ovinciElectricity Sector Regulatory Regime of Pakistan

The principal law regulating the power industry of Pakistan is the Regulation of Generation, Transmission and Distribution of Electric Power Act 1997, ("NEPRA Act")as amended from time to time.

Pursuant to the NEPRA Act, the National Electric Power Regulatory Authority (NEPRA) has been established as the sole electricity sector regulator.

NEPRA’s main functions include the issuance of licences for undertaking regulated activities (including carrying out generation, transmission, distribution or supply business, and construction and operation of related facilities) and the determination of tariffs for the sale of electric power.

Licensees include:

• generation companies – companies that generate electric power for sale to other licensees and consumers;
• companies that transmit electric power, including the national grid company (National Transmission and Despatch Company Limited (NTDC)) and the provincial grid companies (PGCs);
• companies that distribute electric power to end consumers;
• the company responsible for administering system operation and dispatch (National Power Control Centre (NPCC), which is currently a part of NTDC);
• the company responsible for the organisation and administration of trade in electricity and payment settlements among generators, and consumers (currently, Central Power Purchasing Agency (Guarantee) Limited (CPPAG);
• electric power suppliers that act as supply-aggregators for electric power generated by generation companies; and
• electric power traders – intended to act as demand-aggregators for consumers and other licensees.

NEPRA Laws

Pursuant to the NEPRA Act, NEPRA has enacted and approved the following key rules, regulations and binding documents (NEPRA Laws):

• NEPRA Licensing (Generation) Rules 2000 ("Generation Licensing Rules");
• NEPRA Licensing (Distribution) Rules 1999 ("Distribution Licensing Rules");
• NEPRA Performance Standards (Generation) Rules 2009 ("Generation Performance Standards Rules");
• NEPRA Performance Standards (Transmission) Rules 2005 ("Transmission Performance Standards Rules");
• NEPRA Performance Standards (Distribution) Rules 2005 ("Distribution Performance Standards Rules");
• NEPRA Tariff Standards and Procedure Rules 1998 ("Tariff Rules");
• the Grid Code; and
• the Distribution Code.

The above list is a not exhaustive.

Council of Common Interests (CCI)

The CCI is the highest policy-making body of the federation, established under Article 154 of the Constitution of Pakistan, consisting of:

• the Prime Minister, who acts as the chairman of the CCI;
• the Chief Ministers of each Province; and
• an equal number of members from the Federal Government (to be nominated by the Prime Minister).

The functions of CCI include formulating and regulating policies in relation to electricity matters and exercising supervision and control over related institutions.

Facilitative Regime

To facilitate power projects being developed pursuant to a government power policy, the Federal Government has established the following statutory bodies:

• the Private Power and Infrastructure Board (PPIB) – for facilitating non-renewable power projects and hydropower projects with capacity greater than 50MW; and
• the Alternative Energy Development Board (AEDB), for facilitating renewable energy projects.

At the provincial level, the following Provincial Governments have also set up similar bodies/departments for power projects being developed pursuant to provincial government power policies:

• Province of Punjab – Punjab Power Development Board;
• Province of Sindh – Government of Sindh Energy Department and the Sindh Renewable Energy Company (Private) Limited;
• Province of Khyber Pakhtunkhwa – Pakhtunkhwa Energy Development Organisation; and
• Province of Balochistan – Government of Balochistan Energy Department.

In the case of the state of Azad Jammu and Kashmir (AJK), the AJK Power Development Organisation (AJK-PDO) has been established to facilitate power projects in the AJK.

Ownership of Licensees

Generation companies

There are, both, state-owned and privately-owned generation companies operating in Pakistan. Due to relatively recent government policies, the number of grid-based independent power producers (IPPs) has grown greatly over the last two decades.

In the local market, the term “IPP” is used almost exclusively to refer to privately-owned power projects developed pursuant to a government-issued power policy that sell their power exclusively to the government’s purchasing entity, ie, the Central Power Purchasing Agency Guarantee (CPPAG).

