Pakistan and United States are to negotiate a new framework in energy sector on Wednesday (today) with main focus on implementation of market-based reforms to facilitate and accelerate private investment in financially sound clean energy projects, well-informed sources in USAID told Business Recorder.
To improve the policy environment and promote private investment, US technical assistance will initially focus on the five Pakistani institutions whose decisions have a great influence on private investments in the power sector: PPIB, AEDB, Nepra, NTDC and Privatisation Commission. The PPIB and AEDB ostensibly serve as “one window” for private power developers seeking to obtain project approvals.
According to sources, USAID will work with these institutions to improve their capacity to accelerate project approvals, generation licences and pricing guidelines, transmission network development plans and develop other steps to simplify the procedural barriers faced by power project developers.
Since 2010, the United States assistance has contributed over 1.5 gigawatts of electricity to Pakistan’s national grid station. Through this phase of US energy sector assistance, the US has focused on refurbishing existing hydropower and thermal generation facilities, completing hydropower projects and improving the operation and efficiency of Pakistan’s national grid.
“Energy challenges constitute a key structural obstacle to Pakistan’s growth prospects. Energy demand is expected to double by 2030 with electricity capacity expected to exceed 30 gigawatts,” the sources added The United States maintains that to alleviate the current crisis and meet the projection of future demand, Pakistan must implement meaningful market-based reforms to attract investment.
Although, Pakistan has a substantial domestic gas resources, underinvestment in domestic exploration and production over time has left the country reliant on expensive imported fuel sources. The recent entry by Pakistan into international Liquefied Natural Gas (LNG) markets and the declining cost of renewable energy systems create the potential for Pakistan to alleviate the crisis and meet future demand in a financially realistic and sustainable way.
The United States has proposed a new framework for US-Pakistan (and potentially donor -Pakistan) engagement in the energy sector. Under the framework, US will orient its future bilateral assistance on supporting the government of Pakistan’s efforts to implement market-based reforms necessary to facilitate and accelerate private investment in financially sound, clean energy projects, the sources continued.
To this end, Washington has expressed its intention to deploy USAID, the US Department of Energy and the Overseas Private Investment Corporation (OPIC) and other investment tools towards a set of mutually reinforcing activities aimed at stimulating increased levels of private investment and with 3-5 years, adding at least 3 gigawatts of clean power to Pakistan’s national grid.
The sources said, there are two reasons of this focus. First, moving the energy sector towards a more market-based situation is the best means of ending the current crisis and ensuring that future demand can be met. For example, instituting a market-based tariff structure of domestic gas exploration and production would foster expanded private sector development of Pakistan’s indigenous resources. Second, clean power investments in hydroelectric, wind, solar, biomass, and natural gas, combined with an expanded effort to improve the efficiency at all points of energy supply and water security, would promote innovation and growth. A guiding concept is that through increased private investment, privatisation of the distribution companies and improved governance, the fiscal burden of government subsidies would decrease and energy sector arrears (circular debt) could be reduced.
According to Washington, privatisation of state-owned generation and distribution companies will create space for expanded private management and investment in the sector. Increasing the market-basis of the energy sector will require the government of Pakistan to shift from an industrial policy approach towards a more appropriate, regulatory role.
This new initiative is envisioned as a partnership based on a set of goals shared by Pakistan, the United States, multinational banks, other donors and the private sector. Without action and reform by the government of Pakistan, however, the initiative cannot succeed. Under this framework, the United States has proposed to work with the Government of Pakistan and international partners to: (i) strengthen regulatory institutions and develop market-base rules to attract private investment; (ii) commercialise and privatise distribution companies to improve efficiency and management and develop a plan to reduce and eventually eliminate energy sector arrears; (iii) develop an investment strategy for expanding the role of renewable energy systems including the necessary transmission projects to fully utilise these new sources; and (iv) mobilise in a systemic manner loans, grants, technical assistance, insurance and guarantee needed to manage and reduce private sector risks and leverage private capital into clean power projects.
Using USAID’s Development Credit Authority (DCA) a legislative authority that permits USAID to issue partial loan guarantees to private lenders. In this instance, United States will work with investors, financial institutions and development organisations to support select private project developers that may need an additional guarantee to help the project reach financial closure.