Accelerating Wind Power Deployment in Pakistan

November 2016 ∎ WWEA Policy Paper Series (PP-02-16)

Unless otherwise indicated, material in this publication may be used freely, shared or reprinted, so long as WWEA is acknowledged as the source.

This policy paper has been produced under the research project, “Pakistan's Wind Energy Sector – Capacity Building of Public and Private Sector Officials”, implemented by the World Wind Energy Association and Heinrich Bӧll Stiftung, Pakistan. A training workshop will be organised based on the findings of this policy paper later this year.

The policy paper has been authored by Zeeshan Ashfaq and edited by Stefan Gsӓnger. The author duly acknowledges the support and invaluable contributions from public and private sector decision makers.

About the Partners

The World Wind Energy Association (WWEA), an international non-profit organisation headquartered in Bonn, Germany, is working in cooperation with various governments and international agencies to promote wind energy uptake worldwide. With a network of associates in more than 100 countries, developed and developing economies alike, it has assisted many governments, multilateral organisations in developing effective policies for renewable energy technologies' promotion.

Heinrich Böll Foundation is a German political non-profit organization affiliated with the Green Party with head office in Berlin. The main tenets of the organisation are ecology and sustainable development, democracy and human rights, self-determination, peace and justice. The role of the Pakistan office is to engage in political dialogues, discussions and support projects in the field of Ecology & Energy, Democratization and Peace & Security. It supports and strengthens participation, pluralism and the rule of law in the region. Accelerating Wind Power Deployment in Pakistan

Capacity Building and Policy Options

Zeeshan Ashfaq Lead Author Stefan Gsӓnger Editor Accelerating Wind Power Deployment in Pakistan

Preface by the World Wind Energy Association

WWEA is very pleased that with this study, we can Without doubt, there are sll many knowledge present already the third publicaon on what we gaps, in industry, in government, in the finance have been doing in order to accelerate wind sector and in general in the public. This third power deployment in Pakistan. phase of WWEA's efforts to support the wind power market in Pakistan aims at filling such Since WWEA has started this work in the year knowledge gaps in parcular with regard to public 2014, in cooperaon with several key partners, a sector decision makers. lot has happened within Pakistan but also on the internaonal level: Pakistan, aer all, has now a I would like to say thank you for a very fruiul sizable wind market with 590 MW of installed cooperaon especially to Heinrich Böll Founda- capacity and 298 MW of projects about to be on Pakistan who enabled us to undertake these installed. Wind power, hence, is about to become acvies, to the Alternave Energy Development a pillar of Pakistan's power supply. Board of the Government of Pakistan as well as to all other government agencies who have been On the internaonal level and at the same me, cooperang closely on this project, to all our the Paris Agreement has brought a fundamental partners in the wind sector within and outside paradigm shi with regard to the global energy Pakistan, personally to Mr. Shahid Hamid who has supply paerns: In fact, the world's 195 govern- been giving us his valuable advice and guidance, ments agreed in Paris to switch completely to and aer all, to our researcher, Mr. Zeeshan renewable energy by the year 2050. Just very Ashfaq, who has been the motor inside the recently, almost 50 countries declared at the UN project. Climate Change Conference in Marrakech that they intend to move as fast as possible to a 100% May this publicaon contribute to further speed renewable energy supply. up wind and renewable energy deployment in Pakistan! Pakistan has all the resources to do such a step as well. We are very pleased that we have been able Stefan Gsӓnger to support the Government of Pakistan on the Secretary General way to a renewable energy future, and we are ready and prepared to give our advice on the next praccal steps.

I Capacity Building and Policy Options

Preface by Heinrich BÖll Stiftung

The year 2015 had a special significance with implementaon and build the capacies of its regards to global priority seng around pathways employees to achieve opmum benefit and for sustainable development. The landmarks in desired outcomes. this regard are the Sustainable Development Goals and the Paris Agreement. The two empha- Third in the series of publicaons, this paper, size on one of the three pillars of sustainable “Accelerang wind power deployment in development, i.e. environment, and urge world Pakistan: Capacity Building and Policy Opons” leaders to translate the on-paper commitments recommends policy opons and capacity building into acons. As a first step, both agreements tools to accelerate wind power deployment in stress on the global phase out of carbon emis- Pakistan. It highlights human capacity needs sions therefore requiring acons on a phase-in including the ability to manage a high level of towards a sufficient and sustainable use of Renewable Energy integraon; beer under- renewable energy. standing for Renewable Energy cosng and tariff determinaon and of financial modelling Given the recent increase in Renewable Energy techniques for financial closure. The findings of investments around the world the future seems this study will be translated into acon through promising. It is a great opportunity for developing capacity building for actors involved in the wind countries to start with clean energy to meet their sector in Pakistan. Today's energy security chal- growing energy needs. In developing countries lenges present an opportunity for Pakistan to investment in Renewable Energy projects does make choices which fix energy problems not only mean development of necessary infra- sustainably. All relevant stakeholders from public structure. Addionally operaonal capacies and and private sector, academia and civil society efficient systems in the government need to be need to be made aware about alternave energy build. Therefore, support to the growing Renew- soluons that present sustainable and climate able Energy sector in a country like Pakistan just opons for the future. requires direcon and analysis at every step. The Heinrich Bӧll Sung Pakistan has supported Heinrich Bӧll Sung Pakistan therefore is research and exchange among experts as well as delighted to be able to support this connuous awareness raising on sustainable renewable effort of the World Wind Energy Associaon as a energy opons since many years. contribuon towards creang beer understanding about the importance of renewable energy In 2013 the foundaon entered into partnership usage among decision makers and civil society in with World Wind Energy Associaon focussing on Pakistan. While renewable energy sources sll idenfying barriers for wind power development make a small proporon of Pakistan's energy mix in Pakistan. Two dedicated internaonal confer- and much of the focus of the government remains ences and two policy papers looked into idenfy- on large infrastructure projects, we hope that this ing issues at stake and ways to overcome the publicaon will promote discussions about barriers in the wind power sector in Pakistan. One alternave energy sources and lead to policy gap specifically highlighted in the previous studies developments and realisc soluons for was the issue of operaonal efficiency of promong of the wind energy sector in Pakistan. government instuons. It was found that the government, despite having developed a Renew- Marion Regina Müller able Energy policy in 2006, sll needs to invest in Country Director, Pakistan. relevant systems and procedures for policy