Transmission companies

The main transmission licensee owning and managing the national grid is a state-owned company, National Transmission and Despatch Company Limited (NTDC). Recently, the Provinces of Pakistan have begun setting up their own transmission companies (provincial grid companies or PGCs) (such as the Sindh Transmission and Dispatch Company (Private) Limited).

There are also a few privately-owned transmission companies holding special purpose licences (such as Fatima Transmission Company Limited and Pak Matiari Lahore Transmission Company (Private) Limited).

Distribution and supply companies 

Distribution companies are predominantly owned by the government. Exceptions include K-Electric Limited (a century-old public utility company that was privatised in 2005) and a few companies that were set up as private distribution businesses.

Generation Entities

State-owned

The Water and Power Development Authority (WAPDA), a statutory body, owns and operates a number of electric power projects for the government, the majority of which are hydropower based. WAPDA is also continuing to develop further hydropower projects, including Dasu and Keyal Khwar.

Previously, WAPDA was the sole electric power utility of Pakistan. In the 1990s and 2000s, WAPDA was restructured to spin-off:

• its thermal power projects into four generation companies (including the Central Power Generation Company Limited (CPGCL) and the Northern Power Generation Company Limited (NPGCL));
• its transmission business to the National Transmission and Despatch Company Limited (NTDC); and
• its distribution business to nine distribution companies (DISCOs).

Most recently, the government has set up three large regasified LNG (RLNG)based power generation projects through two government-owned companies, the National Power Parks Management Company (Private) Limited and Quaid-e-Azam Thermal Power (Private) Limited.

Government-owned generation companies are often referred to as "GENCOs” in Pakistan.

Additionally, there are also a number of nuclear power plants (NPPs) owned and operated by the Pakistan Atomic Energy Commission.

Private

The private sector has established a number of fossil-fuel power projects (residual furnace oil (RFO), high speed diesel (HSD), pipeline quality gas, reservoir-based gas, RLNG, imported coal, indigenous coal and cogeneration) and renewable energy projects (wind, solar and biomass/bagasse) pursuant to various government power policies. Some of the largest foreign investors in the private power sector include China Three Gorges, Power China, Hydrochina, China Gezhouba, Engie (French), K-Water (Korean), while the largest private investors include Engro, Hubco and Yunus Brothers.

A portfolio of power projects is also owned and maintained by K-Electric Limited, including the Bin Qasim Power Complex, the Korangi Power Station, the Site Gas Power Station and the Korangi Town Power Station.

Additionally, a number of captive private power projects (CPPs) have also been set up by the owners of factories and other commercial establishments to meet their electric power requirements.

Transmission Entities

State-owned

The national grid of Pakistan is owned and managed by the National Transmission and Despatch Company Limited (NTDC), a state-owned company. The NTDC enjoys exclusivity for transmission activities for most of Pakistan.

The National Power Control Centre (NPCC), the system operator responsible for the control of supply of electric power generated by all power producers connected to the national grid, is a part of the NTDC.

The provincial grid companies (PGCs) are owned by the respective provincial governments and include:

• Sindh Transmission and Dispatch Company (Private) Limited; and
• Khyber Pakhtunkhwa Transmission & Grid System Company (Private) Limited.

Private

Some of privately owned transmission companies are:

• K-Electric Limited, which is primarily a distribution company, also has the right to provide transmission services within its service territory which is excluded from NTDC’s service territory;
• Pak Matiari Lahore Transmission Company (Private) Limited – the only transmission company set up pursuant to the Transmission Line Policy 2015 so far, it has been set up to develop and operate the 600kV HVDC transmission line between Matiari and Lahore to transmit the electric power generated by the new local coal-based projects being developed in Thar and Sindh; and
• Fatima Transmission Company Limited.

These companies have special purpose transmission licences, issued pursuant to Section 19 of the NEPRA Act, which only permit the licensee to engage in the construction, ownership, maintenance and operation of specified transmission facilities.

