Khyber Pakhtunkhwa Energy Sector – A Primer

December 19, 2020 By 0 Comments

The energy sector of Khyber Pakhtunkhwa is centered around the development and operations of Hydro Power projects. With most IPPs in Pakistan located in Punjab and Sindh due to port and logistic access, KP has an abundance of hydel resources with an aggregated capacity of 30,000 MW. To facilitate public and private sector investment in the sector, the Sarhad Hydel Development Organization was inaugurated by the government, which was later renamed as the Provincial Electricity Development Organization (PEDO) in 2014 to act as an investment arm for power development projects. KP has also shown the most promise on the upstream exploration. Post-18th amendment, GoKP established Khyber Pakhtunkhwa Oil & Gas Company Limited (KPOGCL) with the mandate of commissioning oil and gas upstream activities and ensuring private sector participation and investment in the E&P industry. The energy sector in the KP is fourth in contribution to KP’s economy after services, agriculture, and industry sector and contributes roughly 7-8% of provincial GDP. It also retains the potential to be a provider of future FDI in the province and employment opportunities to vastly remote rural areas of the region. Overall, the energy sector in the KP contributes to 11 percent in the employment rate of the province. Renewable energy has become an emerging sector with most of the employment taking place in trades related to micro hydel energy trades in Swat and Chitral, which have high potential for the production of cheap electricity through micro hydel power plants. In terms of RE, solar holds the second most potential besides hydel. The prolonged and unresolved power shortage in the country, particularly in the rural area of KP and FATA, has given a surge to solar energy deployment and has the potential to ramp up off-take.

Besides community hydel projects, the GoKP has shown interest in the mobilization of large and medium-sized hydel projects. It has adopted the federal Alternative and Renewable Energy Policy 2006 for all renewable energy projects except hydropower. For hydropower potential, the PEDO has issued the Khyber Pakhtunkhwa Hydropower Policy 2016. The provincial government has developed a ten-year action plan to develop hydropower projects in the province through public funds and private-sector investments. There are differences between the rural policy and the federal policy of 2006. The latter assigns grid interconnection responsibility to NTDC while the provincial rural requires the project developer to construct the transmission line and embed the tariff’s cost. The strategy envisaged a mix of public spending, corporate funding, and public-private partnership to mobilize investments.

Additionally, the large projects, such as SK Hydro, Azad Pattan, and Chakothi Hattian have seen private sector engagement with installed capacities of 870 MW, 640 MW, and 500 MW respectively, primarily with the aid of Chinese investments. Nonetheless, issues persist that hinder the growth and investments in the energy sector. High transmission and distribution losses in PESCO / TESCO circles and weak operational structures have spiralled the power sector under high technical and commercial losses. Additionally, the monopolistic structure of the electricity market alongside high inefficiencies means that there is little incentive for the private sector to mobilize investments on its own. Also, sub-standard customer service, along with red tape, make it a challenging industry to attract private investments.

Some issues persist in renewable energy and oil and gas sectors also. For large and medium hydel, PEDO has demonstrated little capacity to initiate, design, and close projects. Overall, technical capabilities remain weak and require strengthening. Other challenges also abound. For instance, to reach full capacity, PEDO needs to initiate detailed designs and feasibilities on the Chitral river. Further, extensive delays have been observed in project management such as the due implementation of hydro projects which leads to increased costs on both financial and economic fronts, a case in point is that in PEDOs 40 years history, it has only been able to install 120 MW of public sector projects). On the hydrocarbons front, the GoKP needs to liaise with federal agencies to improve the regulatory framework to incentivize exploration. If streamlined, such processes can greatly simplify due diligence and compliance procedures and facilitate investment opportunities by local and international E&P firms. A technology-driven approach also needs to be part of the new hydrocarbon strategy, such as availability of hydrocarbons prospects and seismic data to investors who can access data through secure online platforms. Additionally, seismic studies need to be carried out for unexplored areas to improve upon hydrocarbon prospectivity data. On energy efficiency, there appears to be a lack of a coherent strategy to foster energy efficiency and conservation efforts. There is a need to improve upon a transaction off-take model that can facilitate energy efficiency investments, such as a guarantee fund through first loss guarantees in coordination with IFIs, Pakistan Credit Guarantee Company, lenders etc. Moreover, capacity building through education and training remains a major bottleneck along with compliance, following the enactment of national EEC laws.