II Accelerating Wind Power Deployment in Pakistan

EXECUTIVE SUMMARY

Year 2015 defined the future agenda of renewable costs as they seem less clear on the holisc picture energy (RE) for coming decades. UN General presented by RE development. Investors argue that Assembly adopted “Affordable and Clean Energy” as a although financing RE projects is no longer a bigger sustainable energy goal. Later, historic Paris challenge, local lenders however require capacity Agreement was reached to limit global warming to 2 development on project finance. respecvely 1.5 degrees Celsius by 2050 which is impossible without large scale RE deployment. Last Responses from public officials complement concerns year also witnessed record level of RE investment and raised by the private sector. It is stressed that capacity addion indicang a strong business case for professional capacies in the areas idenfied by RE in future. WWEA must be enhanced accordingly as more RE is expected to come online in future. Even though, RE has been idenfied vital to achieve sustainable development targets, some challenges To address the grid issue, study proposes that private sll remain especially in the developing world. First, to investment should be encouraged to strengthen accommodate higher share of variable renewable exisng grid system. Developing hybrid wind-solar energy (VRE), upgrade of exisng grid and projects, using latest forecasng techniques for transmission infrastructure is required. Second, as RE integrated RE and smart grid technologies are some of has become cost compeve to convenonal sources the soluons to overcome RE grid integraon of energy, cost reducon trends must be translated in challenge. a rigorous but careful manner in developing countries. Third, financing RE projects is sll a major barrier in Public officials oen cite that cost of wind energy many parts of the world. There is a growing need to generaon is higher as compared to other sources of engineer policy as well as capacity building tools to energy. It is a fact that wind power costs are going overcome these challenges. down in Pakistan. Moreover, wind energy costs should been seen beyond levelized cost of electricity and This policy paper aempts to build capacies of public overall system value needs to be factored in. Effecve and private decision makers working in the wind policy implementaon and stable regulatory energy sector of Pakistan in the areas of RE environment can unleash substanal cost reducon integraon, RE costs and tariff, and financial modelling potenal. Study suggests that government should techniques. The purpose of the paper is to make policy connue with the upfront tariff for wind energy makers familiar with various policy tools necessary to projects instead of introducing aucons scheme overcome barriers faced by wind market in Pakistan. which can be detrimental to wind industry in Pakistan. The paper involves perspecves from public and private sector officials to offer an insight into the Study discusses that local banks need to step up their capacity building needs of key actors. Responses from efforts to finance wind projects on purely project stakeholders are collected through in-person finance basis. Presence of sovereign guarantee by the interviews and both quantave and qualitave data government and compulsion on power purchaser to analysis techniques are applied purchase generated power enable local lenders posively to finance wind projects in the country. 590 Private sector response highlights that capacity MW of installed wind power capacity is a promising building areas have been judiciously idenfied. indicator that market is moving in right direcon in Serious lack of capacity in public agencies hinders terms of finance. wind market growth causing crowding out of investment from energy sector of Pakistan. The Study provides the basis for a capacity building Developers are unanimous in their response that the workshop that will be organised by engaging grid operator requires capacity building to effecvely mullateral instuons and development partners integrate VRE in exisng grid system. It is also stressed bringing together parcipants from government and that public officials need capacity development on RE industry.

III Capacity Building and Policy Options

Acknowledgments

First of all, the author would like to thank all interviewees and parcipants of the survey who spared their valuable me and shared their views. A special thanks goes to Stefan Gsänger (Secretary General, WWEA) and Sohaib Malik (IRENA) for always being there to guide me, without their guidance this study would not have been possible.

I am grateful to the project partners: Heinrich Böll Sung (hbs) Pakistan for the financial support including provision of project office, and Alternave Energy Development Board, Pakistan for their connuous support. I owe a special gratude to the whole team of hbs, Pakistan office especially Marion Regina Müller and Mome Saleem for helping me in successful compleon of this study. I'm also indebted to Mr. Irfan Yusuf (AEDB) for encouraging me and showing interest in this research.

IV Accelerating Wind Power Deployment in Pakistan

TABLE OF CONTENTS

Preface by the World Wind Energy Associaon I Preface by Heinrich Böll Sung II Execuve Summary III Acknowledgments IV

Secon A: Study Context 1 Introducon 1 Status of Wind Energy in Pakistan 3 Purpose and Background of the Study 3 Research Methodology 4 Limitaons of the Study 5 Capacity Building Framework 5

Secon B: Findings and Discussion 7 Private Sector Perspecve 7 Public Sector Perspecve 9

Secon C: Overcoming Lack of Capacies: Policy Implicaons 11 Renewable Energy Integraon 11 Renewable Energy Costs & Tariﬀ Determinaon 12 Financial Modelling 14 Capacity Building Workshop 15

