http://en.wikipedia.org/wiki/Build–operate–transfer

SCOPING BOO/T BUSUNESS OPPORTUNITIES IN CAPTIVE RENEWABLE ENERGY MARKET SEGMENT IN PAKISTAN

A Study Conducted for IFC

By:

Izhar Hunzai,Ghulam Mehdi, and

Ghulam Nabi Justaro

Consultants:

INTEGRATION, GERMANY

April 2014

Task 2

ABBREVIATIONS

AEB: Area Electricity Board

BOO: Build, Own, Operate

BOOT: Build, Own, Operate, Transfer

DISCO Distribution Company

FSA: Fuel Supply Agreement

GENCO: Generation Company

GB: Gilgit-Baltsiatn

GOP: Government of PakistanIA Implementation Agreement

IPP: Independent Power Producers

KESC: Karachi Electric Supply Company

LOS: Letter of Support

MYT: Multi Year Tariff

NEPRA: National Electric Power Regulatory Authority

NTDC: National Transmission and Distribution Company

PC: Privatization Commission

PEPCO: Pakistan Electric Power Company

PPA: Power Purchase Agreement

PPIB: Private Power Infrastructure Board

PPP: Public Private Partnership

PPS: Pakistan Power Sector

SBP: State Bank of Pakistan

T&D: Transmission and Distribution

WAPDA: Water and Power Development Authority

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TABLE OF CONTENTS

1 INTRODUCTION................................................................................................................................... 61.1 Energy Sector Overview..........................................................................................................61.2 Market Actors............................................................................................................................... 61.3 Captive Market Overview........................................................................................................8

2 METHODOLOGY................................................................................................................................... 93 CP OFF-TAKERS MARKET............................................................................................................... 9

3.1 Market Overview........................................................................................................................ 93.2 Market Segmentation.............................................................................................................11

3.2.1 Cement Industry..............................................................................................................113.2.2 Sugar Industry..................................................................................................................133.2.3 Textile Industry................................................................................................................153.2.4 Leather Industry..............................................................................................................16

3.3 Captive Power Projects.........................................................................................................173.3.1 CP Dedicated......................................................................................................................173.3.2 Captive Power +...............................................................................................................183.3.3 Off-grid power projects................................................................................................183.3.4 BOO/T Businesses in the CP-RE Segment............................................................18

3.4 CP-RE policy and projects in the pipeline.....................................................................213.5 Conclusion – Off-Takers Market........................................................................................22

4 CP BUSINESS MODELS AND SERVICE PROVIDERS...........................................................234.1 Market segmentation............................................................................................................. 23

4.1.1 CP as a sole supply source (S1).................................................................................234.1.2 CP complementing grid supply, excess power not fed to the grid (S2)...244.1.3 CP complementing grid supply, excess power fed to the grid (S3)...........254.1.4 CP as least cost source of electricity (S4).............................................................274.1.5 Captive energy for process heat supply (S5)......................................................27

4.2 Service Providers Summary................................................................................................295 CP Energy Sources and RE Technologies...............................................................................29

5.1 Energy Mix.................................................................................................................................. 295.2 Solar PV........................................................................................................................................ 315.3 Concentrated solar power systems (CSP).....................................................................335.4 Solar thermal..............................................................................................................................335.5 Solar water pumps.................................................................................................................. 345.6 Wind Power................................................................................................................................355.7 Hydropower............................................................................................................................... 365.8 Biomass to power....................................................................................................................365.9 Geothermal................................................................................................................................. 37

6 FINANCING AND SECURITY REGIMES....................................................................................376.1 Policy for Private Sector Participation in the RE segment.....................................376.2 Feed-in-Tariff.............................................................................................................................376.3 Financial and Fiscal Incentives..........................................................................................38

6.3.1 Fiscal Incentives...............................................................................................................38

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6.3.2 Financial Incentives........................................................................................................386.4 Risks...............................................................................................................................................39

6.4.1 Economic Risk:.................................................................................................................396.4.2 Market Risk:.......................................................................................................................396.4.3 Political Risk:.....................................................................................................................396.4.4 Completion and Cost Overrun Risk.........................................................................406.4.5 Performance Risk:...........................................................................................................40

6.5 Success factors and lessons learned................................................................................407 CONCLUSION...................................................................................................................................... 408 Annexes:................................................................................................................................................41

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ACKNOWLEDGMENT

The report has benefitted from valuable input from a spectrum of industry leaders, managers and service providers, and from comments and guidance from regulators and sector experts of energy market in Pakistan.

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1 INTRODUCTION

This (Task 2) part of the global and Pakistan-focused study explores market conditions for scalable BOO/T businesses in the captive renewable energy segment. To describe this under-developed market, this study looks at the broader energy context and sector organization, and how off-takers and service providers are responding to supply and service shortages. The study also looks at BOO/T like business models and relevant technologies, and security and risk issues.

1.1 Energy Sector Overview

Pakistan has a significant natural endowment and comparative advantage in renewable energy (RE), including hydropower, solar, wind, and being an agricultural country, biomass that add up to a total energy potential of more than 500,000 MW. In the non-renewables, its Thar Coal reserves, estimated to be 175-2000 billion ton, are said to be higher in value than all the oil reserves of Saudi Arabia and Iran combined.

Despite this potential, Pakistan is facing an acute energy crisis with a peak electricity supply deficit of 6,500 MWs, and a natural gas supply deficit of 2 billion cubic feet per day (source). The widening demand-supply gap has resulted in regular load shedding of eight to ten hours in urban areas and eighteen to twenty hours in rural areas.

Rapid growth in demand, high system losses, and inadequate generation capacity are among the major reasons for this huge gap. Seasonal reduction in the availability of hydropower, declining indigenous gas resources, and high costs and dependency on imported fuel for power generation are primarily responsible for the current crisis.

The political economy and slow policy response have created a mountain of circular debt, which a financially strained new government in Islamabad is trying to tackle. The market is large and currently under-performing, but it is also opening up. And, there is some evidence to suggest that the policy framework is on the mend, which can create new opportunities for the private sector to engage with this under-served market and develop Pakistan’s enormous energy potential.

1.2 Market Actors

The following public and private sector actors are of relevance in power generation, transmission, and distribution services in Pakistan.

Table 1: Instit

# Intuitional Entity Functions

1 Ministry of Water and Power (MoWP)

GOP authority for policy making and execution and coordination with investors and other market actors

2 National Electric Power Regulatory Authority (NEPRA)

Issues licenses for generation, transmission and distribution of electric power; establishing and enforcing standards to ensure quality, safety, and proper accounting of operation and supply of electric power to consumers. Approval of investment and power acquisition projects of the utility companies and determining tariffs for bulk generation and transmission and retail distribution of electric power

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3. Alternative Energy Development Board (AEDB)

Implements GOP policies and plans, develops projects, promotes local manufacturing, and coordinates all associated activities as the national facilitating agency for the development of renewable energy in the country.

4 Private Power Infrastructure Board (PPIB)

Acts as a ‘one-window’ facilitator for conventional private sector power generation projects, including hydropower projects of more than 50 MW.

5 Provincial/ Special Administrative Authorities

Four provinces, Azad Jammu and Kashmir (AJK) and Gilgit-Baltistan (GB) governments have their own authorities to facilitate development and implementation of renewable energy projects within their geographical jurisdiction.

National Transmission and Dispatch Company (NTDC).

A public sector company that owns the national grid and provides transmission and distribution services.

6 Independent Power Producers (IPPs)

Electricity utilities in Pakistan comprise nine separately corporatized distribution companies (DISCOs); the Karachi Electric Supply Corporation (KESC). In addition, there are four generation companies (GENCOs): and the Water and Power Development Authority (WAPDA) Hydel Wing. Control of power transmission and despatch is allocated to NTDC.

7 Captive Power Projects (CPPs)

Integrated CPPs for self-supply and for spillover to the grid. Traditional industry-owned CPPs, as well CPP/IPP hybrid business models

Figure 1 depicts the institutional and functional organization of Pakistan’s power sector.

Supply-Demand Overview

Pakistan's energy consumption in has grown 80 percent over the last 15 years, according to the Pakistan Institute for Petroleum, and energy prices have increased more than doubled during the last 10 years. A big part of the energy crisis is dealing with massive inefficiencies in the system, such as huge numbers of customers who don't pay their bills and widespread theft and losses due to inefficiencies across the energy grid. In Pakistan, electricity losses are phenomenal: 25% + as opposed to an average of 4% in advanced countries. More than half of these losses are composed of theft and pilferage and about half or slightly less are technical losses, which could be brought down. Very poor or very powerful are involved in electricity theft. Utility employees are usually partners in such a process.

The persistent shortage of electricity in the country has adversely affected the national economy. Industrial production has been severely hit. According to one estimate power shortages have resulted in an annual loss of about 2 percent of GDP [Abbasi (2011)]. Another recent study reports total industrial output loss in the range of 12 percent to 37 percent due to power outages [Siddiqui, et al. (2011)].

Figure: Supply/Demand Situation

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Source:

Moreover, the power sector in Pakistan has created serious problems for fiscal managers given the limited available budgetary resources; a substantial portion of revenues has been consumed in subsidies given to the power sector. As much as 7.6 percent of total revenues were used up in providing subsidies to the power sector in the FY 2007-08; while this share stood at 5.9 percent and 8.6 percent in the FY 2008-09 and FY 2009-10, respectively. The present government is removing these subsidies in a phased manner, which has created a new dynamic in the market, creating room for private investment in the energy market.

1.3 Captive Market Overview

Industry owners have responded to an energy-deficit market and softening government policy by installing captive power projects (CPPs), based on available and affordable fuels. The Government first encouraged gas for such initiatives as a low cost fuel choice, but after realizing rapid depletion of developed resources, it is now placing emphasis on coal fired power generation in anticipation of developing the Thar Coal Field’s huge lignite reserves in Pakistan’s Sindh Province.

Energy-intensive industries across Pakistan are increasingly relying on captive power generation to meet their energy requirements. Lack of reliable power supply from the grid and higher tariffs are key reasons for industrial consumers to consider the CP option. The choice of captive power type depends on a number of factors, including baseload and back-up power requirements, industrial processes, location, access to fuel sources and size of CAPEX and OPEX investments.

Almost all industries are connected with the National Grid. Large industries like cement and sugar typically have invested in multi-fuel CPPs for baseload and back-up power needs, while smaller units, such as textile spinning and tanning industrial units, use lower threshold diesel or gas-fired gensets.

