Pakistan’s NEM Policy: Reforming Rooftop Solar And Distributed Energy Regulation

Governments in Pakistan have a habit of using quick-fix and politically expedient solutions to resolve vexing problems without proper homework or consideration of their potential consequences, and later reversing them even more quickly. The government’s policy flip-flops for net-energy metering (NEM) connections are a glaring example of this habit.

The issue with this approach is that it ultimately adds to the misery of consumers who are already reeling under the unbearable burden of electricity prices, which have almost doubled in the past couple of years. Ironically, the power sector regulator, NEPRA, is hinting at raising these prices even more next year.

The NEM and similar policies have always been considered interim or stop-gap arrangements to help nascent renewable technologies take a foothold in the energy market, which is skewed towards fossil-fuel-based generation. Revising or terminating them is neither unexpected nor unprecedented. However, the way this is being done in Pakistan, and the reasons being used to justify it, raise some serious questions, such as:

1. Why, a policy that at its inception in 2015 had a tenure of three years (extendable under certain conditions), extended to seven years, also relaxing some of the previous conditions?
2. What has the government gained by hinting at a revision to the NEM policy in the media last year but not acting on its intent?
3. How was a policy that NEPRA had praised until last year, and had accused DISCOs of not implementing it in earnest, turned around, witnessing DISCOs going head over heels to process new NEM applications (almost overnight)?
4. What has the government done to develop a legal and regulatory framework in which rooftop solar and other distributed energy resources (DER) options could be evaluated fairly and objectively?
5. What has NEPRA done to set a proper procedure for approving and connecting NEM facilities by DISCOs in order of their value addition to the grid, rather than first-come, first-served?
6. What has NEPRA done to devise a proper mechanism for charging and compensating NEM customers that reflects their value to the grid and the country?
7. What has NEPRA done to push DISCOs to adopt smart metering in their systems, which would have allowed a realistic price for buying from and selling to NEM and other DERs that enable the grid to serve demand at, or closer to, end-users?

The government and NEPRA should undertake some introspection on the NEM policy, whose revision now seems imminent. The development may not lie with the NEM participants, as these facilities made up only a small fraction of the system until last year. It could be the endless rises in electricity tariffs that have made it unaffordable for most consumers, compelling them to seek alternatives like rooftop solar systems, which are connected but not interactive with the grid, and on which DISCOs have neither reliable data nor control.

The costs and benefits of an NEM connection, and those of any other DER, depend on its size, design, location in the distribution system, and the status of this system at the point at which it connects. This requires a proper framework for evaluating the costs and benefits of NEMs and other DER facilities to encourage potential customers to select a suitable size and design for their facilities.

DERs deserve to be treated as partners to the government’s efforts to transform the power grid, and not foes or demons. Electricity from DERs, including that from rooftop solar, will be pivotal to ensuring secure, affordable, and sustainable energy supplies for the nation

Nothing seems to have been done by the government, NEPRA, or any other entity in the past ten years to develop such a framework. It is a pity that we are currently losing multiple benefits that both the grid and the nation could have reaped, for want of the required legal, regulatory, and financial frameworks in the country.

NEPRA’s present tariff-setting approach is based on the principle of cost-of-service (COS) regulation. In this approach, all fixed and variable costs (generation, transmission, and distribution, including regulatory and market operation) are covered in the annual tariff determination to work out the revenue requirement (RR) by DISCOs for the next year, with a provision to adjust any deviation from the previous year’s RR. The average tariff is determined by dividing the new RR by the expected consumption (kWh or MWh sales) and then reflected in the tariff for different categories of consumers.

This approach is at the root of this issue, as it does not consider the costs and benefits of any new option at the distribution or consumer levels against the grid supply costs. Once the RR is fixed, any variation in the revenue base (sales) impacts the tariff, positively or negatively (in hindsight, mostly negatively).

Any option that decreases sales will reduce the recovery of the approved RR by DISCOs and provide them with grounds to seek an increase in their tariffs. However, if an option reduces the RR sufficiently to offset any negative impact on sales, it will reduce the overall tariff, not increase it. Not considering the benefits that DERs provide to the grid and the nation is a critical flaw in the above approach.

Though the above approach has served regulated electric utilities well for over a century, it has not been without its critics. It is known to encourage utilities to overinvest in their capital assets and earn more profits (often termed gold-plating or Averch-Johnson effect), albeit at higher prices for consumers. It is also known to discourage utilities from supporting any distributed energy supply or demand management option in their systems that would reduce their sales.

Obviously, the utilities would defend the status quo and resist any effort that threatens their profits. The media campaign to demonise NEM customers by labelling them greedy and heartless profiteers, and the mantra of “cost-shifts” to non-participating consumers, is more of a myth than a reality.

DERs impact supply costs in many ways, based on how their addition to the grid affects the various cost streams, both fixed and variable. Admittedly, they impose some additional costs to the system for their proper integration and operation, but nothing insurmountable or too costly. Their medium- and long-term benefits to the grid and the nation far exceed their short-term costs.

NEPRA's present focus on determining costs and benefits on a year-to-year basis is also not suitable for distributed options, which demand upfront investment, but whose benefits accrue over a longer period.

The government and NEPRA should reconsider their position on this issue. The present approach, which considers them just a negative load at the tail end and a threat to the grid, is neither realistic nor fair. DERs deserve to be treated as partners to the government’s efforts to transform the power grid, and not foes or demons. Electricity from DERs, including that from rooftop solar, will be pivotal to ensuring secure, affordable, and sustainable energy supplies for the nation.

The government must confront the new technology and market challenges with a set of dynamic and progressive policies that not only reflect the new market realities but are also flexible, fair, and alive to emerging trends. It should be willing to adjust these policies as frequently as may be warranted. The government should also extend its support in devolving the power sector away from the present centralised control (decision-making, planning, and price setting) and move it closer to users of electricity.

NEPRA will also need to abandon its present approach to setting tariffs, which is now a relic of the past. It should replace it with a new and performance-based regulatory approach that is more objective, transparent, and non-discriminatory, as well as technology-neutral and financially fair.