Bibliography 16 Capacity Building and Policy Options

Section A: Study Context

Introducon 285.9 billion, breaking the previous record of $ 278.5 billion set in 2011. Figure 1 illustrates the Global Renewable Energy Trends and Challenges: historical RE investment trends since 2005. Last year saw an investment rise of 5% when com- The year 2015 was a landmark period for renew- pared to 2014 and it was four mes more than the able energy (RE) for number of reasons. Firstly, investment in 2005 (Global Trends in Renewable 193 countries of the United Naons (UN) General Energy Investment 2016, 2016, p. 12). Investment Assembly adopted “Affordable and Clean Energy” in RE has overpassed $ 200 billion per annum as a Sustainable Development Goal (SDG 7) to mark for a sixth consecuve year. Renewables not secure universal access to affordable and clean only provide an opportunity for a cleaner future energy. Secondly, in December 2015, 195 coun- but also a business case for investment in both tries gathered at the Conference of Pares developed and developing counes. Figure below (COP21) in Paris and reached a historic agree- also highlights the investment trends in devel- ment to limit global warming below 2 respecvely oped and developing world. For the first me, 1.5 degrees Celsius signalling a strong imperave developing countries overdid developed coun- for sustainable energy future. Even more, the tries in terms of RE investment in 2015. Develop- Paris agreement commits the pares to achieve ing naons commied $ 156 billion, a rise 0f 19% greenhouse gas neutral energy supply by the year in comparison to 2014 and 17 mes the figure of 2050, which in fact is only possible with a global 2004. To the contrary, investment in developed 100% RE supply. Lastly, 2015 witnessed a record countries contracted by 8% to $ 130 billion and level of global RE investment and capacity addi- the most revealing reducon was seen in Europe on ever in a single year. (Renewables 2016 Global Status Report, 2016, p. 100). In 2015, new RE investment (excluding large hydro power projects) globally was recorded at $ World Energy structure has transformed since

Figure 1: Global New Investment in Renewable Power and Fuels, Developed, Emerging and Developing Countries, 2005‐2015

1 Accelerating Wind Power Deployment in Pakistan

2014 when oil prices fell from $ 115.7/barrel in excluding hydro power to 785 GW. Wind and solar June 2014 to $ 27.1/barrel in January 2016. The photovoltaic (PV) saw a record addion of 63 GW prices of coal dropped from $ 84/tonne in April and 50 GW respecvely, represenng 77% of all 2014 to $ 36.3/tonne in February 2016 (Global RE capacity added last year (Renewables 2016 Trends in Renewable Energy Investment 2016, Global Status Report, 2016, p. 32). During last 2016, p. 18). However, such reducons have not year, overall RE constuted 53.6 % of all the new damaged the increasing level of investment in energy installed globally excluding large hydro renewables. Figure 2 shows an investment which signiﬁes growing importance of renewable comparison between various sources of energy. power. Figure 3 displays global wind power The investment in RE was more than the double installaon trends of last ﬁve years. As of end of $ 130 billion invested in fossil fuel based energy 2015, wind energy strengthened its foothold in generaon during last year. RE revoluon and accounted for 434 GW of installed power globally. Renewables experienced largest annual capacity addion in 2015, with 147 gigawa (GW) of RE Although, RE has been recognised vital to achieve installed worldwide, taking the total RE capacity sustainable development targets, some

Figure 2: Investment Comparison by Energy Resource $ Billions 300

250 Renewables ex large hydro 200

150

Fossil fuel 100 Large hydro 50 Nuclear 0 2008 2009 2010 2011 2012 2013 2014 2015 Source: BNEF, UNEP

Figure 3: Total Installed Capacity 2011‐2015 [MW]

434’856

392’927 371’374

336’327 318’530 296’255 10,70% 282’608 5,80% 10,40% 254’041 5,60% 236’803 7,50% 4,95% 11,1% 7,31%

End 2011 Mid 2012 End 2012 Mid 2013 End 2013 Mid 2014 End 2014 Mid 2015 End 2015 *

Total installed capacity: Includes all installed wind capacity, connected and not-connected to the grid. © WWEA - 2016

2 Capacity Building and Policy Options challenges sll persist, especially, in developing 2006. The policy provided certain fiscal and countries. Focus must shi from idenfying what financial incenves to urge private investment in requires to be done to how best to achieve set different RE sources, however, renewables were targets. Developing world faces three dominant not able to fully benefit from the policy. For challenges to scale up RE deployment. First, to instance, wind power growth remained slower ensure integraon of variable renewable energy and it took almost seven years for Pakistan to (VRE), comprehensive planning must be commission its first wind energy project aer the designed. Solar and wind power are affected by announcement of RE Policy 2006. Nevertheless, weather paerns and availability of daylight, Pakistan's wind market started gaining momen- providing variance in output. More flexibility and tum from early 2014 and so far 590 Megawa system upgradaon are required in exisng (MW) of wind power has been installed. Further- energy structures to accommodate higher share more, 298 MW of wind energy projects have of VRE. achieved financial close and they are expected to become online in near future. Second, falling costs of RE is opening up windows for cost effecve deployment and renewables are Overall in the RE sector Pakistan managed to becoming cost compeve to non-RE sources. aract a record $ 723 million of investment in From 2008 to 2015, the costs of onshore wind and 2015 i.e. 77% more than that of 2014 (Global solar PV declined by 35% and 80% respecvely Trends in Renewable Energy Investment 2016, (Next Generaon Wind and Solar Power: From 2016, p. 29). In future this figure could rise to a Cost to Value, 2016, p. 6). As, both technologies much larger one as many wind, solar and bagasse have become mature, developing countries need power projects are in pipeline. RE investment to translate cost reducon trends into their and capacity inducon trends could have been energy system to make them more aracve in more profound, had the grid constraints been less energy provision objecves. severe in the country.