CPPs provide a hedge against uncertainty and increasing cost of grid-supplied power to energy-intensive industries, especially in cases where the cost of energy forms a significant part of the production costs. Capacity addition plans have moderated over the last two years, primarily due to gray areas in policy and regulation, and slowdown of industrial growth in the country. Further, fuel supply issues have aggravated in recent years leading to developers holding on to their capacity addition plans.

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2 METHODOLOGY

The study looks at a sample of CP off-takers from pre-selected industries that require uninterrupted power supply to run their production processes. These include sugar, cement, textile, and tanneries. The study documents integrated or independent CPPs, their capacity and investment thresholds, business models used, fuel sources and technologies employed, their energy cost/pricing structures, and future power sourcing strategies and development plans. The study also documents growth areas, likely investment models, risks and transactional procedures in place, financing mechanisms, business models, service providers, and technology choices available.

The study design comprises of three key elements: a) collection and analysis of primary data through a questionnaire survey of energy intensive industries and captive plant off-takers; b) interviews with industry insiders, business owners, experts, and regulators; and c) secondary research on financing, technology providers and ECP contractors.

The questionnaire was designed to understand various factors that influence decisions about “generation and purchase of captive power in general and in the renewable energy (RE) segment, in particular; the technology and service provider selection procedure; financing options, and the reasons for low off take of RE solutions, and BOO/BOOT arrangements. The interviews also helped to bring forth the various institutional and other factors that influence changes in CP-RE segment.

The questionnaire was emailed to 140 potential off-takers, with a brief description of the background and purpose of the study. This was followed up with telephone calls, and help was taken from friends/professional networks to get appointments for conducting formal interviews. In addition to questionnaire survey, semi-structured interviews were held with industry leaders, regulators including Private Power Infrastructure Board (PPIB), Ministry of Water and Power MoWP), Alternative Energy Development Board (AEDB); Gilgit-Baltistan Power Development Board (GBPDB), and other stakeholders connected with the captive power sector. More than 40 sector experts from industry, regulatory authorities, and service providers were interviewed to capture the various aspects and dynamics of the captive power market. The analysis is based on primary information gathered from a sample of twenty-three questionnaires. The sample was selected to cover captive power projects both by type of industry and by fuel type. The data and information was augmented and validated by semi-structured interviews and secondary research.

In addition to these key elements, the study draws on an extensive survey of available service providers and literature. While the questionnaire and interviews explain ‘why’ industries commission CPPs and the choice of technology and fuel sources, the service providers survey and literature review provides research guidance and lessons on ‘how’ these market dynamics and trends can be facilitated.

3 CP OFF-TAKERS MARKET

3.1 Market Overview

Captive Power market in Pakistan is evolving and BOO/T type businesses are at present limited, but appear to have a potential market in the energy, infrastructure and other service sectors. This is because public sector financing remains insufficient for long-term projects, and supply from public utilities is becoming more erratic and expensive due to poor policy and fiscal constraints. Mature and emerging markets around the world are increasingly adopting innovative business solutions, such as captive and BOO/T models,

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and the industry in Pakistan is sensitive to these market signals.

The concept of BOO/T is new in Pakistan and the policy and institutional infrastructure is still evolving. In 2010, the Ministry of Water and Power (MoWP) approved the ‘Short Tem Capacity Addition Initiative’, under which qualified parties were invited to establish energy generation projects on BOO basis. Under this initiative, the interested parties could offer one or multiple projects of any capacity, above 50 MW, based on any technology and fuel in consultation with the Power Purchaser.

This policy was formulated to expand and regulate existing CPPs, installed by the industry in capacity close to 3,000 MW, but were operating below their full capacity because there was no policy to sell their surplus to the grid. Out of some 120 CPPs, more than 30, with a cumulative capacity of 637 MW, are now selling their surplus electricity to the NTDC/ Distribution companies (DISCOs). Many industries have also installed Co-Generation (CoGen) power plants (combined heat and power plant), which capture process heat for power generation.

With the exception of sugar industry, which uses bagasse, these CPPs are mostly based on natural gas, heavy fuel oil (HFO), high-speed diesel (HSD), and dual fuels. Textile industry, alone, accounts for 1,800 MW, of which 1,300 MWs are on natural gas and 500 MWs on high-speed diesel. Other major industrial units, including cement, paper, chemical and steel sub-sectors have also in-house power generation facilities. Besides saving on energy costs, these CPPs ensure that industrial units get uninterrupted, reliable and stable supply of electricity for smooth production operations.

These CPP plants have so far helped to sustain the profitability of various industries, despite the countrywide shortage and high cost of electricity provided by power utility companies. An annual addition of 70-100 MW in the captive power segment is projected during the next five years. However, these additions are not enough to meet the total power requirement of these industries. Adding additional capacity is constraint by chronic shortages in the supply of domestic gas and the high cost of imported fuels, as well as delays in developing an appropriate feed-in-tariff (FIT) structure for renewables.

These CPPs are almost exclusively integrated in the core businesses, and CPPs in the renewable segment are few and far apart. The only notable exceptions are cement factories, which generate electricity from waste heat recovery (WHR) technologies and sugar industry, which uses bagasse.

Industry insiders interviewed for this report provided the following explanation when asked to identify key barriers on the uptake of RE technologies in the captive energy market.

i) Wind and solar energy is costly and varying too! Although we have wind corridors for up to 50,000 MW capacity with an average 7 to 8.6 meter per second of wind speed, it is estimated that power generation in Wind Power varies in between 10 to 85% with 30 to 33% average in a year and thus its utility as captive power plant is not possible we can say until we should have wheeling agreement with national transmission grid utilization facility.

ii) Similarly, solar power from radiation exposure is a remarkable and unlimited resource, but again an expensive / costly source and affected by weather / seasonal changes which makes it questionable for certain periods as captive power generation where a constant power is required.

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iii) The cheaper versions like Biomass, biodiesel, municipal waste, bagasse are used to produce electricity in conjunction with coal operated power plants through cogeneration at various locations can be considered in our country

iv) Hydropower sites are far away in the north from industrial areas, not connected with the grid.

3.2 Market Segmentation

CP overlaps on-grid and off-grid market segments in different geographies. These are briefly described below.

In off-grid geographies, captive market includes entire towns and districts, mostly in the mountain areas, where captive market is further divided into public and community utilities. Captive power is also the last resort for industrial mining companies in interior Sindh and Balochistan.

In the grid-connected areas, CP market is quite diffused and most of the current captive power generation is based on a mix of conventional energy sources. The RE segment is limited to bagasse-based technologies, WHR systems and microhydels and small-scale hydropower projects in the north.

Captive market emerged in Pakistan as a reaction to shortages in grid-supplied energy, and it is largely unregulated. It ranges from individual gensets of >5 kW used by private homes, offices and small businesses, to baseload-capacity CPP plants of higher than 40 MW installed by large industries. Almost all types of businesses and industries are connected to the grid, and have some form of in-house power generation capacity as a back up.

A new incentive for the captive off-takers is the willingness of government to buy surplus energy and pay an upfront price. This is good news for captive power developers and service providers, who can step in and offer well-structured solutions to off-takers to add capacity and upgrade to new technology.

Policy-wise, captive power fits well into the current fiscally-constraint environment in Pakistan, and also provides a cost-effective alternative to the inefficient public sector generation and distribution system run on unsustainable subsidies. The choice of technology and fuel source is critical for captive power.

The RE segment in CP market is very small, but appears to have the most potential. This is because Pakistan has a huge comparative advantage in renewables, including hydro, solar, wind, and being an agricultural country, biomass. The potential of all these RE resources equals to more than 500,000 MW of power. This potential has not be been realized so far because energy policy is highly politicized and fragmented in Pakistan, which makes rational policy development an uphill task.

The present and likely early off-takers of more structured captive power models are industries that rely on regular supply of energy for their production processes, or where energy cost forms a large part of their production cost. Sugar, cement and textiles industries are at present are major players in captive energy market.

3.2.1 Cement Industry

Cement production is one of the most energy-intensive industries. Pakistan’s cement industry has an installed annual production capacity of 44,768,250 tons, but it is utilizing 75-85 per cent of this capacity. It consumes about 720 MW electricity, or 11 per cent of the total industrial energy usage. Average electricity consumption is in the

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range of 90-130 kWh per ton of cement, depending on the technology and the age of the cement plant. Its total fuel and electricity constitute about 74 per cent of the production cost. The industry relies on both grid-supplied and captive energy, and sources include coal, gas and furnace oil, and WHR.

To optimize power generation at their plants, and keeping in view future opportunities in domestic and export markets, the cement industry has recently embarked upon an ambitious plan to construct CPPs run on multiple fuels. Lucky Cement’s 175-MW natural gas-based plant at its Karachi and Pezu plants; a 100-MW oil-based plant at Attock Cement, a 27-MW HFO and diesel-based plant at Cherat Cement, a 16.3-MW dual-fired (gas and oil) and a 6 MW gas-based plant at Fauji Cement, DG Khan Cement’s 82-MW gas-oil-based plant at DG Khan and a 33-MW plant at Khairpur, are pioneers of CPPs in Pakistan. Many cement factories have further diversified their fuel sources and switched to coal due to gas shortages and rising cost of oil for power generation.

Coal is emerging as a priority fuel in government policy, because of huge Thur Coal deposits. This region of Thur is a remote and impoverished desert area in Sindh province, with poor infrastructure, and was recently spotlighted in Pakistani media as more than 150 children died because of a two-year drought hitting this under-developed area. For technical and other reasons, the work on Thur coalfields has not even started, except exploratory projects.

Using imported coal, Fecto Cement is installing a 15-MW plant, while Bestway Cement is planning to construct an 18-MW one at Chakwal. Fauji Cement will install a 36-MW plant. Cherat Cement plans to set up a 14-18 MW power plant, and Zealpak Cement a 35-MW coal-fired CPP. Kohinoor Maple Leaf Group plans to establish a 30-MW power plant at Mianwali, which will use indigenous coal. All these power plants will initially use a blend of imported and indigenous coal, and may further diversify their energy sources.

In the RE segment, Bestway Cement has installed a 15-MW waste heat recovery power plant at its Chakwal plant – the first of its kind in the local cement industry. The plant utilizes waste heat (exhaust gases from the cement production process) through a heat recovery system that captures this heat. A steam turbine is then used to generate electricity from the captured heat. There is no additional fuel consumption, and as such, the cost of fuel comes out to zero.