Distribution Entities

State-owned

The majority of DISCOs in Pakistan are state-owned entities with the exclusive right to carry out distribution activities in their respective service territories. As these state-owned DISCOs were formed after the restructuring of WAPDA, they are referred to as “Ex-WAPDA DISCOs”. They include the following companies:

• Faisalabad Electric Supply;
• Gujranwala Electric Power;
• Hyderabad Electric Supply;
• Islamabad Electric Supply;
• Lahore Electric Supply;
• Multan Electric Power;
• Peshawar Electric Supply;
• Quetta Electric Supply;
• Sukkur Electric Power; and
• Tribal Areas Electricity.

Private

The following is a non-exhaustive list of privately-owned distribution companies:

• K-Electric Limited, formerly a state-owned DISCO that was privatised in 2005, which is responsible for distribution activities in the city of Karachi and its surrounding areas;
• Lasbela Industrial Estates Development Authority (LIEDA), which obtained a distribution licence for the distribution of electric power within the industrial estates under LIEDA’s ambit;
• DHA Electric Supply Company, formed for the distribution of electric power to housing developed by the Defence Housing Authority (DHA);
• Bahria Town (Private) Limited, formed for the distribution of electric power to housing developed by Bahria, etc.

Foreign Investment Protections and Incentives

There are no notable restrictions on the injection of foreign investment into the power sector. On the contrary, the government encourages foreign investment by extending various protections and fiscal and financial incentives to investors.

Some of these protections are provided in the law, while many are promised contractually via concession agreements signed between the investor(s) and the government. In the local power sector, these agreements are referred to as “implementation agreements”.

These protections and incentives include:

• exemptions from tax and applicable duties and concessionary rates;
• repatriability of investment and proceeds;
• non-discriminatory treatment;
• change-in-law protection;
• change-in-tax protection;
• lapse-of-consent protection;
• force majeure protection;
• dispute resolution before international arbitration institutions;
• government-support for consents;
• direct agreements with lenders;
• compensation upon termination; and
• sovereign guarantee for the state-owned power purchaser’s payment obligations, etc.

If any investment (whether foreign or local) is to be made in a project being developed pursuant to a government policy, the relevant facilitative agency of the government will review the financial and technical strength of the investor before approving their investment in the project.

Typically, the permitted debt-to-equity ratio is from 80:20 to 70:30. Any equity in excess of the permitted ratio will be treated as debt by NEPRA when determining the tariff.

Further, NEPRA will take into account the following, inter alia, when determining the tariff:

• return on equity during construction;
• interest during construction; and
• return on equity.

Repatriation of foreign investment is subject to the exemption/approval of the State Bank of Pakistan, which grants the approval in accordance with the prevailing foreign exchange policy.

Restrictions on the Sale/Disposal of Power Industry Assets and Merger and Acquisition Transactions

NEPRA, the sector regulator, imposes restrictions and conditions on various transactions by licensees, including the sale of power industry assets by licensees and on amalgamations and mergers by licensees.

The licensing rules promulgated by NEPRA impose a number of restrictions and conditions on the generation and distribution licences issued, including restrictions in respect of:

• the transfer of the licensee’s shares and other voting securities;
• the disposal of the licensed business;
• the issuance of guarantee/surety in a cumulative amount greater than 25% of the equity of the licensees' shareholders; and
• the acquisition of shares in any entity, subject to exceptions.

Transactions that involve the above require the prior approval of NEPRA, which approval shall take into account the promotion of competition in the electric power industry as a whole and the change, if any, in the control or management of the licensee, likely to result from the approval, if granted.

Additionally, pre-merger approval is also required from the Competition Commission of Pakistan (CCP).

Further, the implementation agreement entered into between IPPs and the government provides for a contractual “lock-in” period, during which the shares of the project company cannot be transferred without the approval of the government.

There are a number of precedents where the relevant government agency has approved the transfer of project company ownership/control, including:

• Rousch (Pakistan) Power;
• Laraib Energy;
• Star Hydro Power (Patrind);
• Karot Power Company; and
• Kohala Hydro Company.

The National Transmission and Despatch Company Limited and National Power Control Centre

In addition to being the national grid company, the NTDC is also responsible for the development of power generation and transmission in the country. In this role, the NTDC has prepared the Indicative Generation Capacity Expansion Plan 2021–30, which sets out the generation expansion plan for the decade.

