Spurred by falling solar photovoltaic (PV) prices and escalating grid tariffs, solar installations, especially those on rooftops, have seen rapid growth in Pakistan. These solar investments, both residential and commercial, are also supported by a decent net metering regime that lets consumers sell excess solar generation during daytime back to the grid.

However, despite having a renewables refinance facility from the State Bank of Pakistan (SBP), the local banks have failed to tap into what is, perhaps, one of the fastest-growing segments in the country.

Per industry estimates, around 3,500MW capacity of PV panels have been imported into Pakistan in the last 10 years. Of these, about 1,000MW has been installed on solar independent power producers and large grid-scale solar projects. The remaining have been deployed for residential, commercial and agricultural usage.

Per Alternate Energy Development Board (AEDB) stats, up until 31 July 2021, a total of 16,639 applications for net metering of on-grid solar connections had been received by all distribution companies in Pakistan. This would include mid to large-sized residential and small to mid-sized commercial solar PV systems with a combined capacity of 314MWs. The off-grid solar installations in Pakistan, typically those for solar tube wells, micro/small solar rooftop installations on residences, are estimated to be at least 10-15 times the number of on-grid installations.

However, the total number of solar loans (under the SBP’s Financing Scheme for Renewable Energy) at the end of 2020-21 stood at just 423 since its launch five years back. And while the financing scheme covers both the on-grid and off-grid (solar tube wells) connections, the share of financing stands at a paltry 2.5 per cent of just the on-grid installations. For perspective, the share of auto financing in total car sales is close to 50pc in Pakistan.

The launch of the Naya Pakistan Housing Finance Scheme has completely cannibalised the SBP’s renewables financing scheme

Much like most other government initiatives, the SBP’s subsidy scheme has been a story of noble intentions with not-so-able execution. The Financing Scheme for Renewable Energy was launched by the SBP in 2016. The Scheme entails a subsidized 6pc fixed annual end-user interest rate (2pc refinance rate for banks) with a loan tenure of up to 10years.

The original Scheme had two categories, one for sponsors of large renewable projects )1MW capacity and the second for consumers (domestic, agriculture, commercial and industrial) putting up renewable projects for own use with (1MW capacity. The scheme was then relaunched in 2019 with further improvements, including the introduction of a third category for sponsors of Power Purchase Agreements.

The earlier Scheme had few off-takers as banks remained sceptical of solar technology and local vendors. By the time the revised scheme was introduced in 2019, the market had taken significant leaps with reliable vendors operating, net metering connections getting common and PV imports increasing.

However, as the numbers suggest, solar financing has miserably lagged the pace of solarisation. The slow uptake by banks has been owing to a number of reasons, first and foremost of which has been lack of product/technology understanding. Far from introducing an ‘innovative’ financing product, banks were unwilling/uninterested at best, and unaware at worst, to launch a product already designed by the State Bank. The banks didn’t understand the technology and its use, which was evident by the structure of some of the initial financing products introduced for solar.

The second biggest reason, at least until 2018, had been the low Karachi Interbank Offered Rate benchmarks which made banks tread the ‘safe’ route of auto financing and ignore solar. It was only when KIBOR starting climbing and demand for automobiles squeezed towards mid-2019, that banks started exploring solar financing under the SBP scheme.

Another reason banks are still hesitant to leverage the refinance scheme has been the cumbersome documentation requirement from the SBP. The scheme was, essentially, the first refinance scheme available to individual consumers (all earlier schemes focused on large corporates for export refinancing etc), and thus most of the banks had capacity issues in their back-end functions to deal with the SBP’s documentation requirements for consumer loans. The situation has been made worse by the short expiry limit set by SBP for solar financing documentation. This frequently leads to delays in refinancing making banks bear the cost of finance.

Lastly, and this has been more of a recent phenomenon, the launch of the Naya Pakistan Housing Finance Scheme has completely cannibalised the SBP’s renewables financing scheme. There has been a strong push by the government/SBP for the banks to finance low-cost housing. This push is accentuated via designated desks, regular meetings, targets, incentives and even penalties from the SBP. This is in stark contrast to the solar financing scheme, where targets are meant to be merely indicative and push is limited to persuasion.

Resultantly, very few banks are actually lending for solar projects and those that do take an exceptionally long time to process such loan applications.

Thankfully, there seems to be growing realisation within the SBP that the renewables financing scheme, despite its attractive structure, has failed to generate desired volumes. The SBP has, for instance, declared Renewable Energy as The Sector of The Year for 2021-22. It has initiated a series of awareness seminars and consultative workshops with stakeholders to improve the solar financing uptake. However, there are certain tangible steps that the SBP will have to take to perpetuate ‘clean energy inclusion’.

Firstly, no amount of effort would succeed without the alignment of the incentive structure. The SBP needs to revisit the incentive structure for banks to pursue green financing vis-a-vis the housing finance. Banks should be given definitive targets for green financing with a proportionate reward/penalty structure. They should also be made to establish green financing desks, at least at the regional office level, to generate business volumes.

Secondly, since the consumer finance divisions of the banks are over-stretched with housing finance, the small- and medium- enterprises (SME) divisions should be allowed to lend to solar residential customers engaged in net metering with the local utility company. Net metering allows solar users to sell excess solar energy during the daytime back to the grid. This engagement in a commercial activity should qualify those consumers to be classified as an entrepreneur under the SME definition.

Moreover, the back-end departments of SME divisions are usually more experienced with refinance documentation of various SBP schemes. This will help banks better align their resources for green finance and reduce loan turn-around times.

Lastly, the burdensome documentation for refinancing needs to be rationalised. The document expiry limits have to be extended. The central bank should engage banks to streamline refinancing processes.

Distributed solar remains the best, if not the perfect, solution for a lot of our power sector challenges. The co-location of the generation and consumption in such projects means less load on the grid and fewer maintenance expenses for grid managers. It is concerning how, despite government incentives, local banks have been lazy in financing these projects. It is more worrisome considering the entire solar loan portfolio of Pakistan under this scheme has, so far, remained immune to defaults. It is a push coming to shove moment for the SBP, and we can hope the SBP is prepared to seize it.

Published in Dawn, The Business and Finance Weekly, September 13th, 2021