Fecto Cement operates a 6-MW waste heat recovery plant, while DG Khan Cement has an 8.5-MW unit. Lucky Cement generates 25-MW electricity, and Cherat Cement has a 7 MW installation in the works.

These WHR power plants give an edge to cement plants by making their cost of production more competitive. WHR technology is increasingly integrated in cement plant designs. Globally, cement industry is not allowed to operate a plant unless a waste heat recovery power plant has been installed. Cement industries in many developing countries generate more than 50 MW on average from their own plants. But not all cement factories in Pakistan are willing to invest in new technology. A plant of up to 50 MW, which is the most economical, can be commissioned within 18-24 months, costing $ 1.2-1.5 million per MW.

Table ?: Summary for Cement

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Off-Taker Gross Capacity

(MW)

Fuel type

Lucky Cement (2 Plants) 175 Natural Gas

Cherat Cement 27 HFO

Attock Cement 100 FO

Fauji Cement 16 FO/Gas

Fauji Cement 6 Gas

D.G. Khan Cement 33 GAs

D.G Khan Cement 82 FO/Gas

Bestway Cement 18 Coal

Zealpak Cement 35 Coal

Kohinoor Maple Leaf 30 Coal

Facto Cement 15 Coal

Fecto Cement 10 Coal Water Slurry

Bestway Cement 15 WHR

Facto Cement 6 WHR

D.G Khan Cement 15.5 WHR

Lucky Cement 25 WHR

Cherat Cement 7 WHR

Source: Off-takers survey for this report.

Market opportunity

High efficiency waste heat recovery power generation technology Energy efficiency steam turbines and insulation equipment

Market barriers

Wait and see attitude: industry owners are hoping that the government is able to overcome the current energy crisis, and improve the quality of grid supply

A majority of industry owners are used to public subsidies and price manipulation of factors of production, and are largely immune to internal competition, and not willing to invest in technology up-gradation.

3.2.2 Sugar Industry

Pakistan's sugar industry, one of the largest in the world, comprises 81 sugar mills with an annual capacity of about six million tons of sugar, and an estimated annual turnover

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of PKR 200 billion. The industry crushes 30-40 million tons of sugarcane that yields about 12 million tons of sugarcane waste known as bagasse. The potential of bagasse-based co-generation power is estimated at over 2,000 MW.

Bagasse, termed as a captive biomass, is fibrous in nature. It has a calorific value of 2,300 kcal/kg. Bagasse is an excellent raw material for power generation. It already provides a stable and reliable source of electricity and steam to power the sugar mills. The surplus electric power generated by the sugar mills can be sold to national or local grids. A sugar mill crushing 2,000 tons of sugarcane can generate 11 MW of power per day, of which two megawatts will be its own consumption and the rest can be marketed.

Bagasse co-generation is an important element of the government's alternative energy strategic plan. Pakistan Electric Power Company (PEPCO) has recently signed a Power Purchase Agreement (PPA) for 328 MW of captive power from sugar industries and is now negotiating for an additional 256 MW from under-construction CPPs. Almost all Sugar Mills are operating bagasse-based co-generation plants, with an average capacity of 18 MW, and are ready to sign PPAs with PEPCO. Table ? gives a sample list of these industries

The “National Policy for Power Co-Generation by Sugar Industry”, notified on January 24, 2006, offers attractive incentives to the sugar mills, similar to those available to Independent Power Projects (IPPs), including guarantees for power purchase and payment for it, income tax holidays, concessional duties on import of machinery, guaranteed rate of return on investment, etc. NEPRA offers up-front tariff of 9.28 cents per kWh for bagasse-based power.

Bagasse is an ideal fuel for CP-RE segment. The power generation cost is very low as the energy source is available virtually at no cost. Second, the fuel is available on site and transportation infrastructure is not required. Third, transmission losses are reduced as the bagasse co-generation power plants are decentralized. Fourth, there is net zero emission of carbon dioxide. Finally, the sugar mills have decades of experience of related technology.

The only downside is that most sugar mills are using old, low-pressure 23 bars based steam power systems, whereas other countries have abandoned low pressure boilers and switched to high-pressure boilers (minimum 60 bars) in cogeneration power systems. Resultantly, sugar mills in Pakistan are unable to optimize and sell more surplus electricity to the grid.

Additional power generation through a readily available renewable biomass fuel will not only help the country reduce its chronic power shortages during this critical period, but can also save precious foreign exchange spent on import of furnace oil. Furthermore, efficient use of a biomass fuel like bagasse is environmentally friendly and would help mitigate greenhouse gas emissions from the country's power sector.

Table ?: Summary of CCPs for Sugar Industry

Off-Taker Gross Capacity

(MW)

Fuel type

Al-Abass Sugar Mills 15 Imported Coal

Al-Noor Sugar Mills 37 Bagasse/FO

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Ashraff Sugar Mills 8 Bagasse

Bandhi Sugar Mills 12 Bagasse/biomass

Brother Sugar Mills 13 Bagasse

Chamber Sugar Mills 5 Bagasse/FO

Colony Sugar Mills 36 Natural Gas

Deharki Sugar Mills 18 Bagasse/FO

Digri Sugar Mills 6 Bagasse/FO

Ittehad Sugar Mills 22 Bagasse/FO

Faran Sugar Mills 13 Biomass/FO

Fatima Sugar Mills 24 Bagasse/FO

Gotki Sugar Mills 12 Bagasse

H.M Ismail Sugar Mills 4 Natural Gas

HAmza Sugar Mills 24 Bagasse

Indus Sugar Mills 11 Bagasse

Ittefaq Sugar Mills 11 Bagasse/FO

Nishat Mills (3 Factories) 78 HFO/Natural Gas

Source:

Market opportunity

Bagasse based cogeneration in sugar industries with high pressure boilers Insulation of pipes and improved WHR Biomass based (agriculture residue such as rice husk)

3.2.3 Textile Industry

Pakistan has one of the largest textile industries in the world, and shipped 1.3 trillion rupees (USD13.8 billion) worth of textiles in the year 2013, mostly to the U.S. and Europe. Textiles account for 63 percent of Pakistan’s exports, and mills employ 20 percent of the nation’s workforce. Faisalabad, which generates the most tax revenue after Karachi, accounts for half of all textiles shipped from Pakistan. But textile industry is passing through a difficult time due to power crisis. All Pakistan Textile Mills Association (APTMA) members interviewed for this study say that the industry is loosing market share due to prevailing energy shortage.

Heavy investments were made in CPP projects back in 2002 to generate electricity through gas, which has now become short in supply due to high demand of gas from other sectors. In the textile sector, spinning and weaving of fiber are electricity-intensive, whereas dyeing and finishing are heat-intensive processes, for which gas is

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the cheapest energy choice. Most large spinning units are now run on back-up diesel generators, whereas in weaving sector a large number of units in Faisalabad, use power-looms for fabric manufacturing; some medium-sized power-looms have installed diesel generators.

A number of textile processing units have installed boilers that can run on bio-fuels like cotton waste, rice husk and other waste. Big units such as Nishat, Gul Ahmed, Sitara and Sapphire have captive power plants. More importantly, these companies use gas-fired combined-cycle power plants, which generate power from gas; and the waste produced is automatically utilized to generate steam.

According to APTMA members, about 30 percent of industrial capacity is closed down since the energy crisis has hit the country and chances of revival are bleak due to energy shortages, especially gas and high cost of imported furnace oil. Gas supply to the textile industry was cut by100 days during the last fiscal year. Textile industry is bracing for the gas supply to worsen in the coming years, as the planed Gas pipeline from Iran is almost but shelved by the current government.

A series of meeting have recently taken place in APTMA, where the members have evolved a consensus to seriously look for renewable energy sources for power generation, particularly the solar.

Table ?: Summary for Textiles Industry

Off-Taker Gross Capacity

(MW)

Fuel type

Nishat Mills (3 factories) 189 HFO/Gas/Diesel

Din Textiles 9 HFO/Gas/Diesel

Gadoon Textile Mills 47 HFO/Natural Gas

International Industries 4 Natural Gas

Roomi Fabrics 16 Natural Gas

Saleem Yarn Mills 2.7 Natural Gas

Shadman Cotton Mills 9.25 RFO/Gas/Diesel

Prosperity Textile Mills 7 HFO

Source:

Market opportunity

Solar thermal solutions Use of alternative fuels (Rice husk, cotton waste, etc)

3.2.4 Leather Industry

The leather sector is Pakistan's second most dynamic sector after textiles. It contributes 5 percent to manufacturing GDP, about 7 percent to export earnings and provides employment to more than 200,000 workers. The leather industry consists of six sub-sectors namely, tanning; leather footwear; leather garments; leather gloves; leather shoe uppers,

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and leather goods, and uses low cost gas for most of these processes.

In Pakistan there are more than 2,500 tanneries (registered & unregistered) and footwear-manufacturing units. Over the years, the number of registered tanneries in the country has increased. Located in Karachi, Hyderabad, Lahore, Multan, Kasur, Faisalabad, Gujranwala, Sialkot, Sahiwal, Sheikhupura and Peshawar, the increase in the number of tanneries can be attributed to increase in demand of tanned leather in the world markets. However, power shortages are hurting a vibrant industry. Against a capacity of 90 million sq. m per year, the tanneries are producing 60 million sq. m.

Table? Textile Industry capacity and products

Products Estimated annual capacity

Tanned leather 90 million sq. m

Leather garments/ apparels

7 million

Leather Gloves 10 million

Leather footwear 200 million

Source: Pakistan Tanneries Association, 2011)

The leather industry requires both electricity and steam. Most firms are using diesel-run generators as a back up for electricity. The tanning industry in Pakistan uses machinery, which are out dated and believed to be imported from various countries in the 1970’s and 1980’s. Generally, a leather unit consumes over 0.97-1.87 MJ i.e. 270-300 KWh of energy to produce 100 sq. ft. of finished leather. The absence of energy efficient technologies and lack of proper maintenance of steam pipes; steam traps and insulation are causing wastage of significant amount of energy in most leather processing units (UNIDO, 2006).

3.3 Captive Power Projects

From the off-takers’ survey results and secondary research, we came across at least two business models that fall in the captive power market, but are not necessarily BOO/T, or strictly in the renewable segment. In the RE segment, one model we found was RE and captive, but not BOO/T. A fourth model was BOO/T in RE segment, but not exclusively captive.

