PROCUREMENT of renewable energy (RE) in Pakistan has historically been carried out through upfront or cost-plus tariff regimes. However, after the Alternative Renewable and Energy Policy 2019, the primary mode of procurement will be auctions. Auctions are a highly flexible method of energy procurement which can be designed to cater for diverse policy goals. They are competitive, transparent, and efficient if properly carried out, and can result in true price discovery, market growth and local value creation.

These are all, however, only potential outcomes of an auction and if poorly designed, auctions can do more harm than good. Risks associated with careless design of auctions include heavy administrative costs, barriers to entry especially for small developers, concentration of awards in the hands of a few players and low project completion rates.

For Pakistan the challenge is even more unique. Historical trends indicate that RE has already undergone drastic cost reductions over the past decade. Solar and wind tariffs in Pakistan have seen more than 70 per cent reduction, going as low as 3.7 and 4.5 cents respectively. Pushing for further cost reductions can be unrealistic and can even be detrimental for growth of local and indigenous RE markets which are already under threat from post-Covid global supply chain disruptions, a rise in commodity prices, removal of sales tax exemptions and the addition of advance tax on RE technologies.

Moving for an auction design beyond cost, would imply prioritising other non-cost related energy policy objectives and global best practices. This entails allowing domestic markets to grow, 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.

Maintaining a balanced regional spread of renewable projects in Pakistan is recommended.

One of the major dangers associated with auctions is that of award concentration where one or few winners dominate the market by procuring too much volume, outbidding small developers due to economies of scale, thereby monopolising and preventing market growth in the long term. Limiting project sizes or setting quotas per bidder is a common way of reducing this risk and spreading benefits across a large range of developers and regions.

In Argentina, for example, only 1 MW- to 100 MW-sized solar and wind projects were allowed to bid in the first and second rounds of the RenovAr programme, which was further reduced to 10 MW in subsequent rounds. In Uruguay, project sizes were similarly limited with only one award per bidder initially and a cap of up to 100 MW per bidder in later rounds. In the upcoming third 2022 Spanish CSP auctions, projects have been limited to a maximum of 100 MW per bid and 180 MW per bidder. Remarkably, all these examples have successfully indicated that smaller project size is not a deterrent to price reduction or volume procurement. Throughout the Latin American region, tariffs continued to decrease despite majority of the projects being smaller than 40 MW.

Limiting project sizes or implementing bid quotas is one way to ensure inclusive development where both large corporations and small developers are able to participate. Such an inclusive approach also fits well with the incumbent government’s policy of promoting Small and Medium Enterprises (SMEs) and the local economy.

An important case study for Pakistan to learn from is that of South Africa which has successfully allocated 2.58 GW across 25 wind and solar projects over the past year. They have done so with an auction design catering not only for low-cost procurement but also their national development objectives of inclusive and participatory local development.

South Africa mandated 49pc of involved entities to be national, at least 30pc of shareholders to be black and 5pc of ownership to be by black women. It also mandated 25pc of workers on RE projects to be black with at least 40pc of construction content coming from local sources. As a result of this auction design, 60,517 job years for South African citizens have been created to date, a total of R61.9 billion ($4.08bn) has been spent on local content so far, black South Africans hold 34pc of the shares across the complete supply chain and 80pc of the financing has been domestic.

The programme also required independent power producers to report on initiatives and contributions for socioeconomic improvement of the communities in which they operate. As a result, 1,388 educational institutions have been supported by IPPs with a total of R437.5 million ($28.91m) in funding. A total of 1,276 bursaries have also been awarded out of which 97.4pc went to African and coloured students.

The projects were also well distributed geographically, primarily due to the natural spread of renewable energy resource potential. The high geographical spread of projects is another important contributor towards dispersing the socioeconomic benefits of RE in a more equitable manner. Maintaining a balanced regional spread of RE projects in Pakistan is also recommended from a technical perspective as it ensures effective transmission, higher grid flexibility and a reliable supply.

Pakistan can learn a lot from such global experiences in designing its own auction mechanisms. Local industrial players have shown an interest in the budding RE market in Pakistan, bolstered by enabling mechanisms like the State Bank of Pakistan’s RE financing scheme. Most of the operational and under-construction RE projects are owned by local Pakistani enterprises. The government of Pakistan should find a balance between protecting smaller local developers and attracting investment by larger foreign players in the auctions. Doing so will not only encourage more domestic participation and entice foreign investment but would also give a boost to local value, job creation and an inclusive market development.

The writers are energy policy and practice specialists at an energy think tank in Pakistan.

Published in Dawn, April 4th, 2022