Third, finance remains key to develop RE. Purpose and Background of the Study Financing RE projects is sll a main challenge in many parts of the world. Public funding in This study mainly discusses challenges related to renewables stands at 15% of the total investment wind energy sector in Pakistan. It also provides and is less likely to grow further (Unlocking policy opons and capacity building tools to Renewable Energy Investment: The Role of Risk accelerate wind power deployment in Pakistan. Migaon and Structured Finance, 2016, p. 12). Most of the investment must come from private Since 2013, WWEA has partnered with hbs and sector and that too at lower interest rates to Alternave Energy Development Board (AEDB) to foster RE growth. Public funding needs to be used support wind market growth in Pakistan. In this for providing an enabling environment for private regard the partners adopted parcipatory investment and to remove market barriers approach and brought together various stake- related to investment. holders to discuss challenges constraining wind power growth in Pakistan. The findings were Status of Wind Energy in Pakistan illustrated with the help of two policy papers which also included policy soluons to scale up Pakistan is also confronted with similar challenges wind energy development in the country (Malik around RE growth. In Pakistan the first ever policy & Gsaenger, 2014) (Ashfaq, Gsaenger, & Malik, for Development of Renewable Energy for Power 2015). Generaon (RE Policy 2006) was introduced in

3 Accelerating Wind Power Deployment in Pakistan

The two studies idenfied four main areas (Figure Integraon of renewable energy technologies 4) that have impeded the wind power deploy- into exisng infrastructure is an intricate process ment in Pakistan. These include grid availability which requires transformaon in policy, regula- and interconnecon facilies; regulatory and tory, instuonal and market mechanisms. To policy frameworks; operaonal efficiency of accommodate newly planned systems in efficient government agencies; and availability of finance. and effecve manner, power sector needs to Broadly speaking these impediments are a result develop local capacity in line with new develop- of lack of serious will on part of the government to ments especially in developing countries. The real opmally ulise available RE sources in the challenge is not to devise strategies and policies, country. but to implement those policies producvely. One of the main reasons for ineffecve imple- Ever since WWEA and hbs jointly iniated the mentaon of policies to scale up RE deployment diagnosis process of challenges being faced by is lack of awareness, knowledge-base and experi- wind market in Pakistan, various stakeholders ence at individual and instuonal levels. from public and private sectors alike, emphasized on the need to take these efforts beyond policy Research Methodology research and invest in filling capacity gaps in the wind sector. Based on careful consultaons with This policy paper provides a detailed analysis of various stakeholders, frequently menoned both quantave and qualitave data collected capacity development areas are as following: with the help of primary and secondary research tools. First, an extensive literature review was  Ability to manage high level of RE conducted to have a comprehensive look into the integraon issues faced by wind market in Pakistan and their  Beer understanding for RE costs and soluons. Later semi-structured interviews were tariff determinaon conducted with (a) higher management of wind energy project developers, and (b) public officials  Beer understanding of financial involved in wind energy sector. Queson guide modelling techniques for financial close. and quesonnaire were prepared on the basis of capacity building areas idenfied in the previous study.

Figure 4: Barriers Seriousness Assessment

Policy Paper 2014 Policy Paper 2015

4.1 Insufficient grid infrastructure & interconnection facilities 4 3.5 Lack of coordination between government agencies 3.5 2.9 3.3 3 Government's inability to fulfil its power purchase commitments 2.5 2.5 3.3 2.5 Inconsistent government policies 2 3.0 Limited avenues for project financing 1.5 3.0 1 1 Unsuitable business environment and macroeconomic instability 2.9 0.5 Lack of operational efficiency in government agencies 2.1 0 Unsuitable tariff setting mechanism Grid Availability Operational Regulatory Availability 1.7 and Efficiency of and Policy of Land allocation mechanism is inefficient I nterconnection Government Framework Finance Facilities Agencies Decisions 0 1 2 3 4 5

4 Capacity Building and Policy Options

The interviews were used to reflect on the capacity funcon as resilient, strategic and autonomous needs. Results of the interviews are discussed in the enty” It has also been defined as “the ability of next secon. individuals, organisaons, sociees to set and Limitaons of the Study achieve their own development objecves (The Challenge of Capacity Development: Working The study should be interpreted in case- and towards Good Pracce, 2006). It can be described context-specific manner. Readers are advised to as “the ability of human system to perform, take into consideraon following limitaons while sustain itself and self-renew” (Ubels, Acquaye- interpreng findings of the study: Baddoo, & Fowler, 2010). 1. The challenges being faced by wind energy sector in Pakistan are diverse and These definions encompass the concept of mul-dimensional, this study, however, capacity building as a process by which individu- confines itself to highlighng each and als and organizaons mobilise and harness their every issue and discusses only three main resources to effecvely develop and sustain. area: RE integraon, understanding on RE costs and tariff determinaon, and This study uses Internaonal Renewable Energy financial modelling techniques for beer Agency's (IRENA) capacity building framework financial close. which is defined as a process through which individuals and organisaons develop technical 2. The study does not discuss technical and managerial experse and performance issues related to capacity building areas abilies to become more effecve and efficient” and in fact, primarily focuses on policy side (Capacity Building Strategic Framework for of the issues. Nevertheless, technicalies IRENA (2012-2015), 2012, p. 12). IRENA's will be addressed in the training workshop concept of capacity building accounts for differ- by trainers of relevant fields. ent meanings at various levels: 3. Despite convergence in the challenges facing developing countries to accelerate At individual level it appertains to changing renewables development, local content behaviour and atude through knowledge, and country specific issues differ in their training and skills exchange by acvies like nature. Therefore, to make the findings of learning by doing and parcipaon. At organisa- this study relevant to other countries, onal level, it includes strengthening organisa- similaries and dissimilaries between onal funcon and performance by developing Pakistan's wind energy sector and that of tools, guidelines and modalies. It also deals with other countries must be taken into strengthening of relaonship between individu- account. als and organisaons. At system level it involves overall policy, regulatory and economic frame- Capacity Building Framework works within which individuals and organisaons perform in accordance to their mandate. This It is essenal to first adopt a framework around study intends to develop individual and organisa- the meaning of the term capacity building and onal capacies at all three levels. how does it help (in this case to foster wind power deployment in Pakistan). IRENA's strategy outlines certain characteriscs for supporng RE deployment through capacity Scholars and praconers have defined capacity building (Capacity Building Strategic Framework in several ways. According to Kaplan (1999) for IRENA (2012-2015), 2012, p. 14). This study capacity refers to “the ability of organisaons to builds on the same capacity development strategy by adding some features to it.