3.3.1 CP Dedicated

The first model is integrated captive power projects for self or dedicated use. These are a large number of businesses of all sizes that primarily depend on the grid-supplied power but also have in-house generation capacity, which they switch ‘on’ or ‘off’, on needs basis. Energy intensive industries in this model are simply switching to their own generation during load-shedding hours. Low energy consuming industries, such as textiles and tanneries are alternating between power and gas utilities and back up diesel generators, as well as moving their shifts around to adjust to unpredictable supply schedules of utilities. Those with sufficient open space or roof area are also looking for efficient and sustainable solutions, especially solar PV and solar thermal technologies. This segment can grow with the right policy framework and further falling of PV prices, supported by innovative

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business and financing models.

3.3.2 Captive Power +

The second model is captive cum grid spillover power projects. (i.e., for self-use and sale to utility). This model uses bagasse for co-generation, especially in sugar industry, and can easily outcompete the grid by going multi-fuel, and producing year-round energy, by burning hybrid and other low cost fuels during nine months of the year, when bagasse is not available. Using bagasse and more efficient WHR technology, they can produce energy at a discounted rate for themselves and for a captive buyer, that is national grid, which is now a state own company. The fuel type is neutral in this model, rather skewed towards conventional power.

Sugar makers are an influential lobby in Pakistan, and it is normal for ministers and parliamentarians to own a couple of sugar mills on the side. As such, they can influence the policy and can be champions and early off-takers for CP if they see profit in it, and they can either internally finance or access investment capital from diverse sources.

3.3.3 Off-grid power projects

Isolated grid power projects (i.e., small, stand-alone). This model is mostly dispersed and used by a variety of corporate developers, such as mining companies operating in off-grid areas, and off grid public and community-owned utilities in remote towns and villages in the mountain areas of northern Pakistan. The northern part of the country is endowed with rich hydrological resources for generating low cost hydropower, but without industrial consumers and grid connectivity, without which this resource cannot be developed.

These areas may be ideal for captive power projects coupled with energy intensive industries, such as marble and granite quarrying and processing, as well as other industrial mineral. At present, industries are reluctant to move to these areas because of poor communications and under-developed infrastructure, but this may change under the planned Economic Corridor Project between China and Pakistan.

3.3.4 BOO/T Businesses in the CP-RE Segment

We found the following completed or under implementation BOO/T type business models. These RE projects are being developed in an IPP mode and are intended to supply to DISCOS, and are not strictly captive.

Laraib Energy Limited (“Laraib”) is the owner and developer of 84 MW hydroelectric power-generating complex known as the New Bong Escape Hydroelectric Power Complex Jhelum River in Azad Jammu and Kashmir (AJ&K). The Project has been developed on BOOT basis, whereby it would be transferred to the Government of AJ&K free of cost at the end of a 25-year term. Laraib is a subsidiary of The Hub Power Company Limited (“HUBCO”), which owns 75% of the shares of the Company. The parent company owns the 1,292 MW Hub Power Station, itself a private capital-financed IPP in Pakistan (Box 1).

Financial closing was achieved in 2012 for the Sapphire wind power plant, a 50 MW wind power project with the credit facility of $95 million from the Overseas Private Investment Corporation (OPIC) of the United States in the wind corridor of Sindh. It is expected to go into operation by the end of 2015. The project is designed to generate 133 gigawatt hours of emission-free electricity annually, using General Electric wind turbines.

OurSun Solar Power Limited, a subsidiary of the Meeco Group closed a Power

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Purchase Agreement (PPA), for an initial capacity of 3 MW, with a possibility to extend the capacity up to 8 MW in the near future. The solar installation will be built with tier one PV panels and tier one European inverters. Within the PPA contract scheme, OurSun Solar Power will generate RE, which it will sell to Packages Limited at a price fixed by the contract for a period of 10 years on BOOT basis.

Green Power (Pvt) Limited (GPPL) has developed a 50 MW wind farm Independent Power Producer (IPP) Project on BOO basis in Sindh, Pakistan. The project company’s original sponsor is Tapal Group (AVS enterprises). Recently, FUAJI Foundation has acquired the enterprise and changed its name to Foundation Wind Energy-II (Private) Limited (FWEL-II).

FWEL-II project site is located at KhuttiKun New Island in the Taluka Mirpur Sakro of Thatta District. Project lies within the wind corridor identified by AEDB for commercial wind projects.  The Government of Sindh, through AEDB, has allocated Land to the project. The total site land area is 1,656 acres. The total investment required for FWEL-II is around US $ 127 million with debt equity ratio of 75 %: 25%.  The Lending for the project is arranged from foreign and local banks with a distribution of 66 % & 34%, respectively. Asian Development Bank and Islamic Development Banks are the Lead Foreign Lenders while National Bank of Pakistan is the Lead Local Lender. The equity financing for the project is being arranged by Fauji Foundation (20%), Fauji Fertilizer Bin Qasim (35%), CapAsia (A Malaysian Private Equity Firm 25%) and Tapal Group (20%). 

The EPC Contract of FWEL-II was successfully signed off on August 23, 2011 with M/s Nordex Germany (Lead) & M/s Descon Engineering Limited consortium. The EPC cost is USD 110 million. The electricity generated will be sold to the Central Power Purchasing Agency (CPPA) at 132 KVA National Transmission and Despatch Company (NTDC) Thatta grid station.

Goldwind, a subsidiary of Chinese hydropower developer China Three Gorges Corporation (CTG) has begun construction work on a 49.5 MW wind farm in Jhimpir, Thatta DIstrict, Sindh, at a cost of $130 million on BOT basis. Goldwind is also offering a two-year operations and maintenance service.

Fauji Fertilizer Company limited (Subsidiary of Fauji Foundation) is also developing a 50 MW Project in the same area.

A new BOOT project, Khairpur Waste-to-Energy Power Project located at Khairpur Special Economic Zone (KSEZ), is envisaged to be the first of its kind project utilizing Municipal Solid Waste and Agricultural Waste to generate 20MW (Approx.). The scope of this project includes:

Detailed Design, Finance, Development /Construction, Operation, Maintenance and Transfer of 20MW Power Plant

Electricity generated by the Power Plant will be sold to the industrial units operating in KSEZ on priority basis (including “Khairpur Khjoor Mandi Project” which is also carried out under PPP Mode) and any surplus electricity produced will be sold to Sukkur Electric Power Company (SEPCO)

Collection of revenue receipts, including but not limited to, tariff charges from KSEZ industrial consumers and SEPCO.

Other turnkey and BOO/T type CP installations include the following:

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The National Parliament Building in Islamabad will soon be retrofitted with a 1.8 MW, $ 60 million solar PV installation, under a friendly gift from China. The investment will save the Parliament at least $1 million in utility bills.

China is also supporting a 10,000 acre solar park sponsored by the provincial government of Punjab that, once fully operational, could generate up to 1,000 MW of solar energy.

The Pakistani newspaper The Nation has recently reported that the governments of Pakistan and Canada have reached an agreement to develop a 500 MW solar project in the Cholistan desert of Balochsitan.

German company AEG is setting up a 50MW to 100 MW plant in Punjab on turnkey basis, and this can expand to 300 MW in the next phase.

Box 1: Laraib Business Model

The Project achieved Financial Closing on December 20, 2009. USD financing has been provided by Asian Development Bank (ADB), Islamic Development Bank (IDB), International Finance Corporation (IFC), and the French origin Société de Promotion et de Participation pour la Coopération Economique (“PROPARCO”), whereas PKR financing has been provided by Habib Bank Limited (HBL) and National Bank of Pakistan (NBP).

A single buyer purchases the energy generated by this Boot business i.e. Pakistan’s National Transmission and Dispatch Company Limited (NTDC), which runs the national grid, under a long term PPA. Under the PPA the hydrological risk is borne by the Power Purchaser through guaranteed payment for fixed costs like debt servicing, O&M, ROE and insurance. A cost plus tariff mechanism is in place under the PPA and the Project has been allowed a tariff of PKR 6.8362/KWh (US cents 8.5453/KWh) at Financial Closing, which will be adjusted for certain allowed reopeners at the Commercial Operations Date (COD).

Other Concession Documents package includes the Implementation Agreement between Governments of Pakistan and AJ&K, and among AJ&K partner entities (i.e. Government of AJ&K and AJ&K Council), Water Use Agreement with Government of AJ&K and Land Lease Agreements with Government of AJ&K.

Under its guarantee (i.e., the GOP Guarantee), the Government of Pakistan has guaranteed the payment obligations of NTDC, Government of Pakistan and Government of AJ&K under the Concession Documents.

The construction of the Project started on December 29, 2009 under a fixed price, time certain EPC Contract executed with Sambu Construction Company Limited of South Korea (Sambu) on June 2009. The water to wire E&M equipment package has been supplied by a leading E&M supplier, namely, Andritz Hydro under a subcontract with Sambu. Hyundai Engineering is the design subcontractor of the EPC Contractor. The Project has achieved commercial operation date on March 23, 2013, which is about two months ahead of the required commercial operations date under the PPA.

Owner’s Engineer, comprising of joint venture of Montgomery Watson Harza (MWH), monitored construction of the project and National Engineering Services of Pakistan (NESPAK), while Mott MacDonald of UK are the Technical Advisor to the Financiers and were responsible for construction and environmental monitoring on their behalf.

The Operation and Maintenance (O&M) of the Project is being carried out by TNB REMACO Pakistan (Private) Limited, a wholly owned subsidiary of TNB Repair and Maintenance SDN BHD,

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which is ultimately owned by Tenaga Nasional Berhad, Malaysia.

The Project insurances have been placed offshore with leading insurance companies through AON, UK who are the Insurance Advisor and Broker of Record for the Project.

The Project was registered as a Clean Development Mechanism (CDM) project by CDM Executive Board under the United Nations Framework Convention on Climate Change (UNFCCC) on January 31, 2009, thus achieving the distinction of becoming the first Hydropower Project in Pakistan/AJ&K to have been registered with UNFCCC as a CDM project.

3.4 CP-RE policy and projects in the pipeline

Around 22 solar power projects with a combined capacity of 772.99 MW are under different stages of development and can achieve commercial operation by 2015-16, according to AEDB documents. These projects will achieve commercial operation by stipulated period subject to Grid connection and finalization of tariff by NEPRA.     

Additionally, there are some 30 clean energy projects in the pipeline, with a total output of 1,947 MW. The government wants to attract foreign investment up to $2.7 billion in order to expedite some of these clean energy projects. The main motivation is high cost of yearly oil imports and the burden oil places on the national economy.