To counter the issues, present and further enrich the business environment in the KP province, GOVERNMENT has been presented with specific entry points for their intervention that can streamline the process. This process then, in turn, could speed up the projects that are in the pipeline in different energy streams and ultimately bring in more projects that could catalyse the economic development in the province. For instance, there exists an opportunity in the ARE policy 2020 to auction new RE projects on a competitive bidding process. This would require capacity building at PEDO to incorporate changes that would be introduced in the ARE policy 2020. PEDO would also need to deepen its’ understanding of the transaction design and implementation process, including project management, evaluation of technical and financial feasibilities and risk-return parameters. GOVERNMENT could also help in providing transaction support in preparing and evaluating concessions under the tripartite agreement, which can be done by deploying specific consultants specialized in the domain. Support around specific transactions could assist PEDO in procuring the right concessionaires for new hydel projects and build capacities for future purchases. In turn, this will improve GoKP’s ability to invite financially and technically sound concessionaires to ensure projects continuity over its’ proposed life, hence realizing Value for Money (VFM) for the government. It is suggested that GOVERNMENT deploys specislized transaction consultants to assist PEDO and help them in designing the optimal framework.

One of the most significant ways that Government can help GoKP is to build upon the wheeling regulations and coordinate a market between generators (publicly owned, such as PEDO) and Bulk Power Consumers (BPC) for industrial off-take of power. Some projects can be facilitated for wheeling such as Malakand HPP (81MW) that can be offered to industries through strike price (which would still be substantially lower than what they are paying to CPPA(G)). If these projects are successfully executed, they can pave the potential for a homegrown, competitive power model for GoKP, realizing efficiencies for the entire province. Government can facilitate such transactions under wheeling arrangements. It can build upon projects for a competitive market off-take that would consequently reduce their reliance on federal institutions while augmenting revenues for the province through indigenous hydel development offerings. Also, GoKP can coordinate for the establishment of a new transmission company. Under the NEPRA Act amendment, provincial governments can now set up their own provincial transmission companies, such as the one established in Sindh called the Sindh Transmission and Dispatch Company (STDC). With the setting up of this company, GoKP can evacuate power by relying on its agency (instead of NTDC) while promoting projects under both public and private sector. At the same time, maintaining a viable transaction structure and bid security package would allow investors to utilize the opportunity (most likely under a tripartite arrangement).

Another entry point suggested in this report is around waste to energy. There is a strong political will to execute waste to energy projects, and they have the potential to bring about a socio-economic revolution in KP. Further, such projects have a strong link with climate change, are capable of generating employment opportunities, and can directly impact health improvement indicators and sub-surface water. With rapid urbanization in Peshawar and Mardan, one of the most daunting issues is the mounting waste problem that affects public health, pollutes the environment, and threatens to drown some poverty-stricken areas in toxicity. It is estimated that solid waste is growing in Peshawar and the adjacent regions at an annual rate of 2.4%. GoKP can carry out specific pre-feasibility studies, identifying densely polluted areas in major cities and targeting an optimal point that would be suitable to place a waste to energy plant that could benefit the population. Additionally, a Model Concession Agreement (MCA) and a bid security package for a transaction that could be implemented in the Public-Private Partnership (PPP) domain could start from a pilot transaction and if successful, can be replicated throughout with more substantial stimulus. This exercise could involve several stakeholders such as the Ministry of Climate Change, Global Environment Facility (GEF) for assistance on financial and technical fronts.

Another area that GoKP can target is the completion of feasibility analysis of the Chitral River that is a conglomeration of around 36 tributaries originating from the same number of separated valleys in the district. It is the largest river in KP, but the capacity for hydraulic power generation remains severely limited. To be fully implemented, site and feasibility assessments of projects need to be undertaken. GoKP can help prepare transaction opportunities and a transaction structure for possible locations in the Chitral River. The transaction opportunities include developing a well-defined pre-feasibility study in the area and identifying key factors that could help in harnessing energy. Adding on to the site surveys, GoKP can help the government formulate models and analysis on the Chitral River and the surrounding area through preliminary designs in the first stage, leading to detailed plans. Consequently, legal and financial feasibilities could be firmed up in case investors are interested in specific sites and locations.

