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History of Power Sector Policies in Pakistan

[dropcap font=”” size=”1″ background=”” color=”” circle=”0″ transparent=”0″]T[/dropcap]he first Policy of the Government of Pakistan to attract private investment in power generation was introduced in March 1994. The Hub Power Project was processed as an Independent Power Project (IPP) before that date and essentially this policy consolidated all the processing steps, incentives, consents and approvals which were applicable for private investment in power generation in Pakistan in one package. The main aim of this Policy was to overcome the severe shortage in generation capacity at that time; the Policy also attempted to reduce the need for the public sector to finance investments in power sector in view of the budgetary constraints.

The 1994 Policy was one of the earliest attempts by a developing country to open the power sector for private investment. Since the private sector had no experience of operating in developing countries, it was recognized that the Government would need to insulate investors from majority of the risks that were associated with, or could arise from, private investment in Pakistan. The Policy therefore provided a comprehensive Government guarantee, to cover the obligations of all public-sector entities involved in processing and approving, or (after completion and start of commercial operations) working with such projects. These included provisions for remitting dividends/return on equity, servicing foreign currency debt, the timely interconnection of all IPPs with the national grid, purchase of power produced by the IPPs, supply of fuel etc. Also, the Government offered an attractive, fixed price for all power (again, cost plus pricing was the only accepted practice at that time) to be supplied by IPPs.

The Policy was successful in meeting its main goal and added about 3000 MW of new capacity (in addition to Hub) was installed by the year 2000. As a result, the shortfall in generating capacity was overcome. However, the Policy was severely criticized in Pakistan. The main criticism was that it guaranteed a fixed and high price2 for the power produced by IPPs. It was widely speculated that the high prices could not have been agreed and approved without collusion by some of the public-sector counterparts in Pakistan. The Government therefore went through a phase of persecution and prosecution – and issued Letters of Intent to Terminate and in one case an actual Letter of Termination – of many IPPs. While attempts to prosecute the IPPs on charges of corruption in the respective courts of jurisdiction proved futile, this episode soured relations between private investors and financiers, and the Government. As a result, when a new Policy was announced in 20023, the Government first needed to restore the private sector’s confidence for investing in Pakistan. It therefore retained the consents, incentives and concessions (and negotiated up-front tariffs) from the 1994 Policy. The 1994 Policy was also criticized for focusing only on imported energy4. All Projects implemented under this Policy were based on fuel oil or natural gas.

It may be noted that some of the criticism of the 1994 policy is misplaced. While the offered tariff was attractive, and substantially lower prices for power were obtained by many countries5 a few years later; the background conditions were quite different between the projects implemented under Pakistan’s 1994 Policy and the subsequent projects in other countries. First, major technological advances became commercially available by 1995-96 – the efficiency of gas combined cycle plant improved from about 45% to more than 55%. The offtake level guaranteed in Bangladesh for example was around 85% (compared to 60% in Pakistan), which also meant lower generation costs – as fixed costs were distributed over a larger volume of electricity. Finally, and perhaps most importantly, in Bangladesh and Egypt the Government solicited competitive bids from investors based on the price of power from those IPPs. The absence of competition in the 1994 Policy may have contributed to higher prices than what could have been achieved through competitive bidding, but it needs to be noted that at that time private investors had no experience of competitive bidding for power projects in developing countries (and therefore may not have responded actively to Pakistan’s request for investments in power generation).

The main concern about the 1994 Policy was that the Government started persecuting, and tried to prosecute, IPPs essentially on the assumption that high prices meant corruption. It needs to be noted, however, that the 2002 Policy also did not strongly push for competitive bidding or made it mandatory for new IPPs in Pakistan to procure power on competitive basis.

The Policy for Development of Renewable Energy for Power Generation (the RE Policy) was announced by the Government in 2006. It adopted most, if not all the provisions of the 1994 and 2002 policies – government guarantees for power off take, repatriation of dividends and debt servicing, coverage for wind risk, etc., and an attractive tariff which again was based on a cost-plus approach in determining the price of power. At that time, power generation from RE projects was substantially more expensive than thermal or hydro projects. The policy contributed to diversifying the sources of power supply and reduces the country’s vulnerability to changes in international oil prices, and indirectly to support the Government’s commitments and efforts on global warming and climate change. .

RE projects all over the world are impacted by sharp reductions in capital costs – as equipment prices have fallen drastically over the last decade. This is also true in Pakistan: following this decline in equipment prices, NEPRA is reluctant (with some justification) to continue to accept tariffs which it considered prudent and even approved 5-10 years back. It has therefore reduced offered tariffs a number of times.

The reduction in equipment prices has had a salutary impact on the prospects for investments in RE. Since their cost of power production is comparable to that of thermal (and under some assumptions even lower than the fuel cost of the latter), investors do not insist as much on an up-front/cost-plus regime as they did a few years back. Some are even willing to adopt competitive tendering for their projects. The main concerns about the 2006 RE Policy therefore stem from other external developments.

In many ways, the 2013 Power Policy represented a departure from previous policies. While, its main goal/aim was to eliminate the generation shortfall by adding around 10000 MW of new capacity by 2018, the Policy included a few other goals: reduced reliance on imports for power generation, lowering average generation costs to below 10 US cents/kWh, competitive bidding for new capacity especially for RE projects, and reducing power transmission and distribution losses to below 10%. It also stressed the need for enhanced private sector participation in the power sector.

Against this set of objectives, the Policy has achieved its main goal – and power shortages appear to be over or will be in the very near future. But this success is also largely due to public sector (or direct Government) investment in new capacity and increased private sector involvement in power remains somewhat elusive. The recent lowering of generation costs is also due to external factors – decline in oil prices, reduced RE equipment costs, etc.

Finally, the provision for bidding (specifically for RE projects) is yet to be tested, but private investors appear to be willing to adopt this development. This will contribute positively to reduce generation costs. But a lot of time has been taken to prepare the bidding documents etc. for this initiative to be put into practice. These delays can deter investments and contribute toward changing the perceptions of investors – who may start adding premiums in their bid prices to accommodate delays.