The CP-RE Policy allows consumers to avail features like Net-Metering and Wheeling of Energy, which require interconnection with the grid. However, such schemes require regulatory framework enabling the domestic, commercial and industrial users to use net metering and wheeling facilities for solar and wind energy. The AEDB has prepared draft rules for distributed generation, covering electricity generation from solar at domestic level, and submitted the same to NEPRA for announcement. An important component of this policy is feed-in-tariff (FIT) program, which AEDB has developed with technical assistance from GIZ. The financial model of PV-FIT is based on 25% equity and 75% debt, calculated at US$ 0.2329/kWh, for a period of 25 years, with an internal Rate of Return of 17%.1

At the provincial level, the government of Sindh (GoS) is developing a special economic zone in the district of Khairpur, by the name Khairpur Special Economic Zone (KSEZ). The zone will use wind hybrid power generation for industrial development in the Province of Sindh.

The Government of Punjab (GvoP has developed a new power policy to facilitate investment in the CP-RE market. Punjab Power Policy 2009 provides a framework for the development of power plants in both public and private sectors, as well as for joint venture projects. The policy is intended to promote all types of technologies, including canal-hydel, solar, wind and biomass. These projects would be implemented by the private sector on BOO/T basis.

A Memorandum of Understanding (MOU) has been signed between the Government of Balochistan (GOB) and CK Solar Korea for installing a 300 MW solar power plant near Quetta. The project will cost around $900 million and will be completed by 2016. The government has procured 1,500 acres of land in Khuchlak and Pishin on lease.

The Gilgit-Baltistan Council (GBC) has passed a new Act, establishing the Gilgit-Baltistan Power Development Board (GBPDB). The Board has drafted a new policy to attract investment capital for captive hydropower projects on the tributaries of Indus River. The Chinese Government is assisting GOP in establishing two industrial parts in GB that can support CP-RE in high quality and low cost hydropower.

1"Working Paper for Solar PV Upfront Tariff Development”, NEPRA (2013)

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In KPK, Phaktookwa Hydel Development Organization (PHYDO), previously known as SHYDO, is a publically own company that provides policy, facilitation and development services in the hydropower sector.

3.5 Conclusion – Off-Takers Market

Industries and individual consumers that need uninterrupted supply of power have responded to energy shortages by installing their own private power generation systems—or CPPs. These CPPs range from small gensets of >5 kW, to baseload capacity CPPs of <10 MW, and are integrated with the core industries for self or dedicated use. CPPs are used as a back up for the grid-supplied power, meaning that they are switched ‘on’ during power cuts, and switched ‘off’, during supply hours from the grid.

The total size of this market is roughly proportional to the current power deficit of 5,000-6000 MW during peak hours, which they meet for an average of 8 hours a day in cities and industrial areas, and 15-18 hours in rural areas. Cement, sugar and textile industries alone have an installed in-house capacity of 3,000 MW, with an actual generation of 2,000 MW. The remaining installed capacity is distributed widely among other consumer groups, from private homes, offices and small businesses.

This large and widely distributed CP market includes both on-grid and off-grid geographies. The on-grid CPPs can be further divided into at least three segments, namely a) dedicated and self-supply CPPs connected with the grid but not selling their surplus to it, b) dedicated and self-supply CPPs+ that sell their surplus power to the grid and, c) dedicated and self supply CPPs that are not inter-connected to the national grid. This last segment tends to be largely in the RE segment.

In the RE segment, bagasse and WHR based CPPs are common in sugar and cement industries, and hydropower is the main energy choice in off-grid CPPs. Solar and wind based CCPs are being developed under various BOO/T type arrangements in a changing policy environment, but with the exception of a few, most are designed as hybrid businesses of CPPs and IPPs, with the purpose to sell to the grid.

The policy for CP-RE is still evolving, and it is moving in a direction in which dedicated CPPs can sell their surplus power to the grid for an agreed price. Under these policy conditions, existing CPPs can use their idle capacity and add at least 3,000 MW of power to the system. However, this policy also puts CPPs in direct and, some say, unfair competition, with IPPs and other sectors, such as domestic consumers, transport and fertilizer industry, for low cost natural gas, the fuel of choice under the current scenario in Pakistan, which is also in short supply. Fuel sources and prices are tightly controlled by NEPRA.

Potential off-takers include industries with existing CPPs that need new technology to achieve higher efficiencies and add capacity and benefit from selling their surplus generation to other industries and grid. Industries having a comparative advantage, such as co-generation, as in the cement and sugar industries are likely to be the lead off-takers for the next generation of CPPs, with important BOO/T features, and specialization in hybrid fuels and RE market segment

The BOO/T is a new concept in Pakistan, and both policy and markets are still evolving. A variety of turnkey and EPC contracts are used for procuring infrastructure projects and services across the public sector in Pakistan.

Emerging BOO/T models currently include procuring thermal power projects, small pilot

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projects in CP-RE, such as bagasse, waste to energy, and solar, wind and hydropower.

The BOO/T market in captive RE is currently a very small segment, but it has the most potential to grow.

4 CP BUSINESS MODELS AND SERVICE PROVIDERS

4.1 Market segmentation Based on our assessment of off-takers market and outlook in the short to medium terms, we looked at service providers and their capacity and relevance. For market segmentation, we have considered the following five off-take scenarios. These scenarios are based on the three segments/business models identified in the off-takers market survey. These scenarios are, however, subject to policy changes in the national energy strategy, particularly likely improvements in the grid-supplied power, and transmission ad distribution systems.

4.1.1 CP as a sole supply source (S1)

A captive energy business tied to an off-grid single customer. Apart from off-grid geographies, very few businesses rely on CP as a sole supply source. Some industries, such as sugar mills use co-generation and generate sufficient CP power to meet their baseload needs, without needing any significant amount of power from the grid, except to meet auxiliary needs, such as lighting and air conditioning requirements. But this is an exception rather than a norm, as sugar making is a seasonal activity, lasting just three months of the year. This sole supply scenario applies to remote mining operations, and mini grids owned by public or community hydel units in remote mountain valleys.

Key features: Industry does not exist in off-grid areas, except mining operations in remote areas In grid connected geographies, CP is most suited when grid supplied power is

highly erratic, or available at a higher cost than CP.

Off-take scenarios: Relocation of energy intensive industry to off-grid areas where CP from low cost

hydropower is possible (likely, in the medium term under Economic Corridor planning in GB)

Build new industrial estates closer to sources of raw material, which also have solar or wind potential, and use hybrid CP, solar/wind/coal (examples include new CP/IPP models in Sind and Balochistan, reported in off-takers market section)

Further hikes in the cost of grid supplied power can justify sole supply CP segment to grow and substitute grid supply in clusters of industry (likely, in the medium to long-term, as energy subsidies are gradually removed)

Market-size: Currently very small segment of the market in off-grid geographies, but growth

potential under most off-take scenarios. Bagasse based CPPs alone can generate 3000 MW with investment in more

efficient technology A more structured approach to CP development, through BOOT/T business

models, similar to RE examples reported in the off takers market section, can lead to cost efficiencies and better demand management.

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Relevant service providers:

Company Name

Product/Services Capacity Range

ECO GREEN EPC contractor, waste to energy technology 1-10 MW

BOSCH EPC contractor, for process heat technologies, such as high pressured steam and heat boilers

5-20 MW

AEG EPC contractor for RE solutions, and end use energy efficient technologies 1-50 MW

TOSHIBA EPC contractor for generators, turbines and current control systems 1 – 50 MW

SIEMENS EPC contractor for hydropower electrochemical equipment 1 – 1000 MW

4.1.2 CP complementing grid supply, excess power not fed to the grid (S2)

An increasing number of companies are investing in self-supply power systems, from >10 MW diesel gensets and baseload capacity CPPs used by industry as grid supply becomes erratic and more expensive. At higher thresholds of 10 MW to 40 MW-capacity, CP is used by energy intensive industries, such as cement, sugar, and heavy manufacturing, while textiles and sports industries use lower threshold CPPs that meet their baseload and auxiliary needs.

CP in this segment is dominated by conventional energy sources, and with the exception of bagasse in sugar industry and WHR in some cement plants, most energy sources used are fossil fuels. As the cost of conventional fuels rises and the price of grid-supplied power increases, these industries, especially low-energy consuming industries, such as textiles and tanneries are expected to opt for RE options, particularly in the solar PV and thermal segments.

The main barriers are financing for some industries, such as textiles and leather that are loosing market share for reasons of energy cuts and other reasons, and are not attractive for lenders.

Key features:

A very large number of auxiliary/ back-up /baseload generators run on various fuels

High idle capacity of these CP systems during power availability from the grid Competing demands from different sectors, such as from LPG run transport sector

which is very large with over 3.5 million vehicles, fertilizer industry, domestic consumers; industry, SMEs and cottage industries, on low cost but depleting fuel sources such as natural gas

Off-take scenarios:

Energy-industry coordination and clustering to better utilize the excess and idle capacity

Improved policy environment favorable to a distributed and demand-led model of generation

Investment in new fuel-efficient technologies to off-set rising cost of imported and indigenous fuel sources

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Without market guarantee for surplus power, CPPs have no incentive to add capacity and upgrade technology

Market size:

Potentially, very large market for all categories of CPPs, nearly equal to the current deficit of about 6,500 of power during peak hours, for 8-18 hours a day/ 365 days a year

Current installed capacity is 3000 MW from old CPPs installed by industries, excluding small units by small consumers, but actual generation is about 2000 MW

Future outlook depends on what happens to the grid supply.

Table ?: Relevant service providers

Company Name Product/Services Capacity Range

GE EPC contractor, waste to energy technology 10-50 MW

FUJI ELECTRIC EPC contractor, for process heat technologies, such as high pressured steam and heat boilers

5-20 MW

UNITED COOLING SYSTEMS

EPC contractor for steam power production equipment 1-10 MW

TOSHIBA EPC contractor for generators, turbines and current control systems 1 – 50 MW

HAYUNDAI EPC for generators 1 – 20 MW

4.1.3 CP complementing grid supply, excess power fed to the grid (S3)

Regulation is catching up to allow a producer to generate power for its own consumption, as well as to sell the surplus to utilities. Under the 2002 policy, NEPRA had allowed industries that have set up CPPs to sell to and buy from the grid, using a net metering system. However, due to disagreements over upfront tariff and other terms, this policy is not implemented.