The National Power Control Centre (NPCC), which is a part of NTDC, is responsible for the control and dispatch of electric power to meet the demand of the national grid.

In addition to the above, the investment and expansion plans of distribution licensees and transmission licensees, and their performance and safety in light thereof, are reviewed and approved by NEPRA annually, along with the revenue requirements.

Aside from the NPCC, the following stakeholders also play a role in planning:

• the CCI and the Cabinet Committee on Energy (CCoE);
• policy-making institutions including the federal and provincial cabinets;
• NEPRA;
• the Ministry of Planning; and
• the Ministry of Energy (power and petroleum divisions).

The above list is not exhaustive.

The 2018 Amendment to the NEPRA Act

In 2018, the NEPRA Act was amended to, inter alia, pave the way for a deregulated, competitive market, referred to as the Competitive Trading Bilateral Contract Market (CTBCM) model.

The 2018 amendments introduced the following new licences (in addition to the generation, transmission and distribution licences already provided in the original law):

• market operator – responsible for the operation of the competitive market to be established under the CTBCM model;
• system operator – responsible for the despatch of the electric power generators connected to the national grid system;
• provincial grid companies – responsible for the provision of transmission services within each Province;
• electric power traders – intended to be demand-aggregators in the CTBCM model, contracting with multiple distribution licensees and consumers to procure power on their collective behalf; and
• electric power suppliers – intended to be supply-aggregators in the CTBCM model, contracting with multiple generation licensees and other suppliers to sell power on their collective behalf.

The 2018 amendment to the NEPRA Act also made did the following:

• established the NEPRA appellate tribunal, which is intended to function independently from NEPRA to hear appeals against NEPRA’s decisions;
• removed the exclusivity rights of DISCOs in relation to their respective service territories;
• introduced the national electricity policy (NE Policy) for the development of power markets, to be prepared by the Federal Government and approved by the CCI; and
• introduced the national electricity plan (NE Plan) to be prepared by the Federal Government with the aid of NEPRA and in consultation with the provincial governments.

The above list is not exhaustive.

Protecting Existing Exclusivity Rights 

Islamabad Electric Supply Company Limited versus NEPRA

Historically, the NEPRA Act has granted exclusivity to DISCOs in their respective service territories, with a provision in Section 22(1) for granting case-by-case second-tier supply authorisations to generation companies and DISCOs that want to directly supply consumers within the service territories of other DISCOs.

However, Section 22(1) was subject to a sunset clause that limited its effectiveness for a period of 15 years from the commencement of the NEPRA Act, ie, till the year 2012.

Further, as noted above, the 2018 amendment deleted the exclusivity right of DISCOs in relation to their respective service territories, and also removed the sunset clause of Section 22(1) so that NEPRA could continue to issue second-tier supply authorisations.

Notably, in addition to granting second-tier supply authorisations to generation companies prior to 2012, NEPRA also continued to grant them after 2012 (ie, after Section 22(1) was no longer effective) up to 2018 (ie, the revival of Section 22(1)) and beyond.

The Islamabad High Court, through its decision on writ petitions filed by certain DISCOs against NEPRA, decided that:

• the exclusivity rights that have already been granted to DISCOs could not be withdrawn with retrospective effect; DISCOs with existing exclusivity rights would continue to enjoy them until their licences expired; and
• NEPRA was wrong to grant second-tier supply authorisations during the period from 2012 till 2018, ie, during the ineffectiveness of Section 22(1).

As a consequence of the High Court’s decision:

• the number of new B2B electric power sale arrangements has reduced substantially, on account of questions regarding the legality of such transactions; and
• the growth of wheeling activity has ground to a halt.

The New National Electricity Policy 2021

Pursuant to Section 14A of the NEPRA Act, the Federal Government is required to prescribe an NE Policy, with the approval of the CCI, for:

• development of systems based on optimal utilisation of resources such as coal, natural gas, nuclear substances or materials, hydro and renewable sources of energy;
• development of an efficient and liquid power market design;
• integration of national and provincial transmission systems;
• special provisions for ensuring the development of a sustainable renewable energy market with a dedicated and gradually increasing share in the electricity power sector; and
• any other matter pertaining to the development, reform, improvement and sustainability of the power sector.