5 Accelerating Wind Power Deployment in Pakistan

A comprehensive capacity building does not take parcipave to opmise the outcomes of place in isolaon, in fact, it includes cross cung capacity enhancement. themes where capacity development is required. Workable condions have to be created at all Monitoring and evaluaon are vital to a capacity levels through up-to-date knowledge and prac- building acvity to ensure connuous support ces, and mainstream them into policy. For this and get opmal output. Both WWEA and hbs purpose, capacity enhancement will take place in believe that targets must be clearly defined to all three key intervenon areas. monitor progress, evaluate results and suggest remedial measures if required. Capacity building needs to be issue-based, demand driven and tailor made in order for it to This research intends to develop capacity of both be successful. All three capacity building areas public and private decision makers by making have been selected considerately and capacies them familiar with pracces and policies that will be developed according to the nature and have been adopted by various countries to significance of idenfied areas. address the challenges of RE integraon, understanding of RE costs and tariff determina- Despite the fact that capacity building strategy on, and financing RE projects. Technical issues can be useful for other variable renewable energy relang to capacity building areas will be taken up resources, this study is sector-specific and in capacity building workshop which will be primarily deals with building capacies in issues organised in cooperaon with mullateral related to wind energy sector of Pakistan. instuons where experts/trainers of respecve fields will develop individual and instuonal Since WWEA kick-started its work in Pakistan, it capacies in idenfied areas. Training will be has been highlighng the significance of done keeping in view the above menoned parcipatory policy making in energy sector of characteriscs of a successful capacity building Pakistan. Similarly, this study also engages various strategy. stakeholders to frame it more inclusive and

6 Capacity Building and Policy Options

Section B: Findings & Discussion

The following secons present findings and development on financial modeling techniques. perspecves of both private and public sectors. It is apparent from the concerns raised by inves- Private Sector Perspecve tors that lile progress has been made to overcome grid interconnecon, operaonal A total of twelve private wind energy developers efficiency and financing issues. Therefore, the were interviewed. The responses gathered are need for capacity building has increased to foster summarized below: wind power industry in the country. Selecon of Capacity Building Areas Renewable Energy Integraon A list of capacity building areas (idenfied by Figure 6 summarizes the responses about capac- WWEA) in the wind sector of Pakistan was shared ity need on effecvely managing RE integraon. with the respondents who were asked to share Nine wind energy developers asserted that grid their views. The areas include effecve manage- operator seriously requires capacity building on ment of higher RE integraon, beer understand- integrang higher level of variable renewable ing for RE costs and tariff determinaon, and energy (VRE) into the grid system. Investors financial modelling techniques for beer financial argued that although the share of wind energy is close. meager (less than 2%) in total installed power Nine out of twelve respondents strongly agreed capacity of the country sll, they are facing with with the idenfied areas for capacity building in the challenge of weak grid connecon facility. The wind sector (Figure 5). Most of them noted that issue of interconnecon facilies will mount as the areas have been rightly pointed out, and more and more wind power will be coming on- serious lack of capacity in public agencies causes line in future. The project developer who did not delay in projects which further amounts to feel the need of capacity building in this area increase in project cost. It was highlighted that noted that grid operator is now familiar to deal the wind market in Pakistan mainly faces these with intermiency of wind energy for smooth grid three issues that are resulng into crowding out funconing. Two developers were not sure if the of investment from Pakistan to other aracve capacity building is required or not as their markets. Three respondents who did not strongly projects were in very early stage of development. agree to the selecon of capacity development It was noted even in previous two studies, that the areas argued that although capacity building is insufficiency of grid infrastructure is the single needed in RE integraon, RE costs and tariff most serious boleneck which is confining the determinaon for public officials, local lenders growth of wind power in Pakistan. Absence of and project developers do not require capacity strong grid system coupled with lack of communi-

Figure 5: Selecon of Capacity Building Areas Figure 6: Renewable Energy Integraon

10 10

8 8

6 6 4 4 2 2 0 Strongly Agree Maybe No 0 Agree Yes No Not Sure

7 Accelerating Wind Power Deployment in Pakistan caon between grid operator (Naonal 10 day me aer the submission of tariff request Transmission and Despatch Company (NTDC)), however, it at least takes six months to approve power purchaser (Central Power Purchasing tariff for a project and such a pracce is restrain- Agency (CPPA)) and developers make the situa- ing developers from further investment in the on worse for project developers. sector. Renewable Energy Costs and Tariff Financial Modeling Private sector response on beer understanding Figure 8 illustrates responses relang to financial of RE costs and tariff determinaon can be seen in modeling techniques for a beer financial close. figure 7. Nine respondents suggested that public The figure below shows a mixed response. Six out officials, especially from Ministry of Water and of twelve respondents observed that local Power, need capacity development on RE costs lenders and project developers need capacity and the regulator also needs capacity enhance- building on project finance which is not a popular ment on tariff determinaon mechanism. Two way of financing in Pakistan. Five respondents respondents said that public officials do not opined, 308 MW of wind energy installed capac- require capacity building in any of the two areas. ity and 477 MW of projects (figures have now However, keeping in view the responses gathered changed to 590 MW and 298 MW respecvely) from wind energy developers RE costs and tariff which have achieved financial close, show that determinaon remain key capacity development financial modeling is not an issue anymore. areas. Local lenders, in Pakistan, are risk averse while During consultaons, developers were more financing RE projects and give lile aenon to concerned about increase in capital cost of project viability and team competence for project projects due to holding up of applicaons and development. Local financing is key to scale up RE delay in awarding of tariff by the regulator. One development, therefore, limited role played by developer discussed that Naonal Electric Power local banks needs to be reversed to open up new Regulatory (NEPRA) is obliged to award tariff in streams of financing for renewables.

