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Pakistan’s hydropower projects need reassessment, says IEEFA

28/9/2022

Water flowing at Pakistan's Tarbela Dam Photo: Adobe Stock
The Tarbela Dam, Pakistan – hydropower has been favoured in Pakistan’s renewable energy planning as a symbol of nationalist pride, but achieving its targeted share in the country’s energy mix appears increasingly unlikely, says IEEFA

Photo: Adobe Stock

Poor governance, institutional credit downgrade and extreme weather have added strain to hydropower project reliability in Pakistan, according to a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).

Hydropower has accounted for almost 30% of the power generated in Pakistan over the years, but the country’s long-term goal for it to meet 46% of the country’s power generation needs by 2030 could be risky, according to the report.
 

Pakistan has favoured hydropower in its renewable energy planning as a symbol of nationalist pride and a fundamental resource for water security. However, achieving its targeted share in the energy mix appears increasingly unlikely due to more frequent extreme weather events, significant cost overruns and schedule delays.
 

‘As of September 2022, only 51% of planned hydropower capacity has achieved financial closure and only 39% has begun physical construction,’ says Haneea Isaad, Energy Finance Analyst at IEEFA and author of the report. ‘We estimate that only 15% of the hydropower pipeline will come online in time.’
 

The recent floods in Pakistan have further increased economic stress and shifted the government’s focus towards disaster recovery. ‘Capital for large-scale hydropower projects may become even harder to come by, further jeopardising their realisation,’ she explains.
 

Pakistan’s total 14 GW hydropower pipeline has previously been valued at $31.2bn, but IEEFA’s latest cost estimate is $49–61bn. It is expected that 5.2 GW (37%) out of the 14 GW will be financed through the support of multilateral development banks, which will also require funds to be matched by the government.
 

‘This could mean additional economic burden for Pakistan and allocation through public funds, as well as a supply-demand mismatch for the country’s projected power generation in the future if the planned capacity fails to materialise on schedule,’ comments Isaad. ‘What follows could be a switch back to fossil fuels such as furnace oil or coal.’
 

Climate and geographical challenges
Pakistan is no stranger to extreme temperatures and drought conditions. The country has an arid climate and an early onset of summers this year and last has led to record low water levels in major reservoirs such as Tarbela, Mangla and Chashma. As a result, competing usages such as agriculture took precedence over power generation, and the country suffered power cuts and blackouts.
 

Moreover, as Pakistan’s hydropower pipeline becomes increasingly vulnerable to climate change, the reliance on data that overestimates rainfall or underestimates the climate risks could put the financial viability of these projects into question.
 

Cost and schedule overruns
According to IEEFA’s analysis, almost 81% of the planned hydropower capacity will comprise of large hydropower projects with a capacity over 700 MW, with nearly the entire proposed hydropower pipeline located in the northern belt of the country.
 

While massive dam projects are fundamental to socio-economic development due to their water storage capacity and agricultural sustenance, many of Pakistan’s current projects have already been riddled with delays amounting to decades.
 

Isaad explains that the 969 MW Neelum Jhelum hydropower project proposed in 1987 is a classic demonstration of how the non-availability of funds and engineering challenges can contribute to unprecedented cost escalation and schedule delays. ‘The project was finally completed in 2018 with a cost of Rs507bn ($4.1bn), which is 600% higher than its initial estimate, plus a schedule delay of 21 years,’ she says.
 

Credit downgrade
The recent downgrade by three credit rating agencies (Moody’s, Fitch and S&P) of Pakistan and its Water and Power Development Authority could further dampen the ability to raise capital and delay project implementation cycles.
 

‘If the country is unable to raise sufficient debt in time, the 6.6 GW of hydropower capacity that is yet to achieve financial closure could lead to even more project and cost overruns,’ says Isaad.
 

Timely reassessment
IEEFA recommends that a clear criterion is set for projects already in the pipeline, which should be allowed to go forward in times of such economic distress. However, projects that are yet to achieve their financial closure or begin construction should be put on hold. At the same time, the existing hydropower capacity should be complemented with a portfolio of smaller, quicker to build and easy to finance solutions.
 

‘Pakistan’s focus instead should be to build agile and modular sources of power generation, such as solar and wind power, or even small hydro for their ability to provide distributed generation and add flexibility to the grid. Their shorter construction timelines and lower costs, as well as battery storage or pumped hydro storage, may be a better use of funds than financing mega-dams prone to cost overruns and implementation risks,’ Isaad concludes.