One chronic issue with Pakistan’s government and policy makers is the propensity for quick short-term fixes in reaction to consumer pressures in introducing policies without fully comprehending long-term implications. The governments reacted in the 1990s and again in the 2010s due to 8 to 12 hours of loadshedding and signed IPP contracts to add generation capacity.
The exorbitantly high electricity prices today are primarily due to the 70% capacity charges the government pays for unused capacity. Although the terms for these contracts could have been better, the intent behind the policy was appropriate, as no country can advance economically with daily power outages of 8 to 12 hours. The policymakers, however, failed to increase demand with proper industrialization policies, resulting in excess generation capacity.
Now, in reaction to high electricity prices, the same quick-fix approach is being adopted again by the federal and provincial governments. With solar becoming cheaper, multiple programs have been announced to provide cheap electricity to low-end consumers, including free solar panels for consumers using less than 200 units per month in Sindh and Punjab. The Punjab government has gone even further by announcing a Rs 700 billion solar program for consumers using up to 500 units per month.
While these proposals look attractive for consumers and demonstrate the government’s concerns for the masses, no one seems to have considered the effect of this massive scale rooftop solarization on capacity payments. With the current pricing, these Rs 700 billion will add another 7GW of rooftop solar, resulting in 10,000 GWh annual reduction (20% of current domestic use) in grid-supplied electricity usage, thus increasing the capacity payments further.
Pakistan’s failure to industrialize and modernize agriculture and the electricity infrastructure during the last 30 years has not only caused severe damage to domestic and the export-based economy, but has also tremendously impacted consumers’ pockets. The focus now must be on increasing industrial and agricultural electricity usage twofold.
While solar will reduce the bill for daytime use, the reduction in demand from the grid will increase the electricity rates for all consumers, including the industrial sector due to higher capacity payment. Even the consumers who will get free solar for daytime use will pay more for 12 to 16 hours of electricity usage from sunset to sunrise.
Pakistan needs to increase the demand from grid, not decrease it and the best way is through industrialization and EV adoption. As per NEPRA’s recent data on electricity demand in Pakistan (excluding K-electric consumers), demand is heavily skewed towards domestic consumption, which uses 50% of the total electricity supply. The industrial and agricultural sectors consume 25% and 10% of total supply, respectively. Compare this to India, where domestic, industrial, and agricultural sectors use 31%, 32%, and 22% of the total supply, respectively. While India has 10 times more domestic connections than Pakistan, its industrial and agricultural connections are 20 and 80 times higher respectively. This is one of the reasons why domestic consumers in India only pay 5.2 INR per unit on average for electricity price. Similarly, both domestic and industrial sectors in Indonesia use 38% each of the total electricity supply.
Pakistan’s failure to industrialize and modernize agriculture and the electricity infrastructure during the last 30 years has not only caused severe damage to domestic and the export-based economy, but has also tremendously impacted consumers’ pockets. The focus now must be on increasing industrial and agricultural electricity usage twofold. Similarly, infrastructure spending for grid-upgradation to reduce transmission and distribution losses must be prioritized over motorways and ML-1 railway projects so at least 90% of the total generation capacity is used by domestic, industrial, and agricultural sectors. This will substantially decrease the capacity payment and bring the electricity cost to the same levels as India.
Instead of rooftop solar for every house, the focus should be on large solar farms in GW range. Because of the economies of scale, the cost of these farms per KW is 40 to 50% lower than the small rooftop systems, saving the government at least 40%.
Pakistan must also focus on using scarce money to accelerate economic growth, instead of providing freebies which have very little impact on the economy. Instead of spending Rs 700 billion on massive rooftop solarization, the Punjab government can use this money wisely to substantially improve the overall economy, at least in Punjab. With solar providing the cheapest source of electricity, the focus of solarization should shift to innovative approach which benefits both domestic and industrial consumers, improves the manufacturing base, provides skilled job opportunities, and creates a potential for export-based manufacturing.
First, instead of rooftop solar for every house, the focus should be on large solar farms in GW range. Because of the economies of scale, the cost of these farms per KW is 40 to 50% lower than the small rooftop systems, saving the government at least 40%. To reduce the government’s cost further, industrial and domestic consumers can subscribe to a share in these farms, using the community solar concept. With virtual net metering, the energy generated from their share is subtracted from their overall usage and they only pay for the remaining usage from the grid. These large farms can be located close to industrial parks using lower voltage transmission lines (400V or 11KV), thus reducing line losses. For agricultural lands, these farms are beneficial for raising livestock and crop yield for plants requiring shade (agri-voltaic). These multiple solar farms of 5GW overall capacity would cost around Rs 300 billion, a saving of Rs 400 billion over rooftop solar projects while reducing electricity cost to Rs 10 - 12 per unit for domestic and industrial consumers.
