CHAPTER III              SCOPE AND OBJECTIVES

ARE Policy 2011 will become effective from its date of notification. Consistent with the AEDB Act, the ARE 2011 Policy framework includes incentives for all initiatives under the following categories:

• Alternative Fuels
• Renewable Energy
• ARE-Fossil Fuel Hybrid Systems

• Biogas
• Biofuels - including but not limited to ethanol and bio diesel
• Fuel from Waste – including but not limited to refuse derived fuel (RDF), processed agricultural and industrial waste etc.
• Hydrogen

• Geothermal
• Hydro – up to 50 MW
• Marine – including Ocean, Wave & Tidal
• Solar – Solar Thermal or Solar PV
• Wind
• Energy from Waste – including but not limited to biomass, municipal solid waste and sewerage 

Systems capable of utilizing both conventional fuel and ARE resources having a minimum of seventy percent (70%) share of ARE resource component.

Exhibit 3 below provides an indicative summary of the ARE potential in Pakistan.

Exhibit 3: Resource Potential in Pakistan

Continuing with the policy goals and strategy outlined in the 2006 Policy, the ARE Policy 2011 endeavors to achieve the following:

• To achieve sustained and systematic deployment and growth of ARETs through effective federal and provincial coordination so as to achieve the target as envisaged in the ARE Policy 2011 and ensure universal access of ARETs across the country;
• To provide additional power supplies to help meet increasing national demand;
• Introduce and maintain investor-friendly benefits and incentives to encourage private sector participation and investment in ARE projects with a view, among others, to lower ARE costs and prices through competition in an increasingly deregulated power sector;
• Devise measures to support private sector in mobilizing financing and enabling public sector investment in the promotion and development of ARE projects;
• Encourage employment of ARET in off-grid and general households by displacing their dependence upon conventional sources with ARE sources;
• Optimize impact of ARE deployment in underdeveloped areas by integrating ARET based energy solutions and its productive use for income generating activities so as to alleviate poverty and improve livelihood by involving local communities; with special attention to diverse energy needs of men and women;
• Assist in the institutional, technical and operational capacity building of all parties involved in the ARE sector, including development of prototype contractual framework and business models, which may also be used by the Provinces/ AJK/ GB in the development of their respective ARE programs;
• Facilitate in the establishment of domestic ARET manufacturing basis in the country, among others, to lower costs, improve service, create employment and enhance local technical skills without in any way impeding or discouraging foreign investment or collaboration;
• Harmonize efforts of the various GOP and Provincial/ AJK/ GB governmental bodies engaged in ARE and coordinate their efforts in achieving the declared policy objectives.

Targets covered under the ARE Policy 2011 are those put forth in official development frameworks and policies and will be amended from time-to-time.  Presently, the GOP has set the following targets for the ARE sector:

• At least 5% of total commercial energy supplies through alternative and renewable energy by 2030.

GOP encourages all commercially viable investment options for purposes of development of the ARE sector in Pakistan, and these projects will be entitled to all existing benefits and incentives available to conventional (hydel or thermal) projects in addition to the specific ARE sector incentives granted under the ARE Policy 2011. To this end, GOP is committed to promoting projects in any modalities, including purely in the Private Sector or the Public Sector or Public Private Partnerships.

The GOP recognizes that access to financing is a critical issue for many ARE projects, particularly small and medium scale ARE projects. GOP will facilitate access to all available conventional financial and investment instruments, or as announced from time to time. 

The CDM under the Kyoto Protocol extends to Pakistan being its signatory. GOP encourages the ARE project developers to apply for procuring carbon credits through CDM and mandates AEDB to facilitate, coordinate and assist the ARE project developers and the DNA in reconciling the most effective approach in procuring carbon credits. AEDB will also facilitate the ARE project developers in trading the carbon credits in international carbon market. The revenues generated through the sale of carbon credits will be exempted from income tax or duty.

The sale, management and distribution of carbon credits and the revenues actualized therein as a result of an ARE project will be done under a carbon crediting mechanism that AEDB will formulate within six (6) months of announcement of the ARE Policy 2011.

The AEDB will assist in the development of local CDM capacities as well as to carry out CDM promotion and awareness in ARE sector. In this regard, updated Grid Emission Baseline of Pakistan will be developed and made public within six months of the issuance of this Policy. In addition to the CDM, project developers may also consider VERs in the international voluntary markets.

Considering that efforts are on way to put in place new international climate treaties, GOP is committed to revising incentives for procuring benefits consistent therewith. AEDB is empowered to effect requisite facilitation in the event of any new international regime or protocol applicable to Pakistan.

