Inclusive Renewable Energy Development – Journal
PROCUREMENT of Renewable Energy (RE) in Pakistan has historically been done through up-front or cost-plus tariff schemes. However, after the Alternative Renewable and Energy Policy 2019, the main mode of supply will be auctions. Auctions are a very flexible method of energy procurement that can be designed to meet various policy objectives. They are competitive, transparent and efficient if executed correctly and can lead to genuine price discovery, market growth and local value creation.
However, these are only potential outcomes of an auction and if poorly designed, auctions can do more harm than good. Risks associated with careless auction design include high administrative costs, barriers to entry, especially for smaller developers, concentration of auctions in the hands of a few players, and low project completion rates.
For Pakistan, the challenge is even more unique. Historical trends indicate that renewables have already undergone drastic cost reductions over the past decade. Solar and wind tariffs in Pakistan saw a reduction of more than 70%, reaching 3.7 and 4.5 cents respectively. Pushing for further cost reductions may be unrealistic and may even be detrimental to the growth of local and indigenous renewable energy markets which are already threatened by post-Covid global supply chain disruptions, rising material prices raw materials, the abolition of sales tax exemptions and the addition of an advance tax on renewable energy technologies.
Adopting an auction design beyond cost would mean prioritizing other non-cost energy policy objectives and global best practices. This involves allowing national markets to develop, streamlining the bidding process to ensure maximum participation and competition, reducing barriers to entry, fostering social acceptability, avoiding concentration of projects and, above all, inclusive and participatory development.
It is recommended to maintain a balanced regional distribution of renewable energy projects in Pakistan.
One of the main dangers associated with auctions is that of auction concentration where one or a few winners dominate the market by buying too much volume, outbidding smaller developers due to economies of scale, thereby monopolizing and preventing growth. of the long-term market. Limiting the size of projects or setting quotas per bidder is a common way to reduce this risk and spread the benefits across a wide range of developers and regions.
In Argentina, for example, only solar and wind projects from 1 MW to 100 MW were allowed to bid in the first and second rounds of the RenovAr program, which was then reduced to 10 MW in subsequent rounds. In Uruguay, the size of projects was also limited with only one award per bidder initially and a cap of up to 100 MW per bidder in later rounds. In the upcoming 2022 Third Spanish CSP Auction, projects have been limited to a maximum of 100 MW per bid and 180 MW per bidder. Remarkably, all of these examples have successfully indicated that small project size is not a barrier to price reduction or volume sourcing. Throughout the Latin America region, tariffs continued to decline despite the majority of projects being below 40 MW.
Limiting the size of projects or setting bid quotas is one way to ensure inclusive development that both large companies and small developers can participate in. Such an inclusive approach also fits well with the current government’s policy to promote small and medium-sized enterprises (SMEs) and the local economy.
An important case study for Pakistan is that of South Africa which managed to allocate 2.58 GW to 25 wind and solar projects in the past year. They have done so with an auction design that not only meets low-cost purchases, but also meets their national development goals of inclusive and participatory local development.
South Africa has required that 49% of the entities involved be national, that at least 30% of the shareholders be black and that 5% of the owners belong to black women. It also required that 25% of workers on renewable energy projects be black with at least 40% construction content coming from local sources. As a result of this auction design, 60,517 years of employment for South African citizens have been created to date, a total of R61.9 billion ($4.08 billion) has been spent on local content so far, black South Africans own 34% of the shares across the full supply chain and 80% of the funding has been domestic.
The program also required independent power producers to report on initiatives and contributions to the socio-economic betterment of the communities in which they operate. As a result, 1,388 educational institutions were supported by IPPs with total funding of R437.5 million ($28.91 million). A total of 1,276 scholarships were also awarded, 97.4% of which went to African and students of color.
The projects were also well distributed geographically, mainly due to the natural spread of renewable energy resource potential. The wide geographic distribution of projects is another important factor in dispersing the socio-economic benefits of renewable energy more equitably. Maintaining a balanced regional distribution of renewable energy projects in Pakistan is also recommended from a technical perspective, as this ensures efficient transmission, greater grid flexibility and reliable supply.
Pakistan can learn a lot from these global experiences by designing its own auction mechanisms. Local industry players have shown interest in Pakistan’s nascent renewable energy market, supported by enabling mechanisms such as the State Bank of Pakistan’s renewable energy financing scheme. Most RE projects in operation and under construction are owned by local Pakistani companies. The Pakistani government should strike a balance between protecting small local developers and attracting investment from large foreign players in the auctions. This will not only encourage greater national participation and attract foreign investment, but will also boost local value, job creation and inclusive market development.
The authors are energy policy and practice specialists in an energy think tank in Pakistan.
Posted in Dawn, April 4, 2022