Second, the cost savings from the above should be used by providing low-cost loans to new small and medium-size industrial units (B2 category). Doubling these industrial units during the next 3 years will increase industrial demand by 30%. These industrial units can also buy a share in a solar farm to reduce their electricity bill and the cost of production. Besides increasing electricity demand and effectively reducing the capacity charge, these industrial units will increase the manufacturing base of the country and create export opportunities. With an average support of Rs 5 million in interest payment reduction, the government can facilitate 20,000 new industrial units per year at an annual expense of Rs 100 billion in the first year and much less in subsequent years due to improving economy and reducing interest rates. With an average employment of 20 people for these small and medium scale industrial units, the government will in effect provide skilled job opportunities to at least 400,000 young people per year.
Third, we must accelerate the adoption of electric vehicles (EV), especially 2 and 3 wheelers, to not only increase electricity demand for charging, but also cause reduction in the fuel import bill. Pakistan spends $3 to $5 billion to import fuel for more than 26 million motorcycles on the road, with 1 to 2 million new 2-wheelers produced every year. Adopting electric versions will significantly reduce this bill over time and will also reduce pollution in the cities. In addition, every 1 million electric 2-wheelers will create an annual demand of 700 to 1000GWh of electricity for charging.
Instead of importing 25 to 50GW of solar panels during the next 5 years, Pakistan should incentivize local investors for joint ventures with Chinese solar companies to make solar cells and panels with 2 to 5GW capacity in Pakistan to meet some of the domestic demand.
There are two basic hurdles for EV and 2W adoption: the first is a higher up-front price, primarily due to battery cost and the second is the lack of charging infrastructure. For 2 and 3 wheelers, these barriers can be effectively overcome with battery swapping and subscription services by private companies. Many Asian countries including Taiwan, China, Malaysia, and India are successfully using this approach for electric 2 wheelers.
With battery subscription and swapping option, the user does not pay for the battery up-front, making electric cycles even less expensive than petrol-based versions. In addition, just like filling the fuel tank with petrol, the user will just swap depleted battery with a fully charged one at swap stations, saving Rs 3,000 or higher per month in fuel expenses, without worrying about battery quality and how far they can drive with remaining charge. These swap stations also include chargers, minimizing the need for charging infrastructure.
Since most motorcycle users are the same consumers who use 200 to 500 units of electricity, prioritizing electric 2 wheelers over temporary relief on electricity cost is at least 6 times more beneficial to these consumers as they will save Rs 3,000 or more every month instead of just for two months with Rs 14/unit electricity cost reduction. The government should mandate at least half of new motorcycle production to electric versions, increasing it to 100% by 2030. With zero-interest facility for an electric motorcycle without battery costing Rs 150,000 on average, the government can create demand of 1 million new electric 2 wheelers per year at an annual cost of less than Rs 20 billion.
Solarization and EV adoption also provide opportunities for Pakistan to move away from import-based model to domestic manufacturing. Instead of importing 25 to 50GW of solar panels during the next 5 years, Pakistan should incentivize local investors for joint ventures with Chinese solar companies to make solar cells and panels with 2 to 5GW capacity in Pakistan to meet some of the domestic demand. Capital cost reduction and production linked incentives will cost a fraction of the money allocated for free solar programs and will make these Pakistan assembled panels cost competitive with imported ones. Similarly, joint ventures with Chinese companies should be incentivized for Lithium Iron Phosphate (LFP) battery modules and pack assembly in Pakistan. Until these factories start production and meet 80% of domestic demand, duty free imports of solar panels should continue and import duties for battery packs should be eliminated to facilitate fast electric 2-wheeler adoption.
While the PM and Punjab CM have good intentions in reducing the financial burden on low and middle-class families due to high electricity and fuel charges, the focus should be in fixing Pakistan’s economy for the long-term instead of providing freebies, which will hurt the economy in the long run.
With enough manufacturing experience and skilled workforce development, Pakistan can then provide incentives to foreign manufacturers to set up export-based solar panel and battery factories in the coastal region.
With trade restrictions and high terrif imposed by US and EU on Chinese solar and battery imports, Pakistan can penetrate that market by incentivizing higher cost South Korean and Japanese manufacturers for lower cost manufacturing and shipping to middle eastern and European markets. An investment in low-cost but high-quality solar panel and battery manufacturing with reduced shipping cost can payback with significant dividends to Pakistan’s economy.
While the PM and Punjab CM have good intentions in reducing the financial burden on low and middle-class families due to high electricity and fuel charges, the focus should be in fixing Pakistan’s economy for the long-term instead of providing freebies, which will hurt the economy in the long run.
The path to a lasting economic turnaround and growth is through industrialization, economically efficient solarization, and EV transformation. This will reduce the electricity prices in time and create a new growing economy for Pakistan with improved manufacturing base, increased high-value exports, and significantly reduced import bill, while providing high quality employment opportunities for the youth. Embarking on this path will start showing results within a year, long before the next elections.