the infrastructure typically has a life of 20 to 25 years, after which continuous investment is required. Therefore, although renewable energy can solve the issue of moving away from dirty energy, its transmission will still rely on the same old infrastructure. In this respect, says Durrani, “The goal the world over is to move away from centralised grid station power towards distributive power whereby every house produces electricity while consuming it. This is to move away from a model where huge investments are required to transmit electricity from its source of generation.”
Solar is unique in that any house with sufficient space can generate its own electricity and therein lies its potential. However, solar did not figure significantly in the previous government’s power plans. No doubt there are incentives for the private sector to move towards it, but the reality is that without government intervention, despite the outlandishly rosy numbers, solar’s potential will remain in the realm of comic books.
Fatima S. Attarwala is an analyst at Dawn’s Business & Finance. firstname.lastname@example.org