NEPRA has developed a new policy framework for ‘new’ Captive Power (N-CPP) generating units built, owned and operated by industrial sector in Pakistan that can now sell their surplus energy to the grid, while fulfilling their own energy needs (2013). The eligibility thresholds for this program range from a minimum of 10 MW and to a maximum of 49MW under the umbrella of Captive Power. This sale and purchase of New Captive power will be transacted through bilateral agreement between Power Producer and the Power Purchaser.

The financial cost will be recovered by N-CPPs through kW/h delivered to DISCOs, during the 1st phase of the agreements (07 years) on the pattern of Front Loaded Tariff. This is a new concept, close to Public-Private-Partnership (PPP), but a bit different from the previous concept of CPPs, as those were never installed to sell power and earn revenues. The first and foremost rationale of the new scheme is to benefit both the power utilities and the industrial sector of Pakistan. Under this policy, old CPPs that are generating dedicated energy for a captive consumer, as a self-supplying unit, can also become a supplier to the grid, under a new license. The policy is currently under review to include RE on lines similar to many European countries, where the grid purchases RE from individual producers at a premium.

There is also draft policy for energy banking (drawing energy from the grid and returning surplus to it and paying or getting paid for the net balance), and energy wheeling (where a captive energy producer adds an x amount of energy produced at a different location to the

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grid and draws the same at its point of utilization, and pays wheeling charges to the grid. These policies and underlying concepts are still under review and not implemented in Pakistan.

Table ?: Tariff structure for N-CPPs

Scenario Fuel Cost Component at Ref. Gas Price of PKR 238.38/ MMBTU HHV

Fixed Cost Component (PKR/kWh)

Financial Cost Component (PKR/kWh)

Total Cost (PKR/kWh)

Total Cost (USD Cent/kWh)

With Guaranteed Despatch

3.468 3.468 1.536 1.536 8.55

Power Producer Ready to Deliver; but No Despatch By DISCOs

0.00 0.312 1.536 1.848 2.31

Non Gas Months/No Despatch

0.00 0.144 1.843 1.68 4.04

Source: NEPRA (2008); 1 USD= PKR 100

Key features: Grid-connectivity removes threshold limitations and incentivizes investment in

new technology and higher capacity utilization In this scenario, the risk is more evenly divided among the public utility, off-taker

and sponsor

Off-take scenarios: If implemented, the N-CPP policy can be a great improvement on the current IPP

model with better competition Feed-in-tariff incentivizes capacity addition, technology up gradation and year-

round generation for N-CPPs >50 MW However, this model can only work if the public utility that purchases excess

power does not default on payments as is the case with IPPs

Market size:

The CP/IPP hybrid business model removes the monopoly of IPPs and opens the entire energy market for competition to meet the demand

The N-CPP model provides a pathway for old CPPs to up-grade to new technology, utilize idle capacity, and allows BOO/T businesses to crowd-in

For some CP owners, such as sugar industry, it is easy to graduate from seasonal, 3 moths of bagasse based generation, to becoming year round producers and suppliers of energy to the grid, effectively becoming hybrid, sugar-cum energy businesses

Table ?: relevant service providers

Company Name Product/Services Capacity Range

NORDEX EPC contractor, wind turbines and other energy projects 5-50 MW

BOSCH EPC contractor, for process heat technologies, such as high pressured steam and heat boilers

5-20 MW

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DESCON EPC contractor for supply of power production equipment and installation

5-50 MW

Harbin Power (China)

Hydropower electromechanical equipment supplier and ECP contractor

50-2000 MW

TOSHIBA EPC contractor for generators, turbines and current control systems

1 – 50 MW

SIEMENS EPC for automation equipment in 1 – 20 MW

4.1.4 CP as least cost source of electricity (S4)

This scenario cuts across all segments described above, with a focus on hybrid solutions and designing business models that use different trade offs in capex/opex investment decisions.

The latest Energy Strategy of GOP (2013) provides for “affordable power” as a policy goal. The Goal III of the strategy calls for “ensuring the generation of inexpensive and affordable electricity for domestic, commercial & industrial use”. The strategy focuses on shifting Pakistan’s energy mix toward low cost sources, such as hydel, gas, coal, nuclear and biomass. Local and foreign investors and service providers are sought and facilitated to implement this strategy.

Off-take scenarios:

Expensive RFO and HSD plants are convert to low cost and available fuels, if feasible for certain industries

Shift tariff incentives towards low cost energy sources (hydel–run of the river, gas, coal, biomass, etc.)

Proliferate mining across the country and expedite coal projects at Thar Coal Fields, and shift industry closer to low-cost hydropower sites

Increase price for gas consumption for all users, and incentivize transition to solar thermal solutions for heating, cooling and steam requirements.

The service providers are the same as in the previous segments

4.1.5 Captive energy for process heat supply (S5)

Thermal energy in the form of hot air, water and steam is used in a wide variety of industrial processes. Process heat accounts for a significantly higher share of energy in Pakistan, and considered as a key area where significant economies are possible in a short period of time. In the cement industry, part of the process heat is captured and recycled, or used to generate electricity. In the textile sector water heating can account for as much as 65% of the total energy consumed. The most important industrial processes using heat at a mean temperature level are summarized in Table ?.

The most widely used method for process heat in Pakistan is to generate steam employing boilers by using either coal or furnace oil. These technologies are quite outdated and result in high inefficiencies. Solar thermal technologies are well developed and ideally suited to obtain hot water, especially at lower temperatures, and for cutting energy bills in getting to high temperatures needed for high temperature processing. At present, very little uptake of this technology is observed in most industries in Pakistan, despite good potential.

Table ?: Temperature ranges for different industrial processes .

Industry Process Temperature (◦

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C)Dairy Pressurization

SterilizationDryingConcentratesBoiler feed water

60–80100–120120–180

60–8060–90

Tinned food SterilizationPasteurizationCookingBleaching

110–12060–8060–9060–90

Textile Bleaching, dyeingDrying, degreasingDyeingFixingPressing

60–90100–130

70–90160–18080–100

Paper Cooking, dryingBoiler feed waterBleaching

60–8060–90

130–150

Chemical SoapsSynthetic rubberProcessing heatPre-heating water

200–260150–200120–180

60–90

Beverages Washing, sterilization Pasteurization

60–8060–70

Timber by-products

Thermo diffusion beamsDryingPre-heating water Preparation pulp

80–10060–10060–90

120–170

Bricks and blocks

Curing 60–140

Plastics PreparationDistillationSeparationExtensionDryingBlending

120–140140–150200–220140–160180–200120–140

Sources: Kalogirou S (2010)

Off-take scenarios: Greater exposure and incentives to traditional industries, such as textiles and

tanneries to adopt more cleaner and efficient technologies This market segment is ready for new solar thermal technologies, and innovative

investment solutions.

The service providers are the same as mentioned in the previous Tables in this section.

4.2 Service Providers Summary

All types of EPC, turnkey and general O&M service contactors are operating in Pakistan’s energy market, and many have specialized products and services for RE segment. Pakistan’s energy market is closely linked to bilateral investment agreements. With a large part of FDI

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coming from China, Qatar and Saudi Arabia, companies with ownership or established roots in these countries are well placed to do business in Pakistan.

A sample of service providers and their capacity thresholds have been provided in the previous section, whose products and services are relevant to that market segment. The following list includes main international players that are well connected to national sub-contractors, and have experience and capacity and financial muscle to play a major role and transform Pakistan’s energy market.

A longer list of relevant national and international service providers is provided in Annex?.

Company Name Product/Services Capacity Range

Three-Gorges Project Cooperation (China)

Contractor and technical advisor for implementing the energy part of USD 20 billion planned Chinese investments in key sectors of Pakistan in the next five years

1,000-20,000 MW

ABB (Switzerland) EPC contractor for turnkey solutions for power and automation technologies, particularly relevant to multi-fuel captives, i.e., cement, sugar, and textile industries (S1)

50-500 MW

Alstom (France) EPC and turnkey contractor for power generation and transmission projects and green energy technologies. Highly relevant to last-mile solutions in grid-connectivity for S2 and S3 scenarios

1-50 MW

Areva (France) Contractor for a broad range of solutions for RE generation, including engineering, construction, equipment, consulting and maintenance services, relevant to self-supply and spillover captives (S3-S4)

1-200 MW

Descon (Pakistan) General contractor for integrated technologies and services in RE and thermal energy, including heat efficiency (S1, S2, S3, 4, S5)

1 – 5 MW

General Electric Company – GE (USA)

General contractor for energy generation and efficiency technologies (SS, S4, S5).

1 – 2000 MW

Harbin Power equipment company Ltd. (China)

Contractor and supplier of technology and services to Chinese ventures in energy sector in Pakistan, particularly captive hydropower projects for industrial zones in the off-grid north (S4-S5)

50-2000 MW

Siemens (Germany) Turnkey /EPC contractor for large and small hydropower development technology (S4-S5)

1-2000

5 CP ENERGY SOURCES AND RE TECHNOLOGIES

5.1 Energy Mix

For power generation, oil (36%) and gas (29.2) form the bulk of primary commercial energy supply mix of Pakistan, contributing roughly 65% to the total production as shown in Figure?.

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Ins talled C apac ity (MW)

Hydro6444

Thermal13072

Nuclear425

Figure?: Pakistan’s energy mix.

During FY 2012-13, Pakistan imported oil worth US$ 15.2 billion, of which furnace oil and diesel used for thermal power generation was 52 percent. According to the Planning Commission (PC) of Pakistan, the import bill under the present scenario would increase to USD 41 billion by the year 2022, based on crude oil price of USD 70 per barrel.2 It is, therefore, imperative that the energy mix be changed to provide a more affordable and sustainable energy model for the country, which maximizes the use of indigenous resources.

Historically, Pakistan’s energy balance sheet has relied on indigenous natural gas, which formed almost 40% of the energy mix in 2005, and reduced to 29.2 percent by 2013. This important resource has been dwindling in relation to the demand. Today the gas production is 1.3 TCF per annum (4 billion cft per day) as against a demand of 2.0 TCF per annum (6 billion cft per day). It is a cheap indigenous resource that used to be abundant for several decades.

The government of former President Pervez Musharraf began promoting the use of compressed natural gas, or CNG, in private vehicles nearly a decade ago. The idea was to reduce the import bill on buying oil internationally and instead rely on Pakistan's domestic natural gas reserves. So the previous government kept the price of CNG low, and promoted the importation of equipment for cars to run on natural gas and rapidly gave out licenses to open stations. The use of CNG has an added benefit of being less polluting, since it tends to burn cleaner than gasoline.