In 2021, the Federal Government introduced the National Electricity Policy 2021 (2021 NE Policy).

Prior to the 2021 NE Policy, the Federal Government had formulated the Power Generation Policy 2015 ("2015 Policy"), which set out specific incentives and protections for investors developing power projects with government support.

The 2021 NE Policy, which is broader in scope but less specific about the incentives and protections offered, did not replace the 2015 Policy, instead, the 2021 NE Policy supplements the older policy.

The 2021 NE Policy signals greater emphasis by the Federal Government on the following matters, amongst others, in respect of the electricity sector:

• increased competition;
• greater sustainability and environmental responsibility; and
• privatisation of state-owned enterprises (especially the DISCOs).

The New Alternative and Renewable Energy Policy 2019

The Alternative and Renewable Energy Policy 2019 ("2019 ARE Policy") sets a greater focus than the previous policies on:

• competitiveness, which is ensured through bidding; and
• new technologies, which are encouraged through a framework for unsolicited proposals that dispenses with the requirement of competitive bidding (this is available for the first two power projects of each new technology).

The 2019 ARE Policy extends to projects based on:

• biomass (including bagasse, agricultural waste and other waste);
• geothermal;
• ocean/tidal wave energy;
• solar (photovoltaic or thermal, or any technology that uses heat and/or light of the sun to make electricity);
• wind;
• storage technologies (battery systems, cells of all types, compressed gas, pumped storage);
• biogas using any organic material (except fossil fuels);
• energy from waste (including municipal solid waste, industrial waste, sewage, refuse derived fuel);
• hydrogen or synthetic gas (made from any source except fossil fuels); and
• hybrids of any of the above technologies.

The above is not an exhaustive list.

Transmission Line Policy 2015

Recognising the need to augment the national transmission network, the Transmission Line Policy 2015 ("Transmission Policy") was published by the Federal Government.

So far, only one project has been developed under the Transmission Policy: the Matiari-Lahore transmission line.

Projects Under Older Policies

Projects developed under older policies, such as the 2015 Policy and the Policy for Power Generation Projects Year 2002, continue to enjoy the concessions and protections granted to them under such policies.

High Risk-High Reward Market

Pakistan is a challenging country to invest in – the reasons ranging from security risks and circular debt to bureaucratic red tape.

Thus, the government offers some of the highest return-on-equity rates in the global market – up to 14–17% – to attract investment in the local power sector.

The extraordinary return offered by the government has attracted a significant amount of local and foreign investment within the power sector and continues to do so.

Circular Debt

As per the NEPRA State of Industry Report 2021, the circular debt in the power sector stood at PKR2.8 trillion in June 2021, which has continued to increase significantly since then. According to NEPRA, the main causes of the increase are the inefficiencies in the generation, transmission and distribution of power and non-payment of subsidies in a timely manner.

Economic Meltdown

Dwindling foreign reserves, global inflationary pressures, a weakening rupee, grey-listing by the Financial Action Task Force and high fuel prices have led to a very precarious economic situation for Pakistan.

Lack of Planning/Coordination

There is a chronic lack of planning and coordination within the government with respect to the power sector.

Provincial governments exercise their legal power to issue letters of support to projects but without consulting the Federal Government, which leads to unplanned generation capacity additions; while the Federal Government itself is unable to decide whether it is over-subscribed in terms of capacity or whether there is a power shortage. This results in loss to the exchequer and confusion for investors.

Dependence on Imported Fuels

Pakistan has failed to fully utilise its indigenous energy resources, in particular its hydro resources, other renewable sources and local coal. Instead, the country has relied on imported fuels (HSD, RFO, imported coal and RLNG) to meet its energy requirements, which fuels have been expensive and a drain on the national foreign exchange reserves.