For KP’s energy growth, there is a clear need for a well-coordinated demand-side management strategy that can help take prudent supply-side decisions and related infrastructure. With the demand for intersectional developments, such as transmission and grid investment, the need for a cohesive strategy becomes much more significant. To KP, this exercise will mean better preparation, evident not only at the provincial level but also with the federation for a successful evacuation, tariff, and regulatory regime. GoKP can conduct a comprehensive, long-term (10-year) energy demand-side assessment of KP, identifying which sectors are expected to consume energy (such as tourism, hospitality, marble, SEZs, transport).  Furthermore, a calculation of how much could be saved from energy efficiency and conservation, and how much new generation stimulus would be needed. A holistic plan that balances supply-demand scenarios for KP would optimize public sector finances without imposing excessive direct and contingent liabilities. Moreover, capacity building to create awareness regarding the demand side management poses another entry point. Educating the masses about the EEC laws and projects’ adherence to these laws is also required.

As identified, for hydrocarbons off-take, GoKP can be best positioned to organize regulatory dialogues that can best present interests for KP in liaison with the federal agencies. Enhancing the capacity of DGPC / provincial government and making existing regulations more investor-friendly through quick, compliance-based decisions and in line with international standards is a priority. This can be achieved on an on-going basis to ensure that regional priorities are well-matched with federal legislation. There is a need to have a sound regulatory and policy framework to improve the existing investment framework. The policy and organisational context will eventually drive the demand for GoKP to bolster the capacity to address longer-term structural challenges while responding to immediate-term priorities. Also, a sound regulatory structure will provide for more equitable, evidence-informed policymaking, and lead to effective, value-based governance that engages stakeholders in the policymaking process inclusively and openly. Moreover, GOVERNMENT can also facilitate discussions on the unbundling of natural gas, lead discussions forward and devise a framework that can pave the way for operational and institutional efficiencies, which would enable both federal and GoKP to design a new competitive and operationally efficient landscape.

GoKP can also work on fostering energy efficiency transactions, especially in industrial and building sector. There are two impediments generally faced for industrial and building energy efficiency financing; i) high transaction costs and ii) performance risk. GoKP can play an active role in the development of a framework that can overcome both the impediments to catalyze a road to success. For instance, the provincial energy department can attempt a few pilot projects by overcoming the disproportionately high transaction costs that the transactions face. To address this barrier, GoKP can work with financial institutions, such as lenders, IFIs, Pakistan Credit Guarantee Company Limited in making energy improvements easier for KP energy consumers, and to develop low-risk and cost-effective energy efficiency measure packages that can achieve up to 20% energy savings for one specific small industrial unit. The team can choose to focus the pilot project efforts on small commercial office buildings with GOVERNMENT providing transaction support, allowing building owners who meet a specified criterion to obtain funding with minimal paperwork and without lengthy bureaucratic processes.

Lastly, there are positive energy nexuses that can accrue from various interventions that GoKP can capitalize. For instance, one of the fundamental challenges that KP faces is meeting the growing demand for food, water, and energy for a rapidly growing population. First, GoKP can focus on providing 30MW power to the Chashma Right Bank Lift Canal Project, which has been approved by the Executive Committee of the National Economic Council to irrigate approximately 286,140 acres of land in the southern districts of the province. If executed, this can free up space and provide an area for plantation of the crops that could mitigate the provincial government’s burden to import food and declare self-sustenance. This along would be a milestone and can result in significant improvement in food security, climate change mitigation efforts, and employment opportunities to the indigenous population of the province. Second, GoKP can also plan and execute transaction design for a potential HPP near the Tang on the Tochi river, which can boost the energy required for the surrounding areas, i.e., North Waziristan in the north and D.I Khan in the south. If executed, this would catalyse the development pathway in the NMD areas – providing them with cheap and affordable electricity for economic and social upliftment.