Talk23 Private Sector Involvement in Hydropower & future investment Opportunities in Upper Indus Basin

Wednesday, 05 September 2018

Background

Over the past decade energy crisis has remained a major challenge in Pakistan. With increasing population and urbanization the energy requirements of the country are increasing each day. An immense potential of hydro-electric power has been estimated in the upper Indus basin (UIB) - approximately 40000MW in Gilgit Baltistan alone. However, the current economic conditions in the country inhibit government ability for large scale public investment in the power sector as it did in the 60's. Investment from private sector organizations such as corporations, bi-lateral, multi-lateral, and commercial financial institutions can play a vital role in harnessing this potential and meeting the long term energy needs of the country.

To bring this key issue to the forefront of our national development agenda, LEAD Pakistan hosted an interactive session on 'Private Sector Involvement in Hydropower and Future Investment Opportunities in the Upper Indus Basin.' The speaker, Mr. Jehanzeb Murad, a sustainable development practitioner currently associated with KOEN (Korea Energy) with over 20 years' experience in the power sector, talked about the unique challenges and opportunities for the Hydro-power sector in the upper Indus basin and shared insights on how to remove bottlenecks for private investment in the power market.

International Trends for Private Sector in Hydropower

The private sector holds a significant position in the global energy market. Global trends show that the state owned enterprises (SOEs) have only 40% share in total investment in the power sector and most of which is in distribution systems and oil & gas exploration. The share of private sector is even greater for renewable and efficient energy systems i.e. more than 80%, among which hydropower alone have the largest share of 16.4 %.

Pakistan's Experience in Hydropower and Private Investment

Pakistan has suffered from acute power shortages for almost a decade now which affected almost all spheres of life and retarded the economic growth of the country. While reactive efforts were undertaken to provide the public some relief against the menace of load shedding, long term proactive measures have been neglected in national policies. In addition, until a few years ago power sector development has relied heavily on the orthodox approach of financing through the government exchequer. Although the first IPP (Independent power plant) HUBCO, was commissioned in 1995, but the private sector has only recently become a key player in the energy sector of the country in this short period of time.

To facilitate this process the Private Power and Infrastructure Board (PPIB) was formed as a 'One Window Facilitator' in 1994 for promoting private sector investment in the power sector of Pakistan. Some enablers for successful private sector investment have been attractive and balanced power sector policies, attractive USD IRR for renewable projects, role of multilateral banks and ready availability of finance, and well defined tariff structures.

Despite all these efforts to instigate the private sector for investment in energy, the current shortfall in power generation stands at nearly 7000 MW during peak seasons. In addition to the shortfall, the low efficiency of some power projects and an aging transmission system is exacerbating the situation. Long term hydropower IPPs in the upper Indus basin can prove to be a game changer for the energy crisis in Pakistan.

The Upper Indus Basin - Potential Powerhouse of Pakistan

The upper Indus basin of Pakistan comprising of areas of Gilgit Baltistan (GB), KPK and AJK, holds more than 80% of the total hydropower potential in Pakistan, out of which the most under-utilized potential area is GB. Investment in GB's Hydropower can prove particularly profitable as maximum flows, huge dynamic heads and low social and environmental costs, present a good overall return on investments. In addition, at lowest flows in winter seasons, these power projects can still function at 50% efficiency which is higher than many places in Pakistan. Despite having a huge potential for hydropower, only 154 MW are being produced against the regional on-grid demand of approximately 400 MW. Moreover, unlike the rest of Pakistan, GB has not been able to attract private sector investment in the area of hydropower because of lack of a legal framework and uncertainty in constitutional position. The private sector can easily be drawn in if the government and regulatory bodies can provide incentive securities, lucrative policies, and sovereign guarantees to the investors.

Bottle Necks and Troubleshooting

Some of the major bottlenecks for private sector investment in the GilgitBaltistan originate from the lack of organizational capacity,poor legal frameworks and finaicial contraints at the provincial government. The award process for private investors require transparency and clarity on roles and a coherent strategy is required on the part of the federal and provincial governments to assess bids and rank private organizations. In addition, private investors need to be forced to spend a considerable amount of time in conducting high quality feasibility studies. Furthermore, land acquisition remains a huge problem in IPPs and it is imperative to amend the Land Acquisition Act in order to facilitate private investors and have consistency with international practices.

At present, benefit sharing models either for private investors or for communities do not exist in Pakistan. Powerful lessons for its hydropower sector can be drawn from projects in Nepal and India. All aspects considered, perhaps the biggest hindrance for private sector investment in upper Indus Basin is the lack of access to national grid and inadequate transmission infrastructure. Therefore, while more private investment is needed in overall hydro-power sector, special attention is necessary for financing the availability of adequate power transmission in the upper Indus Basin.

Case study: Serendipity in Environment - The Gulpur National Park

The case of 102 MW Gulpur Hydropower Project (GHP) holds important lessons for future IPPs. The GHP on the Poonch River in AJK, recovered from the brink of closure to become a profitable project for its investors. This was achieved through the priority ascribed to biodiversity management and environmental conservation. A red list (endangered) species of the migratory Mahaseer fish was found in the proposed dammed section of the Poonch River. Since International financial agencies such as IFC and ADB (Gulpur IPP investors) etc. attribute high consideration to environmental standards, upholding them not only reduced the social and environmental costs but also reduced the overall cost of the project as a result of redesign. The project also demonstrated a net-environmental gain as the habitat of the endangered Mahaseer fish was declared a national park. GHP

Conclusion and Way Forward

The Gulpur Hydropower Project (GHP) can act as a benchmark for future hydropower projects which can not only contribute effectively to environmental conservation but can also prove lucrative for potential investors. Generally, in private sector projects lowering of environmental standards results in higher investor interest but the GHP is a testament to the benefits of upholding environmental standards. In addition, a strong stakeholder consultation process is necessary before and during the implementation of a HPP. The session concluded with a key message from the speaker that environmental standards hold significant importance in modern day HPPs. The standards can be implemented on hydropower projects through robust stakeholder consultation process. UIB can prove to be the power house of Pakistan, provided its gates are opened for private sector investment. This would require proactive measures for policy development and introduction of a suitable legal framework before we can harvest the power potential of UIB.