Moratorium on Coal

As a result of climate change concerns, financial institutions are now reconsidering their support of coal power; in some cases, even withdrawing their financing commitments for under-development coal power projects.

Unwillingness of Distribution Companies to Enable Wheeling

Presently, examples of electricity wheeling are few and far in between in Pakistan. Where wheeling is being done – the arrangement is at a nascent stage and localised.

Owing to, inter alia, the following factors, DISCOs are unwilling to enable wheeling on their networks:

• cross-subsidisation: DISCOs use high-revenue consumers to subsidise sale to low-revenue consumers and therefore, losing consumers to wheeling could reduce the pool of high-revenue consumers, hampering the DISCOs’ ability to cross-subsidise; and
• stranded cost: DISCOs argue that they expend regularly to maintain and expand their networks and that losing consumers to wheeling could mean that the DISCOs are unable to recover such costs, leaving such costs ‘stranded’.

The consumers lost to wheeling are often reliable, high revenue customers, (eg, factories, commercial establishments) which makes the DISCOs concerns all the more pertinent.

To resolve this issue, DISCOs must be incentivised to enable wheeling. This can be done through a balanced tariff mechanism that is reflective of the true costs and risks associated with wheeling.

Ageing Transmission and Distribution Networks

Unfortunately, due to neglect and lack of investment, the transmission and distribution networks of Pakistan have aged considerably. This has exacerbated technical and non-technical losses, which go on to feed the problem of circular debt.

This means these networks are ripe targets for foreign investment, subject to a suitable government policy being issued to incentivise such investment.

Bureaucratic Hurdles

Due to institutional inertia and other factors, Pakistan suffers from chronic delay in government decision-making and excessive red tape.

Delays in Regulatory Adjudication and Dispute Resolution

An antiquated judicial system, excessive red tape and institutional inertia lead to inordinate delays that frustrate projects at all stages of development and operation.

Regulated Wholesale Market, Moving Towards Deregulated Competition

Presently, the wholesale electricity market is entirely regulated, with NEPRA determining the tariffs for all sales of electricity made by generation companies to distribution companies.

NEPRA has begun the process for deregulation of the market for greater competition. In preparation for this deregulation, a competitive market has been developed, referred to as the Competitive Trading Bilateral Contract Market (CTBCM), which sets out an elaborate mechanism of gradual transition to a competitive market.

To enable the development of the CTBCM, the NEPRA Act was amended in 2018, introducing the new licences discussed in 1.6. Recent Material Changes in Law or Regulation.

Import of Electric Power into Pakistan

NEPRA has developed a legal framework to enable the import of electric power from outside of Pakistan, including from the state of Azad Jammu and Kashmir.

The NEPRA (Import of Electric Power) Regulations 2017 enable licensees to negotiate and contract with power projects based outside of NEPRA’s jurisdiction for the import of electric power.

Currently, imports under these regulations are being made from the state of Azad Jammu and Kashmir and from Iran. The pricing of these imports is negotiated between the generator/exporter and the power purchaser (usually CPPAG, or NTDC for older projects) and subsequently approved by NEPRA.

Pakistan presently does not export electric power.

National Supply Mix

As per NEPRA’s State of Industry Report 2021, the total installed generation capacity of the country was 39,772 MW comprised of:

• 25,098 MW thermal (63%);
• 9,915 MW hydroelectric (25%);
• 1,248 MW wind (3%);
• 530 MW solar (1%);
• 369 MW bagasse (1%); and
• 2,612 MW nuclear (7%).

NEPRA has a broad mandate to ensure competition in the national market.

Additionally, the CCP has the mandate to ensure competition in all markets in Pakistan. In the case of mergers, transactions exceeding the following thresholds would require pre-merger clearance by the CCP:

• the value of gross assets of the undertaking, excluding value of goodwill, is PKR300 million or more, or the combined value of the undertaking and the undertaking(s) the shares of which are proposed to be acquired or the undertakings being merged is PKR1 billion or more;
• annual turnover of the undertaking in the preceding year is PKR500million or more, or the combined turnover of the undertaking and the undertaking(s) the shares of which are proposed to be acquired or the undertakings being merged is PKR1billion or more; 
• the transaction relates to acquisition of shares or assets of the value of PKR100 millionor more; or
• in case of acquisition of shares by an undertaking, if an acquirer acquires voting shares, which taken together with voting shares, if any, held by the acquirer shall entitle the acquirer to more than 10% voting shares.