Figure 7: RE Costs and Tariﬀ Figure 8: Financial Moddeling 10 9 7 8 6 7 6 5 5 4 4 3 3 2 2 1 1 0 0 Yes No Not Sure Yes No Not Sure

8 Capacity Building and Policy Options

Public Sector Perspecve Grid operator faces problems to integrate power produced by wind projects due to its intermient For the study public officials from AEDB, NEPRA, behavior and variability in resource availability. NTDC, CPPA, Pakistan Council for Renewable Power purchaser experiences same issues and Energy Technologies (PCRET), the Planning lack of communicaon between grid operator, Commission of Pakistan, provincial energy power purchaser and project developers exacer- departments of Sindh and Punjab, and Punjab bate the integraon challenge resulng in slower Power Development Board (PPDB) were inter- growth of wind market. viewed. A total of nine public officials were interviewed, three of them did not respond to Figure 10: Renewable Energy Integraon survey quesonnaire cing lack of preparaon and me as the main constraints for not respond- 8 ing. The response from public officials regarding 6 capacity building areas is discussed below: 4 Selecon of Capacity Building Areas 2 As in the case of private sector, five out of six 0 Yes No Not Sure public sector officials noted that the capacity building areas have been carefully selected (see Renewable Energy Costs and Tariff figure 9). Most of them insisted that as more and more RE is becoming online, to deal with the Figure 11 points out public officials' response challenges faced by wind energy market in about RE costs and tariff determinaon Pakistan, professional capacies of public officials mechanism. All six respondents argued that must be enhanced accordingly. training is required for public officials on both components. Public officials when compared to Figure 9: Selecon of Capacity Building Areas developers, however, differed in their response to cost of renewables. Respondents from public sector were more concerned about costs of RE projects, especially wind power projects, and specified them capital-intensive as they require huge upfront costs, hence, declaring renewables least compeve in comparison to other sources Strongly Agree Maybe No of energy in meeng growing energy demand of Agree the country. Whereas, private sector personnel focused on increase in total project costs due to delays in applicaon process and instable Renewable Energy Integraon regulatory frameworks. As developing renewable resources stage new set During the survey, it was learned that public of challenges for grid due to their availability far o ffi c i a l s w e r e l e s s a w a r e a b o u t c o s t from load centers and variability of generaon, compeveness of renewables both in terms of public officials must be equipped with new LCOE and system-based value of RE as these two strategies to cope with such challenges. All six approaches are now recognized imperave to public officials who were interviewed unani- analyze benefits of renewable resources. Public mously stressed on the need of building profes- officials require capacity building to have a clearer sional capacies on RE integraon into exisng and holisc pic ture pre se nte d by R E grid. Figure 10 demonstrates responses related to development. RE integraon.

9 Accelerating Wind Power Deployment in Pakistan

On the tariff front, official from NEPRA asserted Figure 11: RE Costs and Tariff that lack of knowledge about current market situaon has to be highlighted in new tariff on yearly basis, but lack of awareness on up-to-date market situaon creates problem while determining a new tariff. Therefore, capacity development is needed to reflect new developments in wind energy sector when determining tariff. In addion, all public officials were unanimous in their demand for capacity building on aucons mechanism for RE projects which they believed has resulted in lower costs in many parts of the Yes No Not Sure world.

10 Capacity Building and Policy Options

Section C: Overcoming lack of Capacities: Policy Implication

Based on the findings of the study and perspec- generated from wind energy projects. The ves from public and private sector officials, this demand for upgrading Jhimpir power grid will secon aims at assisng policy makers engaged in intensify with more power coming online in near the wind energy sector to devise policy tools to future. The regulator has to announce tariff for cope with capacity building areas and foster private transmission lines to allure investment in renewable energy (wind energy) market growth grid development. in Pakistan. Development of Hybrid Projects Renewable Energy Integraon In Pakistan wind and sun generate energy at This study proposes following tools to overcome different mes. Sun shines bright during the day RE integraon challenges: whereas, wind blows faster in the evening. Co- locang wind and solar energy projects make Grid Privazaon economic and technical sense. Furthermore, same grid connecon can be used for solar power Insufficient and weak grid infrastructure remains project as of the wind farm resulng in reduced to be the most crical barrier in developing wind grid costs and supplying power with lile energy projects in Pakistan. In previous studies interrupon. However, some barriers persist in conducted by WWEA regarding Pakistan's wind developing hybrid wind-solar parks. energy market, public officials noted that lack of funds and difficult soil condions were the two The government should introduce policy and major bolenecks to develop grid infrastructure regulatory measures to encourage development and transmission facilies for wind power of hybrid power projects. For that purpose, land projects in Pakistan (Malik & Gsaenger, 2014) allocaon mechanism has to be revisited and land (Ashfaq, Gsaenger, & Malik, 2015). should be provided to investors in bulk for the development of hybrid projects. On the tariff Keeping in view the intensity of power evacuaon front, NEPRA needs to devise new formula and issue, government of Pakistan introduced the procedure for a single tariff for hybrid projects. transmission lines privazaon policy in 2015 to Intermiency and variability can be reduced by aract private investment in transmission mix of sun and wind power generaon which network (Policy Framework for Private Sector would pave the way for smooth integraon of RE Transmission Line Projects, 2015). However, the into exisng grid structures. government's priority is to develop large High Voltage Direct Current (HVDC) transmission lines Wind Forecasng Techniques and so far not a single private transmission project has been awarded tariff by NEPRA. As variability and unpredictability of wind power present many challenges to grid system opera- The government needs to expedite the privaza- tors, integrang wind energy effecvely into on of grid especially, in Jhimpir and Gharo areas energy system requires high quality wind energy where all the operaonal and upcoming wind predicons. Forecasng wind resource output power projects are located. Moreover, 132 kV days, hours and minutes in advance significantly transmission line at Jhimpir should be replaced reduces grid operaons cost for ulies. with 220 kV line as it unstable to evacuate power Innovaons in forecasng methods have made it