The policy was incredibly successful in the short-term, but not sustainable in the long-term. Pakistan has 3.5 million private vehicles running on CNG, more than 80 percent of vehicles in the country and more than any other country in the world. But Pakistan's gas supplies can't support this demand while also feeding power plants, fertilizer companies and other businesses that rely on the fuel.

So officials are now grappling with the painful task of trying to reverse the policy, trying to wean cars back onto gasoline to redirect the limited supplies of natural gas to other sectors where they believe it will be more productive — power plants, for example.

Gas reserves are depleting in the country and the current controlled prices have served as a disincentive for the exploration and production in Pakistan. Pakistan has proven reserves of 840 billion cubic meters (28 TCF) with an annual consumption of 40 billion cubic meters (1.3 TCF). However, artificially kept lower prices, worsening security situation and uncertainty in policy environment are keys barriers for major investments in exploration

2 Integrated Energy Plan 2009-2022 (Planning Commission, 2010)

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and development of gas fields. Pakistan has all but shelved the planned Iran-Pakistan Gas Pipeline Project, under American and Saudi pressure.

Pakistan has only one coal-fired power plant that supplies to the grid, but imported and indigenous coal is used by many industries for CP. Pakistan has huge coal deposits in Thur desert, but it is of low quality, and the country needs new technology and investment for infrastructure to process this resource for power generation. The government policy favors large-scale open cast mining and development of mine-mouth power generation plants in stages to generate 350-600 MW, through joint private/public partnership for future industrial utilization of coal. In subsequent phases, chemical and fertilizer plants would be set-up as part of a Mega Petro-Chemical Complex, which would be supported by additional coal mining

However, no private firm has come up to develop an integrated coal based project. A 50 MW pilot project is currently being built as a test case, which will use gasified coal for power generation. If successful technology for gasification of low quality lignite will be a major growth area in Pakistan for power generation and supply to the grid, but not so useful for CP.

For the next five years, the government policy is to reduce dependence on imported oil and increase the share of indigenous coal, hydropower and other renewable resources.

Table ?: CP based on conventional energy sources

Resources Key characteristics CP Off-take scenario

Diesel/ Furness oil

High dependency on imports; higher import bills, subject to global market volatility

Low for capacity addition High for energy efficient

technologyGas Resource depletion, artificially low pricing under political

economy; competing demands from different sectors of the economy; security and policy barriers on exploration and development (E&D)

Low for capacity addition High for energy efficient

technology Low for E&D)

Coal Huge reserves but low quality, not ideal fuel source for most CP plants

Low for capacity addition High for energy efficient

technology

5.2 Solar PV

SPV technology is making a slow but steady entry into energy market in Pakistan. The government has set a target of 5% of total power generation from solar and other renewables by 2020. In the near term, the government is seeking to develop at least 500 MW of solar power plants. However, the market is still at an early stage of development, and largely led by public sector. The good news is that this market though dominated by the public sector, has already created a competitive service industry in the private sector.

The following examples give a rough idea of the current trends in the growth of SPV segment in the CP market.

Pakistan is estimated to possess a 2.9-TW solar energy potential. In view of the scarce fossil fuel reserves in the country and high costs of imports, energy security and climate change concerns, it is expected that renewable energy will play a significant role in Pakistan’s future energy mix.

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Source: USAID/NREL (2010)

Covering initial investment cost on solar is key as, in a country with around 300 days of sunshine a year, subsequent costs are largely limited to maintenance and repairs.

The PV technology is well suited to off-grid generation, and to market segments where consumers are willing to pay a premium for stable supply. More important, it is subject to less political and environmental concerns than nuclear, wind or hydro. With broad public support and proactive policies, the global industry has grown exponentially. Global production capacity of silicon solar cell increased from 52 MWp in 2000 to 12.0 GWp in 2008 (source). Even though PV systems can offer cleaner and plentiful energy, the major obstacle they face is that their energy cost is still too high. But generation costs are falling dramatically. In Pakistan, the cost of importing one PV watt is now just $1, compared to $2 just over a year ago, and down from $4 in 2008 (Mehboob, 2013). Globally, it is 75 cents a watt today, and it will see 50 cents a watt by 2017," (Ahmad Chatila, 2013).

PV is a highly elastic and modular technology. It is installed house-by-house and business-by-business. In these settings, the cost of generation has to compete with the retail price of electricity, which gives solar a considerable edge. The high up-front capital cost is one of the adoption barriers for solar projects. Although SPV is more expensive on upfront cost basis, diesel gensets turn out to be more expensive on full-cost basis, as cash outlays for the fuel are deferred. Different cash outlays for diesel and solar sources make the difference in the investment choices.

5.3 Concentrated solar power systems (CSP)

CSP plants consist of two parts: one that collects solar energy and converts it to heat, and

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another that converts the heat energy to electricity. All CSP technological approaches require large areas for solar radiation collection when used to produce electricity at commercial scale. But CSP plants have a much simpler system than a coal or nuclear power plants. Plus, they don’t have fuel costs. So, under the Life Cycle Energy (LCE) cost, CSP plant (like in the case with a PV plant) can cheaper than diesel over a 20-year plant life.

CSP technology is highly relevant to many off-grid parts of Pakistan, such as vast desert-like areas in Balochistan, Cholistan in Punjab, and Thur region of Sind, all rich in mineral resources, but with no infrastructure and grid connectivity. However, at present, this application is not in use in Pakistan.

5.4 Solar thermal

There are a large number of applications in which solar energy can be utilized directly by exploiting its heat characteristics. Solar thermal technologies are comparatively simple, relatively low cost and easy to adopt. The potential applications in solar thermal technologies in Pakistan includes cooking, heating and cooling of buildings, heating water for domestic and industrial applications, generation of high temperature steam, and drying agricultural products under controlled temperatures.

Solar water heating technology is quite mature but its use in Pakistan has so far been quite limited because of relatively higher capital cost of solar water heaters as compared with conventional ones operating on natural gas. A number of public sector organizations are actively working on the development of low cost solar water heaters that have now started gaining popularity in some geographical markets. The production and commercialization of such heaters has already been started in the private sector. Evaluation done by AEDB reveals that using solar water heaters instead of conventional (gas and electric) water heaters has great economic benefits (saving fuel costs), environmental benefits (reducing fossil fuel consumption and pollutants emission) and social benefits (cheaper, cleaner and safer hot water for daily life).

Solar water heating is a potential candidate to replace the conventional energy sources in textile industry and can be an economical choice. Adopting this technology can also substantially reduce the environmental impacts. The payback period for solar water heating incorporated within textile industries in Pakistan is estimated to be 6 years (Muneer, 2010).

The current and potential applications are explained in the following Chart.

Figure ?: End-uses and technologies for use of solar energy

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Source: A.W. Bhutto et al. / Renewable and Sustainable Energy Reviews 16 (2012).

5.5 Solar water pumps

Farmers in Pakistan are facing serious difficulties in irrigating their crops under severe energy crisis and ever increasing diesel costs. One of the economical ways is the solar pumping which can bring a revolution in agriculture and provide farmers energy independence through solar pumping. According to one estimate, more than one million pumps are in use Pakistan, out of which 750,000 are diesel pumps. If solar pumps replace 10% of existing diesel pumps, a saving of about 1,428 MW of electricity is possible.

The key issue in the growth of solar pumps is the high upfront cost of solar pump. Diesel driven pumps have low initial cost but high operational, maintenance and environmental costs. Solar pumps have high initial costs but almost zero operational, maintenance costs and environmental costs. If calculations are done on LCE cost basis for both pumps, then diesel pumps are on average two to four times more expensive over a 20-year period, which is the minimum life of a solar pump, for pumping the same average amount of water per day! At low hydraulic load the solar pump LCE cost is as low as 20% of the Diesel Pump. At higher hydraulic loads, this value reaches 55%, which means that the solar pump option still provides a solution at half the life cycle cost of the diesel driven pump option.

Table? Advantages and disadvantages of Solar Pumps

Advantages Disadvantages

Fuel source is vast, widely accessible and essentially infinite Modular (small or large increments)

Fuel source is diffuse (sunlight is a relatively low-density energy)

No moving parts (no wear); theoretically everlasting High installation costs

Ambient temperature operation (no high-temperature corrosion or safety issues).

Solar cells do not generate electricity at night, and in places with frequent and extensive cloud cover, generation fluctuates unpredictably during the day

Can be integrated into new or existing building structures

Lack of economical efficient energy and storage

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Can be very rapidly installed at nearly any point-of-use Off-take scenarios

No moving parts (no wear); theoretically everlasting Favorable government policy and milestones

High reliability of solar modules (manufacturers’ guarantees over 30 years)

Financial products by private banks for industry, amortizing the capital cost and staggering repayment over several years

No emissions, combustion or radioactive waste (does not contribute perceptibly to global climate change or air/water pollution)

Rural electrification projects

5.6 Wind Power

Pakistan Meteorological Department (PMD) has conducted a detailed Wind Power Potential Survey of coastal areas of Pakistan and identified potential wind corridors where economically feasible wind farms can be established. AEDB is in the process of getting this data validated by Rise National Laboratory of Denmark. Potential areas cover 9700 sq. km in Sindh, with suitable average annual wind speed of 7 m/s at 30 meters. The gross wind power potential of this area is 40,000 MW and keeping in view the area utilization constrains etc. the exploitable electric power generation potential of this area is estimated to be about 11,000 MW. However, this segment is still at an early stage of development.

Key challenges in wind power development include:

Wind power projects require higher capital investment, have longer gestation and construction periods and are prone to more construction risks (inflation, cost overruns, delays, geological surprises, floods, extreme weather, socio-political, wind risk, sometimes environmental and resettlement rates, etc.) compared to thermal plants.

Due to their capital-intensive nature, wind power plants have higher tariff in the initial years.

Wind power plants are very site specific and require more time for site investigations, planning, studies, design, project review, appraisal and approval, before start of construction.

The main plant and equipment (turbines, generators, spiral casing, etc) is site specific and no “off- the-shelf” or standard equipment/machines are available as in case of thermal plants.

Wind power is subject to operational risks such as; metrological, conflict of interest among multi sector users (power generation, environmental, etc.), future developments, etc.

Political risks due to environmental and resettlement issues, required consents/clearance from provincial departments.

As wind power projects are mostly located in remote areas with no or little infrastructure facilities available (i.e. access roads, bridges, electricity, telephone, colony, etc.) new infrastructure would need to be built before start of construction.

