Notes for Development of Pakistan Electricity Market:

1. Lowest Levelized Tariff shouldn’t be the only criteria for comparing and choosing which technology
to use for electricity generation.
1.1. The way Levelized Tariff is calculated it is heavily influenced by payments in the first 5-10 years,
whereas the payments in the later years do not factor in that much. For thermal projects the
payments throughout the life of the plant are relatively similar hence Levelized Tariff can be
used when comparing one thermal project to another. But when using it to compare thermal
plants vs renewables it is not the best measure, as most renewable technologies have high
costs during the debt repayment period (10-13 years) and then very low payment for the
remaining life of the project. By way of example a thermal plant with a levelized tariff of tariff
of 6.6 cents, one would pay approx. 6.7 cents for the first 10 years, and 6.1 cents for the next
20. Whereas for a hydro plant with a similar levelized tariff one would pay 8.2 cents for first 10
years, and 3 cents for the next 20. While the Levelized Tariff is very similar, for 1 KWh for 30
years on the thermal plant one would end up paying nearly $2 vs $1.4 on the hydro plant.
1.2. The price of electricity from Renewable Sources if largely known and fixed at the date of signing
the PPA, hence its easy to lock in a good rate today. Whereas on the thermal projects majority
of the expenditure is on fuel, which needs to be purchased throughout the life of the project.
When calculating Levelized Tariffs we are assuming that fuel prices will remain stagnant. This is
not a good assumption to make. We are expanding heavily on LNG, and today Crude, and LNG
prices are at all time lows. It is expected that these prices will go up, especially for LNG as China
and other western countries move toward Gas from Coal. Hence we can expect to pay more for
fuel in the future, which is not accounted for in the Levelized Tariff.
1.3. Renewables provide fuel and energy security that imported fuel thermal plants do not provide.
When we use renewables such as wind and solar, beyond the initial Capex which is done in
Forex, and after debt repayment, majority of the payments go back into the local economy.
And with hydro even the initial capex is 80% local, being spent on things like cement, steel and
labour. This adds significantly to our GDP, whereas imported fuel projects don’t add anything to
our GDP. Additionally Hydro Plants have a long life, e.g. 50-100 years, and as per policy after 30
years these assets will become government owned. Hence they will be a source of free
electricity for years to come.
1.4. Renewables, and especially hydro, help our balance of payments, as majority of the initial and
ongoing payments are being made locally. This will lead to a more stable Rupee and hence
lower electricity costs.
2. It is a good idea to move towards a full fledged market based electricity exchange, where electricity
can be traded like any other commodity. But there are some fundaments which are required before
one can reap the benefits of this system, and a ill planned and premature move will not only cause
energy shortage but also increase cost of generation.
2.1. For any exchange to work there must be a large number of buyers and sellers. Currently there
is only one buyer, i.e. CPPA-G. In order for the exchange to work there need to be more buyers,
hence we need to separate out the DISCOS into separate buyers.
2.1.1. Separating out the DISCOS into separate buyers alone is not enough, as they are still
controlled by one entity, i.e. Government of Pakistan. Hence they need to be sold to other
private players.
 2.1.2. Being in the hands of private players is not enough either, as currently they are loss
making entities. One would expect it will take some time for the private players to make
these DISCOS into profitable entities. The reason it is important for these DISCOs to be
profitable is because the sellers are largely private entities and they will charge a premium
if they feel the buyer is loss making entity and does not have good credit. Hence making it
more difficult for these DISCOS to become profitable.
2.1.3. As a first step some of the better run DISCOS should be privatized. Once there a few more
buyers in the market, then one can move towards a market based system.
2.2. This kind of change can not be bought on over night. A more suitable approach would be to
gradually phase this in. One way of phasing this in could be for new plants that come online the
government should start with contracts that guarantee 95% off take on take or pay basis, and
5% capacity should be left for the power producer to sell on an exchange on a spot basis.
Similarly DISCOS should be supplied 95% of their electricity demand via the government backed
guaranteed off take agreements. And they should be mandated to buy the rest from the
electricity exchange. As the market matures guaranteed off take percentage for power
producers should be reduced, and eventually become zero for some technologies.
2.2.1. To further elaborate on this point, plants with a low initial capex and fast ramp up time
such as Gas based plants can be running solely on take and pay once the exchange is fully
established, but a technology like hydro with high initial capex may need a high level of
guaranteed offtake. This will actually make the market stronger and better both for the
Gas based, and Hydro Plants. Similar concessions may be made for indigenous coal plants
as well, as they provide base load with the benefit of no forex spent on fuel costs, but
because they cannot ramp up production at short notice they need a higher level of
guaranteed offtake. As pointed out earlier the government needs a mix of technologies to
balance the different needs, such as fuel security, balance of payments, base load
availability etc.
3. While we may be in surplus today, our fuel mix is not optimal yet. We need to minimize the use of
our old thermal FO plants asap. These plants should be supplemented with renewable energy. They
can be used as a hybrid solution to enable the renewable energy plants to act as base load plants. As
an example the Jamshoro plants are located very close to the Jhimphir Wind corridor, and utilize the
same grid. If we were to add more wind plants here and operate them instead of the Jamshoro
plants one could save 8 Million USD per month in just fuel cost! One could continue to pay the fixed
expenses of running the Jamshoro plant and save 8 Million USD on average just on fuel not utilized.
And as the fixed cost would be paid, whenever there is a shortfall in wind the Jamshoro plants could
be turned on to provide electricity. Hence giving base load like characteristics to the renewable
plants at no extra cost. In some instances this may even be true for more efficient gas plants.
4. Lastly we must again think about the importance of indigenous fuel, vs imported fuel. With a large
current account deficit, and a big chunk of our imports already being for energy imports its very
important for us as an economy to have more indigenous fuel sources. This will not only conserve
forex, but the added expenditure which goes back into the local economy will act as a multiplier and
grow our GDP exponentially.