The collection and dissemination of ARE project related data is important for the sustained development of the ARE sector. GOP, therefore, has resolved to empower AEDB to collect primary and secondary ARE data and assemble it into a usable form and to make it readily accessible by potential investors and others interested in the ARE sector.

The AEDB will establish a central depository unit of ARE data collected through primary and secondary sources from time to time. Such data will be provided to interested parties upon attractive terms.

CHAPTER IV               INCENTIVES AND PROCEDURES FOR GRID CONNECTED ARE PROJECTS

All qualifying ARE based power generation projects shall be eligible to avail benefits available to conventional power generation projects, in addition to those specifically outlined in this ARE 2011 Policy.

It shall be mandatory for NTDC/ CPPA/ DISCOs to buy all the electricity offered to them by ARE projects established pursuant to the ARE Policy 2011 at rates determined by NEPRA.

Electricity shall be purchased from ARE power projects at 220 kV at the outgoing bus bar of the power station of the project company if the power station is located within 70 km of an existing 220 kV transmission line, or at 132 kV if it is within 50 km of an existing 132 kV transmission line, or at 11 kV if it is within 5 km of an existing 11 kV distribution feeder, or at 400 V if it is within 1 km of a 400 V distribution feeder.  The minimum average power to be supplied in each case would be 1,250 kW/km, 250 kW/km, 100 kW/km, and 20 kW/km, respectively. ARE-IPPs may also undertake to lay a new transmission line for connection with the main grid.  The power purchase tariff determination will be adjusted accordingly for each of these options. The construction of transmission lines for evacuation of power from ARE IPPs set up for connection to the utility grid should be the responsibility of the power purchaser, unless the ARE-IPP, of its own choice, undertakes to install such infrastructure on a mutually agreed upon transmission charge with the power purchaser.

The net energy available for sale shall be determined after taking into account electrical efficiency, auxiliary loads, transformation efficiency, plant availability and other similar considerations, including for anticipated maintenance and outages. However, once EPAs are entered into, technical parameters shall not be varied except with the consent of the power purchaser.

Specific incentives are provided under this Policy to ARE IPPs selling all generated electricity (minus auxiliary consumption) to the grid.

ARE-IPPs up to 5 MW will enjoy simplified methodology and procedures for grant of generation licence by NEPRA. NEPRA will also facilitate by providing for a generic template license and a concessional fee structure for such initiatives.

GOP in coordination with relevant provincial/ AJK/ GB agencies will facilitate investors in the acquisition of appropriate land and rights of way (“ROW”). However, the primary responsibility as well as the cost of acquisition will be on account of the project company.

The variability risk of all ARE resources including wind and hydrological risks shall be borne by the ARE-IPPs.  No related risk cover will be considered in the tariff determination, as well.

NTDC/ CPPA acting for the power purchaser shall enter into a specific Energy Purchase Agreement (EPA) with the ARE-IPP based on the standard model developed by the AEDB consistent with this Policy.  The GOP shall also enter into an Implementation Agreement (IA), which will guarantee the payment obligation of the public sector power purchaser on account of power sales extending over the term of the EPA.  The EPA will be based on the purchase of all power generated and delivered at a per-kWh rate, that is, there will be no capacity charge, capacity testing, risk, and penalty conditions implied. GOP through the AEDB shall also facilitate the acquisition of carbon credits as provided in this ARE 2011 Policy. The Security Package shall include the Site Sub-lease Deed in respect of projects who have been / would be allocated land by AEDB, and where required, a Water Use Licence Agreement (“WUL”).

ARE-IPPs may avail either of these two categories of tariff to be determined by NEPRA in accordance with the NEPRA Act and the rules and regulations framed thereunder: (a) determined tariff; (b) tariff through competitive bidding, which will be subject to NEPRA approval. The tariff shall be determined on the basis of Energy Purchase Price (EPP) in Rs/kWh. However, NEPRA may consider two parts tariff [i.e. (1) Energy Purchase Price (EPP) (2) Capacity Purchase Price (CPP)] where applicable and other market best practices to adapt to the financing requirements for ARE projects.

In addition, ARE-IPPs could also benefit from feed-in tariffs to be determined by NEPRA, periodically for appropriate ARE sources, however, feed-in tariffs once announced shall be to the exclusion of the avenue of the determined tariff.