In practice, however, none has proactively regulated market concentrations in the energy sector.

Pakistan does not currently have a competitive market.

Federal and Provincial Environmental Protection Agencies

The regulation of environmental matters, including the environmental impact of power projects, is the mandate of the federal Environmental Protection Agency (EPA) and the provincial EPAs.

The federal EPA has jurisdiction over:

• federal land
• military projects;
• cases with trans-country impacts; and
• cases with trans-Province impacts where

a) the responsible authorities agree that the federal EPA should be the responsible authority; or

b) no agreement can be reached and federal EPA decides that it should be the responsible authority.

For all other cases, the relevant provincial EPA will have jurisdiction. However, the federal EPA reserves the right to review any environmental report at any time and the right to suspend the powers it has delegated to a provincial EPA if it believes those powers have been misused.

In order to get EPA approval, projects are required to undertake Environmental Impact Assessments to identify and mitigate the environmental consequences of their development and operation.

There are no climate-change specific laws in force in Pakistan.

Carbon Credits

Pakistan is registered as a host country with the United Nations Framework Convention on Climate Change (UNFCCC). A number of renewable energy projects have generated and sold carbon credits.

There is no policy in Pakistan for early retirement of carbon-based generation.

Pakistan only recently established a number of local coal power projects to reduce its reliance on imported fuel by exploiting the country’s Thar coal reserves.

That said, the useful life of all projects is reviewed at the time of issuance of licences and the term of each licence is designed to be commensurate with the useful life of the relevant project.

Growth of Renewable Energy Sources

In order to reduce reliance on carbon-based generation, the federal government has earmarked 4000MW of renewable energy projects for development, while the Provincial governments are drafting policies for encouraging off-grid solutions, such as rooftop solar units.

Alternative Energy Development Board and Renewable Policies

The Federal Government has set up the Alternative Energy Development Board (AEDB) to facilitate the development of alternative energy power projects, including solar, wind, small hydro and biomass projects.

Policies facilitating the development of renewable energy projects include:

• the Policy for Development of Renewable Energy for Power Generation 2006; and
• the National Policy for Power Co-Generation by Sugar Industry 2008.

Selection of project developers by the AEDB has not been done on competitive basis so far, but there are plans to undertake competitive bidding for future projects.

Recently, there have been no capacity targets as such for alternative energy projects, as the government is of the view that it has surplus generation capacity.

Off-Grid

The Provincial governments, in particular the Government of Sindh, are beginning to explore the viability of off-grid energy solutions that do not require expansion of existing networks to supply electric power to remote areas. These include mini grids powered by solar energy that supply electric power to villages independently of the national grid.

Net-Metering

NEPRA promulgated the NEPRA (Alternative & Renewable Energy) Distributed Generation and Net Metering Regulations 2015 to enable net-metering by solar-enabled houses and establishments.

Mechanisms for Providing Incentives

The mechanisms for providing incentives to project companies include:

• execution of implementation agreements to provide contractual commitments and protections to the project companies;
• legislative changes to the fiscal and financial regimes to (i) vary the tax and duty rates and (ii) provide exemptions from taxes and applicable duties; and
• upfront tariffs that promise fixed, lucrative returns and reward efficiencies.

The above list is not exhaustive.

The construction and operation of generation facilities is regulated pursuant to:

• the NEPRA Act;
• Generation Licensing Rules;
• Generation Performance Standards Rules;
• Tariff Rules;
• Pakistan Engineering Council (PEC) Byelaws; and
• the Electricity Act 1910.

NEPRA Laws

Pursuant to the NEPRA Act and the Generation Licensing Rules, no person can construct nor operate a power project unless they have a licence to do so from NEPRA.

Once they hold a licence, they must construct the power project as per the approved parameters.

