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Disco death spiral looms amid Pakistan’s ‘perfect storm’ of rooftop solar domination

By Tom Kenning
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Rooftop solar panels in Pakistan.
Pakistan’s solar representatives fear utilities could adopt a ‘Sun Tax’ in panic at rooftop solar boom. Image: Infraco Asia.

Pakistan’s solar PV sector is at a critical juncture, charting a course in stark contrast to global norms. While utility-scale solar dominates markets like China, the US and Europe, Pakistan’s solar landscape is governed by rooftop installations. This deviation has profound implications for energy policy, economic dynamics and the future of the nation’s utilities.

Waqas Moosa, chairman of the Pakistan Solar Association (PSA) and CEO of Hadron Solar, tells PV Tech Premium why large-scale solar is stagnant compared to rooftop PV and offers a potential new model for utilities to come out of their existential predicament.

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Rooftop PV’s dominance in Pakistan is a direct response to skyrocketing electricity prices, the depreciation of the Pakistani rupee and the decreasing cost of solar panels.

The rise of rooftop solar also poses existential challenges for Pakistan’s utilities, or “discos” (distribution companies). As more consumers adopt solar, utilities face declining revenues, creating a “death spiral” where fewer customers bear the increasing costs of maintaining the grid.

“We are going through a perfect storm in terms of the way the market is picking up,” says Moosa. “All the factors are lined up in the right way.”

Financial challenges

The depreciation of the rupee did make PV module imports more expensive, says Moosa, but simultaneously, solar panel prices in China went down from around US$25-26 cents to almost US$10 cents and below in a period of just 18 months. This helped mitigate the impact of higher solar panel import prices.

The depreciation also affected rooftop PV uptake in a different way. As many electricity prices in the power sector are tied up to dollar index prices, when the rupee depreciated, grid electricity prices automatically went up, making rooftop solar self-consumption more attractive.

Pakistan has also struggled with International Monetary Fund (IMF) financing in recent years, which meant the government was unable to use subsidies to absorb higher power prices and the costs were passed on through to the consumer.

Moreover, economic pressures and attractive payback periods for solar systems – sometimes as short as one year – have fuelled this rooftop solar boom in a country where many people are using expensive gas or diesel generators for their power.

Moosa notes that the “magic number” for payback periods to drive solar rooftop adoption is usually three years, so the promise of even shorter payback periods have caused a “huge jump” in consumer interest.

Unlike utility-scale solar farms, rooftop installations are driven by individuals and businesses seeking energy independence, with residential, commercial and agricultural users embracing solar. As such, unlike many countries where solar growth is driven by government initiatives, Pakistan’s solar boom owes much to private investment.

The government has provided some support, such as exempting solar panels from the General Sales Tax (GST) set at 18% and implementing a net metering policy. However, subsidized financing, which was a key driver in earlier years, has been phased out. Likewise, the GST exemption once covered the entire balance of system (BOS), but now the only equipment it covers are panels.

Large-scale solar void

Pakistan’s lag in utility-scale solar deployment stems from several factors. A major hurdle is overcapacity in the power sector due to aggressive power plant commissioning over the past decade. Moosa explains that this overcapacity, coupled with capacity charges – fixed costs paid to power producers regardless of utilisation – has stifled demand for large-scale solar projects.

The government’s focus has been on solving past power shortages, notes Moosa. But this has left the country with underutilised plants and high fixed costs, making it challenging to incorporate large-scale solar into the energy mix.

Due to the overcapacity, there is a lot of activity in renegotiating contracts over installed power systems. This means there is no guarantee of offtake of power produced from a PV plant and that also contributes to the lack of interest in large-scale solar from both government and private enterprises.

Policy and regulatory frameworks also lag behind, with limited incentives for large-scale solar farms. While smaller rooftop installations can thrive in the absence of substantial government support, utility-scale projects tend to require more robust policy backing, such as subsidies or feed-in tariffs, which are notably absent in Pakistan.

“Right now, is probably not the right time to invest in utility-scale projects where there is a need for a guaranteed buyer,” adds Moosa.

“If we do have an area where we should invest, it should be energy storage-based projects, perhaps adding storage to an existing project, or even for transmission and distribution network improvement projects, because with the high capacity, we still have issues on the transmission and network side.”

Bull run on Chinese panels

China remains Pakistan’s primary supplier of PV modules, with a significant surge in imports rising to 13GW in the first half of 2024. However, a subsequent oversupply slowed imports down in the latter half of the year leading to estimates of 17-18GW in total imports for the calendar year.

“We had a bull run on solar panels,” says Moosa. “Even people who had nothing to do with solar energy would start importing PV panels and trying to get an advantage. As a result of that, we went into an oversupply situation.”

Despite the significant slowdown in Q3, imports are stabilising, and Moosa predicts a steadier demand in 2025, fuelled by continued affordability of panels, high electricity prices and payback times staying below two years.

Large Chinese module suppliers typically have around three to six distributors of their product in Pakistan, although they do book some orders directly with end-customers for those requiring 500kW-1MW of capacity. Companies, such as Hareon Solar installing rooftop solar, for example, often buy solar panels from this market since larger importers are able to grab better deals through scale and it saves time and costs compared to importing directly.

The ‘disco death spiral’

Moosa adds that utilities are “under a lot of stress and panicking,” before raising concerns that the discos might “do something silly” and follow Spain’s lead from the 2010’s with its infamous ‘Sun Tax’ by taxing solar energy or reducing net metering benefits.

“The result is going to be we will install less solar and import more oil, taking the problem of today and pushing it two years down the road. That’s why we’re trying to work with them to find better solutions.”

If not, Moosa fears that these short-term fixes could drive customers off-grid entirely.

To survive and thrive, Pakistan’s utilities must embrace what Moosa calls “Utilities 2.1”. This involves transitioning away from a single-buyer model to a multi-buyer, multi-seller model and adopting competitive electricity trading. Regulatory frameworks like the Competitive Trading Bilateral Contracts Market (CTBCM) are in development, offering hope for a more dynamic energy market.

Additionally, utilities must explore integrating distributed generation into their business models. Moosa says that Pakistan can learn from early PV adopters such as California, Germany, Hawaii and Australia, where utilities have successfully adapted to high solar penetration by offering services like grid storage and auxiliary services.

Nonetheless, Pakistan’s rooftop revolution underscores the power of market-driven solutions. For Pakistan’s energy future, the question is not whether solar will dominate, but how the nation’s energy ecosystem will adapt to this new reality. As Moosa puts it: “The solar industry is doing to the power sector what TikTok and YouTube have done to the media industry”.

In terms of PV manufacturing, Moosa recently told PV Tech Premium how it is important for Pakistan to target niche markets, particularly small-scale solar modules for agricultural and off-grid applications, rather than compete directly with the Chinese giants.

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