11 Accelerating Wind Power Deployment in Pakistan

easier for power system operators to reduce the with the issues of variability. The government uncertainty related to electricity supply from should encourage private investment in the VRE. development of smart grids by providing incenves to investors. Such policy will lower the Wind forecasng primarily deals with medium burden for government which is already fiscally and short term fluctuaons. Weather data challenged. Smart grids offer a clear opportunity providers feed medium term forecasts for coming for developing countries like Pakistan to leapfrog 48 to 72 hours. On the other hand, short term over old technologies to improve system reliabil- predicons are forecasted for next 1-2 hours ity and use exisng infrastructure in opmal which can be more accurate as compared to manner. medium term forecast (Hossain, 2015, p. 15). As variability is inherent to VRE, forecasts can only Renewable Energy Costs and Tariff solve part of the problem, they cannot fully Determinaon address the variability issue. However, they can be very effecve in balancing power demand and Wind Energy Costs reducing grid operaons costs caused by fluctuaons. It is, therefore, suggested for NTDC The growth of wind energy has pushed the and CPPA to use latest wind projecon tech- capacity addion of renewable power generaon niques for smooth funconing of grid operaons. to a record level. It is mainly the cost reducon in It is important to understand that wind onshore wind energy technology that has helped forecasng should be done on the grid system the increased deployment of renewables world level as well as at the wind farm level in order to over. Today, the global weighted average onshore minimise stascal mistakes and opmise the wind energy investment cost is $ 1560/kW and quality of predicted and available power output. LCOE stands at $ 0.07/kWh (The Power to Change, 2016, p. 10). Whereas in Pakistan the Smart Grid levelized tariff for wind energy projects is $ 0.10/kWh that is three cents more than the global Smart grid technologies (SGTs) permit higher average and costs for seng up wind farm is also level of RE penetraon in electricity system “by on a higher side. Global trends in RE cost reduc- making the system more flexible, responsive, and on need to be translated in Pakistan by pung intelligent” (Smart Grids and Renewables, 2015, right policy and regulatory frameworks in place. pp. 5-6). Smart grids can be very cost effecve when construcng new or upgrading old grids. Cost reducons are primarily driven by four Studies have shown that value of benefits by drivers: economies of scale; compeve supply using SGTs exceeds the value of costs (Renew- chain; cost of finance (related to general capital able Energy Integraon in Power Grids, 2013, p. cost and to perceived risks); and technological 12). When combined with wind forecasng improvement. It has been learned that wind technologies, SGTs enrich efficiency and energy costs have contracted by 7% whenever producvity of RE generaon. For instance, in the global wind installaons doubled. Acute compe- case of Denmark, wind forecasts are integrated on on the market has also driven the costs down regularly into grid operaons resulng in and this trend is being translated in new markets successful management of over 30% of electricity to reduce the cost of wind energy projects. generaon from wind energy. Addionally, gradual improvement in wind turbines technology, in terms of, beer micro- As smart grid can enable higher integraon of RE, sing, reliability in maintenance, efficient blades, changes in regulatory and policy frameworks are high hub height of turbines and larger blades has required for successful installaon of SGTs to deal improved the capacity factor that has been

12 Capacity Building and Policy Options resulng in lower overall cost of wind energy (The market and it would also result in well-med Power to Change, 2016, p. 11). commissioning of the projects. Moreover, tariff determinaon mechanism requires revision to There is the lack of clarity among many of the make it transparent and more adjustable to the public officials relang to the cost of wind energy market situaon. in Pakistan. Public officials oen argue that the cost of wind power generaon is higher as NEPRA has been reviewing tariff on yearly basis to compared to other resources of energy although, incorporate developments and advancements in the cost is decreasing gradually and becoming wind industry since 2013. NEPRA calls for inter- compeve with other resources. Moreover, it venons from various stakeholders which follows should be seen beyond the tradional focus on a public hearing where supporng data is LCOE and the overall system value (SV) needs to discussed and analysed thoroughly to determine be factored in for a comprehensive analysis of a new tariff. Thereaer, gathering responses from posives and negaves resulng from renewable various stakeholders NEPRA issues a noce of a power generaon (Next Generaon Wind and new tariff few days aer the public hearing. It is Solar Power: From Cost to Value, 2016, p. 4). proposed that the regulator should change the Posives seem to outnumber negaves when it tariff mechanism slightly to make it more inclu- comes to fuel costs, carbon emissions, grid system sive. Intervenons and supporng data called reliability and line losses. from different stakeholders should be made public before a public hearing. It would result in Wind energy technologies can unleash substanal beer discussion and parcipaon at a public cost reducon in future by taking correcve hearing. Moreover, tariff determinaon measures e.g. effecve implementaon policy mechanism should include clearly defined and stable regulatory frameworks. Comprehen- framework for review and appeal. The appeal sive administrave operaons, approval process would allow stakeholders to quesons processes formed on defined naonal policy the decisions of the regulator based on law and guidelines can result in reduced development and substance. Appeal process also provides check transacons costs for wind projects in Pakistan. and balance regarding the wrong decisions (if any) of the regulator. Tariff Determinaon For effecve management of RE energy, certain Two mechanisms, predominantly, feed-in-tariff suggesons, including, grid privazaon in wind (FIT) and aucons are followed worldwide to resource rich areas, development of hybrid power accelerate the deployment of renewables. In projects, usage of wind forecasng techniques Pakistan, RE policy 2006 offers a FIT known as and developing smart grid have been proposed in upfront tariff for wind power projects. Aucons this study. All of these should be factored in and framework for wind projects is non-existent at this accommodated in a new tariff to incenvise and point in me. encourage investors.