The PEC

The PEC is responsible for regulating engineers, constructors and operators working in Pakistan. Such persons must be issued the requisite licences from the PEC before they can undertake construction and operation works.

The following key consents, inter alia, are required for the construction and operation of generation facilities:

• letter of intent (LOI) – issued after successful application to the relevant facilitative body (approval only required if the project is being developed pursuant to a government policy). See 1.1 Principal Laws Governing the Structure and Ownership of the Power Industry for a list of the federal and provincial facilitative bodies);
• generation licence – issued after successful application to NEPRA under the NEPRA Act and the Generation Licensing Rules;
• generation tariff – issued after successful application to NEPRA under the NEPRA Act and the Tariff Rules;
• letter of support – issued after successful completion of milestones under the LOI (approval only required if the project is being developed pursuant to a government policy);
• project agreements, including:
1. power purchase agreement – entered into with the power purchaser;
2. implementation agreement (IA) – entered into with the relevant government, usually the Federal Government (approval is only required if the project is being developed pursuant to a government policy);
3. lease agreement – entered into with the lessor, if the land is not acquired by the developed as a freehold;
4. water use agreement – entered into with the water supplier; and
5. fuel supply agreement – entered into with the fuel supplier, if applicable;
• grid interconnection study approval – issued by NTDC after review of study;
• environmental approvals – issued after successful application to the relevant environmental protection agency, along with environmental impact assessment;
• Consents required under the IA include:
1. commitment from the State Bank of Pakistan (SBP) to make available foreign currency for the project’s requirements;
2. SBP approval of the foreign currency loans;
3. SBP approval for remitting and retaining the company’s revenue in foreign currency;
4. consents required from NEPRA under the NEPRA Act;
5. Confirmation from the Ministry of Finance (or Federal Board of Revenue (FBR), the federal tax authority) that during the Term, the Company shall not be subject to taxation in Pakistan on its profits and gains derived from electric power generation;
6. statutory notifications and permits from the Ministry of Commerce (or FBR) for importation of plant, machinery and supplies;
7. statutory notification for reduction in stamp duty and registration fees; and
8. special sanction of the provincial government under Section 34 of the Electricity Act, 1910 permitting the company to connect the complex to the earth, etc.

The majority of the terms and conditions for the construction and operation of generation facilities are set out in the respective licence of each generation licensee. The typical terms and conditions include:

• the term of the licence;
• requirement to pay the licence fee;
• the approved specifications of the generation facility, including capacity, location and technology;
• the approved offtake arrangement;
• the approved off-takers/consumers;
• requirement to only charge the tariff determined by NEPRA;
• obligation to work towards implementation and operation of a “Competitive Trading Arrangement” (which may be read now as a reference to the CTBCM model);
• requirement to comply with the “applicable documents”, which include the NEPRA laws, “Grid Code”, “Distribution Code”, etc;
• requirement to comply with the Generation Performance Standards Rules;
• prohibition on abandonment of the generation business/facilities;
• requirement to maintain records;
• requirement to comply with the applicable environmental standards;
• obligation to provide information to NEPRA; and
• obligation to design, manufacture and test the facility according to the latest International Electrotechnical Commission, the Institute of Electrical and Electronics Engineers or any other equivalent standards, etc.

Acquisition of Land for Power Projects

Power project developers themselves are not granted the right of eminent domain. However, the government is empowered under the Land Acquisition Act 1894 to enable developers in acquiring land for public purposes, which includes electric power generation for sale to the government (ie, CPPAG).

In other cases – especially where the land is already owned, or has been acquired, by the government or a third party – the project company may enter into a lease for the project land.

Decommissioning of Generation Facilities

There are no general requirements for decommissioning a generation facility. That said, the term of each generation licence is designed to be commensurate with the useful life of the project. Nevertheless, some projects opt to change fuel and/or upgrade their units to extend the useful life of the project.

At the end of the term of the concession agreements for most power projects, the relevant government has the option of having the project transferred to it for a nominal sum.

To date, none of the power projects whose concession agreement terms have expired have been transferred to government.