New power capacity: Competitive bidding yet to be implemented: WB

 Competitive bidding for new power capacity in Pakistan has yet to be implemented, delaying the expected benefits to consumers in terms of lower generation costs and the much-needed transition to a more secure, sustainable, and affordable electricity sector, says the World Bank.

The bank in its latest report “Pakistan Sustainable Energy Series, Variable Renewable Energy Competitive Bidding Study” stated that based on the government’s current projections, Pakistan will need to carry out competitive bidding for more than 11 GW of solar and wind power capacity between now and 2028, starting as soon as possible. The actual capacity required could be significantly higher than that.

Competitive bidding can help to ensure that future procurement of Variable Renewable Energy (VRE) is carried out strategically, transparently, and at the least cost, it added.

The report noted that with 1,700 MW of solar and wind power capacity installed as of September 2021, against a target of 12,900 MW by 2030, 11,200 MW must be installed between now and then. Allowing two years for project development means that procurement of this additional capacity must be completed by the end of 2028.

The actual figure may need to be higher than this if capacity from other sources is delayed (or does not materialize), or if demand increases by more than expected.

Analysis by the World Bank published in 2020 suggests that the “least-cost” generation mix would see at least 20 GW of solar and wind added by 2030. Even allowing for some reduction due to lower demand projections since then, 11 GW of additional solar and wind should be seen as the minimum that would be added over the next six years.

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Considering the volume of capacity outlined, and the rate of past development (1,700 MW installed over roughly ten years), it should be clear that a phased approach beginning in 2022 is required. This will deliver immediate fuel savings—even after allowing for capacity payments—and help ensure that the country does not end up with a power supply deficit in the middle of this decade.

Furthermore, early action will be critical to building the capacity of the relevant procuring authorities, allowing for early lessons to be incorporated into the competitive bidding regime, and ensuring that the private sector has the stability and predictability to bring forward competitive projects.

The report recommended that Pakistan adopts two models of site-specific competitive bidding, whereby the locations would be determined by the relevant authorities up-front. Competitive bidding can be specific or neutral with regards to the locations or sites to be developed and the technologies to be used.

It further recommended two forms of competitive bidding that would be implemented in parallel: i. Park-based bidding through the strategic identification of renewable energy parks, or “RE parks”, which would be developed in zones where there is excellent solar and wind resource potential (allowing for improved utilization of transmission lines through what is sometimes referred to as “hybridization”), plenty of available land, an absence of environmental, social and other constraints, and viable options for large-scale power evacuation.

Identification and development of such RE parks have been proposed under several previous studies, including the VRE Locational Study published by the World Bank in February 2021, and allows for the public sector to facilitate large additions of low-cost VRE capacity through the development of “shared infrastructure” combined with competitive bidding.

ii. Substation-based bidding whereby substations with spare capacity would be identified and listed in a bidding round, with private developers invited to propose projects within a fixed radius from each substation.

This approach would target smaller project sizes comprising mainly solar capacity, although wind power would also be eligible. Park-based bidding would largely target zones with high wind resource potential in Balochistan and Sindh since the solar resource potential is high across the country and especially in these two provinces.

The project sizes would be larger, and such schemes would require substantial public and private sector investment in new infrastructure. Substation-based bidding would largely target additional solar power capacity, with smaller project sizes. However, this approach has the benefit of avoiding substantial new transmission infrastructure and of reducing technical losses, especially where solar capacity is placed at the ends of long radial lines.

In both cases, this study recommends a technology-specific approach whereby the competitive bidding rounds would target fixed quantities of solar and/or wind capacity as determined by the resource potential and prior analysis of the optimal supply mix for each zone or site.

A third model, based on site-neutral bidding, is not proposed for the time being but could be a further option once the market is more developed.

This could be combined with technology-neutral bidding, which would introduce further complexity. There should be a clear schedule for the volumes of renewable energy that will be procured through competitive bidding, with an annual cycle to provide certainty and confidence to the process.

The competitive bidding regime should be designed to achieve approval of a tariff 33 weeks following the commencement of the process, requiring all organizations to streamline their approval processes.

To support project bankability, a relatively simple indexation and compliance bond formula should be implemented. The RFP process should include provisions for environmental and social assessments and local benefit sharing, in line with international good practice.

An IT platform should be used for carrying out the competitive bidding process to ensure transparency and promote market confidence, combined with a communications strategy to reach as many bidders as possible. Pakistan should seek to maximize the economic development benefits from the expansion of VRE, but we do not recommend stringent local content requirements, the Bank recommended.

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