Number of issues ranging from delay in tariff Renewable Energy Aucons/Compeve award to the tariff determinaon process itself Bidding? have been causing troubles to the growth of wind industry in Pakistan. During the survey, many wind The talks of introducing RE aucons/compeve power developers pointed out that delays in tariff bidding have been doing rounds in the policy approval increase total cost of wind power circles of Pakistan for some me now. Naonal projects. The regulator must ensure mely Electric Power Regulatory Authority, in its call for approval of tariff to encourage investment in wind intervenon to announce a new wind tariff, has

13 Accelerating Wind Power Deployment in Pakistan

asked for whether to determine a new upfront Availability of finance is already a challenge to the tariff or a benchmark levelised tariff for compe- wind market growth in Pakistan. Lastly, it could ve bidding. force investors to use substandard and unreliable equipment which does not allow full ulizaon of WWEA is concerned in general about the current wind resource. internaonal trend towards aucons as this tool has not yet proven to contribute to accelerated Recent biding by Pakistan Power Infrastructure cost reducon nor to increased renewable energy Board (PPIB) for Regasified Liquified Natural Gas deployment. Rather the opposite, the introduc- can be quoted as an example where lack of on of aucons seems to reduce compeon by preparaon for structuring, transacons and reducing the variety and number of parcipants project risks aracted very few investors and bids in the market. In parcular smaller, domesc and were higher than expected. To avoid this kind of local investors, and communies invesng in situaon in the future, government must come up renewable energy are systemacally discrimi- with a judicious plan by taking all relevant stake- nated by most aucon systems as they cannot holders on board and formulate a comprehensive afford to take the risks usually involved in bidding policy on RE . These policies should also cover processes. However, parcularly in developing other areas which are sll detrimental for the countries, such smaller investors do create renewable energy sector in the country. With substanal addional value for their community and for their country as these type of investors, regard to the cosng aspect, WWEA recognises different from internaonal corporaons, and understands the concerns that power prices typically re-invest their profits in the local or should be kept as low as possible. This objecve naonal economy. must sll allow investment in power generaon infrastructure in order to fill the exisng All such trends must be analysed carefully before generaon gap. fundamentally changing the current legislaon in Pakistan. The main queson arises here: how WWEA suggests that instead of a complete would aucons mechanism effect the wind power change in the support system, government of market and the wind power sector of Pakistan, Pakistan should consider to start a dialogue with especially if introduced immediately? In addion, the renewable energy sector in the country on there are technical requirements which need to how and how far the current FIT could be be in place before an aucon system can start – adjusted and overall cost reduced. For this while the implementaon of the FIT can be done purpose, WWEA is willing to play an acve role easily. and collect further input from the private sector. A dedicated event could be arranged in which all With regard to the impact of aucons, WWEA relevant stakeholders, from public as well as from sees that their instantaneous implementaon private sector, come together to explore such could be detrimental, parcularly, in five ways to opons and get a beer mutual understanding. the wind industry in Pakistan which took ten years to gain momentum. Firstly, it favours experienced Financial Modeling and big investors hence, marginalising local and small developers. Secondly, it would negavely During the survey, it was learned that the wind impact domesc finance, which already plays a energy market in Pakistan was moving in right limited role in wind power project development direcon with regard to financing. It is notewor- in Pakistan, by further reducing it. Thirdly, it could thy to menon that so far around 480 MW have adverse effects on projects which are at (number will increase in near future) capacity of different stage of their development without wind power projects have achieved financial compensang them. Fourthly, it can be costly for close by capvang funds from internaonal and both organising agency and parcipants. domesc financial markets. It is also imperave to

14 Capacity Building and Policy Options

note that the most of the funding has been Capacity Building Workshop provided by development finance instuons and foreign banks. The share of local finance Based on the findings of this research, a training instuons is rather a small one as they seem risk workshop will be organised by engaging mullat- averse while financing RE projects in Pakistan. eral instuons and development partners and bringing together parcipants from government As private finance and local financing facilies are and industry. Experts will train public and private key to develop RE projects, local banks need to sector officials in harmony to their capacity step up to narrow the financing gap. Project building requirement. finance has surfaced as a dominant feature of funding large infrastructure projects. Domesc It is widely believed that supporve and financial instuons should fund projects based facilitave environment is imperave for on disnct project risks and expected cash flows successful deployment of renewables. As the rather than corporate balance sheet of sponsors. leading voice of wind energy worldwide, WWEA Furthermore, project finance plays a pivotal role has been facilitang the government and industry in financing RE projects in emerging market like in Pakistan to create a conducive environment for Pakistan where pares mostly rely on guarantees wind power development since 2013. This study and purchase agreements to ensure the viability aims to build individual and instuonal of projects. The presence of sovereign guarantee capacies to have a strategic and lasng impact by GoP and compulsion on CPPA to purchase on wind energy market of the country.∎ generated power makes it easier for local banks to finance RE projects on purely project finance basis.

15 Accelerating Wind Power Deployment in Pakistan

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