Most of the wind power installations require construction of new roads and bridges and/or their widening (if exist) to enable transportation of heavy equipment ad machinery from the nearest port or manufacturing facilities.

Firm/dependable capacity is substantially lower than the installed capacity in most of the cases. Power and energy yields depict considerable seasonal and year to year variations and are subject to metrological risk.

Project Agreements (IA, PPA) are different and complex compared to thermal

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plants. The security package requires special provisions to address wind specifics. One of critical factors is that there is very limited international experience for

private wind power projects in Pakistan.

5.7 Hydropower

Pakistan has an installed hydroelectric capacity of 5,928 MW of large (>250 MW), 437 MW of medium (>50 MW and <250 MW), and 253 MW of small to micro (<50 MW) plants, mostly in the northern parts of the country. This amounts to 6,608 MW of total capacity, or less than 15% of the identified potential.

Key barriers include higher upfront cost of hydropower generation, as well as locational mismatch, such as industry and markets are located in the plains of Pakistan, while suitable sites for low cost hydropower are located in off-grid areas, such as in GB. However, consider potential also exists in KPK, AJK, and large canals in Punjab and Sindh.

Realizing hydropower potential through private investment and through BOO/T requires streamlining the coordination between the various national and provincial agencies. Specifically, as hydropower development projects below 100 MW of capacity fall under provincial authority, the capacity of provincial technical and regulatory institutions to process investment proposals needs to be enhanced.

Off-take scenarios:

Simplified regulation and institutional capacity, including a one window service and specified turnaround time for processing investment proposals

Creating synergies with wider economic development goals and sector development policies, such as mineral development, irrigation, industrialization, and achieving seamless integration in development strategies

Targeted incentives and concessions, linked to specific targets and outcomes

Provisions for multi-scaled investments, from micro, community-based utilities, to captive power generation and export

Fostering responsible investor behavior, incorporating corporate social responsibility (CSR) and encouraging local equity participation in joint ventures

Incorporating sustainable development principles in investment policy, maximizing positive and minimizing negative impacts of investment

Promoting a partnership approach among public, private and community sector stakeholders

Opening up multiple opportunities for investment for sector development, such as generation, distribution, technology development, skills and professional training

5.8 Biomass to power

Sugar mills in the country use bagasse for cogeneration purposes and have recently been allowed to sell surplus power to the grid up to a combined limit of 700 MW. The total potential is estimated to be 3000 MW. No other significant commercial biomass-based technology is presently employed for energy production/use in the country beyond experimental deployment of biogas digesters, improved cooking stoves, and other small-scale end-use applications. Use of biogas digesters in rural households, after a promising

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start, has stagnated due to withdrawal of external subsidies.

Bagasse is burnt to produce energy even in low efficiency boilers. In the bygone times of low oil prices, Bagasse was almost a liability and a mere disposal issue. Low efficiency boilers adequately consumed bagasse for the self-requirements of the sugar mills. New technology with almost twice more efficiency (high temp and pressure boilers and steam turbines) and higher energy prices has generated interest and rationale for replacing the existing low efficiency equipment by higher efficiency equipment, and sell the surplus to the Grid.

The major problem is the limited season of sugar cane availability. Sugar mills in Pakistan have a crushing season of only 3-4 months. Storage could probably be done for another two months requirement, but it is expensive. Thus the plant and facilities are potentially available for eight months. Although this is not a unique problem, hydropower also suffers from the same difficulty of seasonality. However no fuel cost in case of hydropower is a major redeeming feature.

Off-take scenarios:

Utilization of captive power plants capacity through Feed In Tariff Incentives to sugar mills to install high-pressure boilers on existing plants to

increase efficiency Hybridization of bagasse with other renewable of conventional sources, such as rice

husk, corncob and shrubs etc., coal, gas and furnace oil, during 8 months of the year when bagasse is not available.

5.9 Geothermal Unknown potential

6 FINANCING AND SECURITY REGIMES

6.1 Policy for Private Sector Participation in the RE segment

The private sector can undertake CP-RE projects falling in any of the following categories, according to existing and emerging government policy:

CPs as IPPs, based on new plants (for sale of power to the grid only) Captive and grid spillover power projects (i.e., self-use and sale to utility) Captive power projects (i.e., for self or dedicated use) Isolated grid power projects (i.e., small, stand-alone)

6.2 Feed-in-Tariff

A draft policy is available under which a CPP of capacity greater than 1 MW of RE may be able to supply surplus electricity to the power utility (grid spillover), while at other times drawing electricity from the utility to supplement its own production. The energy supplied by the utility to the power producer in a month, (i.e., units received by the producer minus units supplied by the producer, if greater than zero), shall be paid for by the producer at the applicable retail tariff (e.g., industrial or commercial rates, depending upon the type of user connection). In the reverse scenario, where the producer supplies a net amount of energy to the utility, the formula recommends a tariff equal to the average energy cost per kWh for oil-based power generation (as determined by NEPRA for GENCOs/IPPs over the applicable quarter of the year) less 10%. However, this policy is still not approved and not

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implemented.

6.3 Financial and Fiscal Incentives

All renewable energy-based power projects technically enjoy the following fiscal and financial incentives. These facilities are equally applicable to private, public-private, and public sector renewable energy power projects.

6.3.1 Fiscal Incentives

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 of projects for power generation utilizing renewable energy resources.

Specifically, for small hydro, wind, and solar, the following facilities are available:

Exemption from income tax, including turnover rate tax and withholding tax on imports

Repatriation of equity along with dividends freely allowed, subject to rules and regulations prescribed by the State Bank of Pakistan

Parties may raise local and foreign equity and debt finance in accordance with regulations applicable to industry in general

Non-Muslims and non-residents shall be exempted from payment of Zakat on dividends paid by the company.

6.3.2 Financial Incentives

Permission for power generation companies to issue corporate registered bonds Permission to issue shares at discounted prices to enable venture capitalists to be

provided higher rates of return proportionate to the risk. Permission for foreign banks to underwrite the issue of shares and bonds by private

power companies (CP-IPPs) to the extent allowed under the laws of Pakistan Non-residents allowed purchasing securities issued by Pakistani companies without

the State Bank of Pakistan’s permission, subject to prescribed rules and regulations. Independent` rating agencies available in Pakistan to facilitate investors in making

informed decisions about the risk and profitability of the project company’s bonds/TFCs.

In the case of unsolicited proposals, a Letter of Intent (LoI) shall be issued to enable the sponsors to carry out a feasibility study and obtain tariff determination and a generation license from NEPRA. Thereafter, a Letter of Support (LoS) shall be issued to assist the sponsors in achieving financial closure for the project.

In the case of solicited proposals, bids shall be invited by AEDB/Provincial/AJK Agency from IPPs to participate in a competitive bidding process. After completion of evaluation of bids, a LoS shall be issued to the successful bidder to facilitate the project’s financial close. The procedure will be structured in consultation with NEPRA. The tariff determined through competition will be regarded as final and will not be re-opened by NEPRA.

Within this policy framework, provincial governments are permitted to process BOO/T applications, and detailed terms, such as such as the period of concession and risk sharing

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mechanisms are negotiated on case-to-case basis, or specified in the Request for Proposals (RFPs), and PPA are signed.

Average tariff rates for all types of Captive projects are summarized in the following Table.

Table ?: Comparison of Reference and Current Energy Prices of Existing CPPs

CPPs by fuel type Reference price (PKR) Current Price (PKR)

RFO 5.11 10.25

Gas 2.89 4.11

Bagasse

Hydro

Solar

Other

Source: PEPCO (2013)

6.4 Risks

6.4.1 Economic Risk:

In the absence of sufficient BOO/T projects, the experience of IPPs can be taken as a guide, despite major differences in the business model. IPPs are primarily facing the issue of liquidity, mainly due to delayed payments from the utilities, and utilities are unable to recover their costs from 25% of system losses. Exchange rates risks, policy vacuum, and higher costs of finance are other economic risks, in a country like Pakistan. The economic risk may be considerable, but it can easily be mitigated by the huge energy potential of the country, from huge hydropower, solar, and coal resources, among others.

6.4.2 Market Risk:

Again using the experience of IPPs, energy producers have considerable risk exposure to the fluctuations in the price and supply of base fuels, such as furnace oil, gas and diesel that affect their margins. As IPPs, CPPs can sell power only to one single customer. This contractual arrangement exposes them to the single customer risk. In the IPP model, the Government guarantees to compensate for utility’s default on its contractual payments. However, the circular debt crisis has shown that Government is not willing or able to honor such guarantees.

6.4.3 Political Risk:

Political risks, such as exposure to social and political instability and poor governance, and the sense of security constitute considerable risk in Pakistan’s current environment. Government guarantees to investors through the Captive/ BOO/T are long-term in nature, and subject to changing political priorities and, even change of government.

6.4.4 Completion and Cost Overrun Risk

The greatest period of risk in a power plant project occurs during the construction phase

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with the financial providers putting up most of the capital before construction starts and supporting this exposure till the plants is complete. A variety of reasons from excessive holidays to political protests and other security related disruptions to tight work schedules, are commonplace in Pakistan.

6.4.5 Performance Risk:

A key risk to power producers is poor O&M. The risk of under-performance, particularly in O&M intensive technologies, is high in low-tech environments. This requires requisite technical and management capacity and sufficient O&M budgets, to keep the plant closer to its optimum thresholds. Eventually, these extra costs are passed on to consumers, but at the development stage, this is a risk for the developer and the lenders financing the project.

7 CONCLUSION

CP market in Pakistan has captured the service gap created by grid deficit. The RE segment is very small but evolving, and may have the most potential. This is because Pakistan has a huge natural endowment in renewables: hydro, solar and wind.

BOO/T type business models are relevant, both as integrated CPs in small-scale industries, and as CP-IPP hybrids. The government policy is to improve energy mix and grid supply. The clarity in government policy is key to developing innovative BOO/T business models in RE segment and to attract domestic and foreign investment capital.

The cost of solar power is falling, while the cost of thermal generation is rising, and subsidies have created a mountain of public debt. Efficiency and cost of indigenous energy resources, such as bagasse and rice husk, can also be improved considerably through technology and capacity investments.

The planned KAshghar-Gawadar Economic Corridor presents new business opportunities to invest in hydropower projects in GB, on BOO/T basis, to supply to the two industrial zones where Chinese and Pakistani businesses can establish industrial units.

Specific risk elements in the context of Pakistan must guide investment structures and packaging of securities to cover risk.

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