The benchmark currency rate used as a reference will be the interbank rate for US Dollars (US$) prevailing 30 days prior to the date the tariffs are determined by NEPRA. For unsolicited proposals or feed-in tariff regime, it will be the interbank lending rate as on the date of signing of the Engineering- Procurement-Construction (EPC) contract by the ARE IPP.

Indexation of various components of tariff and adjustment for foreign exchange rates (‘true up’) will be automatic, based on predetermined formulae and reference parameters. ARE IPPs will not have to approach NEPRA frequently for tariff indexation; only yearly submissions may be required.

GOP recognizes the economic, social and environmental benefits of ARE. In order to encourage sustained investment in the sector, it has been resolved that ARE projects be awarded rate of return in excess of that available to conventional power producers during the lifetime of the ARE project. Accordingly, this shall be ensured that the ARE projects shall be given preferential rate of return while calculating the tariff.

GOP in its resolve to ensure fast growth of ARE projects will provide additional benefit of a premium to the tariff, for projects that are able to achieve financial close earlier than scheduled. AEDB has been mandated to coordinate and consult with NEPRA to develop the parameters, methodology, quotas and procedures for availing such premium, and is expected to notify the same within six (6) months from the coming in to force of the ARE 2011 Policy.

GOP recognizes that Feed-in Tariff has been globally tested tool to attract prompt investment in ARE sector.  Feed in tariffs are therefore to be announced by NEPRA in respect of various ARE sources at such levels as deemed appropriate and duly supported by relevant NEPRA rules on the subject.

For direct sales, where ARE DGs require to use national / regional transmission and/or distribution grid network to transport power from their project site to the point of interconnection of the power purchaser;  such transmission and inter-connection services shall be acquired upon payment of corresponding transmission and inter-connection charges ‘wheeling charges’ as determined by NEPRA for the respective utility. This wheeling charge will reflect the cost of providing and maintaining the transmission interconnection, including the energy losses suffered en route, calculated on a utility-wide basis by NEPRA. For the purposes of connection, distribution codes and connection codes approved by NEPRA shall be referred.

ARE DGs can enter into bilateral contract with the respective utility for sale of power in excess of their usage to the grid at rates determined by NEPRA.

GOP, visualizing the ARE resource potential in Pakistan believes that a significant potential in ARE can be employed through sale of part or all electricity to DISCOs produced by ARE DGs. NEPRA shall formulate clear and specific regulations for regulating sale/purchase of ARE between ARE DGs and the Utilities providing inter –alia tariff and corresponding technical parameters for notification under the NEPRA Act.  The following buy back mechanisms are envisaged under the ARE Policy 2011.

4.4.3.1           Net-Metering

A consumer based ARE DG up to 1 MW has an option to sell full or part of generated electricity to the grid, which is netted against the energy delivered by the grid.  Under this mechanism utility consumers are encouraged to generate their own electricity from ARE resources. Under this arrangement the tariff charged would be the applicable retail tariff to the premise (e.g., industrial, commercial, or residential rates).

4.4.3.2           Banking

Energy generated by ARE DGs can be stored into the grid which is to be supplied back by the utility on demand. This mechanism is expected to support displacement of conventional power usage at small scale along with promotion of small scale ARE applications.

The procedure that ARE-IPPs has to follow for executing their projects is described under following headings:-

AEDB welcomes and shall process proposals for ARE-IPPs in coordination with relevant provincial/ AJK/ GB agencies on a solicited as well as unsolicited basis. In the case of unsolicited proposals, LOI shall be issued to enable the sponsors to carry out a feasibility study, obtain tariff and generation licence from NEPRA. Thereafter, the LOS shall be issued to assist the sponsors in achieving financial close for the project. In the case of solicited proposals, bids shall be invited by the AEDB inviting participation in a competitive bidding process. After evaluation of bids, the LOS shall be issued to the successful bidder to facilitate the project’s financial close. The procedure is structured in line with NEPRA’s powers and functions. The tariff arrived at after competitive bidding will be final and will not be re-opened by NEPRA.

Potential sponsors of ARE projects to be connected to the national or a utility’s grid at a location of their choice (“raw site”) may submit proposals consistent with the terms of ARE Policy 2011 to AEDB.  The process flow is given in Exhibit 4 below and is further explained in subsequent paragraphs.

Exhibit 4:  Schedule for Unsolicited Grid-Connected ARE-IPPs

4.5.2.1           Submission of Unsolicited Proposals

Any sponsor wishing to undertake a project at a raw site would be required to submit a preliminary proposal to AEDB, which must be in compliance with applicable policy guidelines and include, at a minimum, the following:

1. Statement of qualification of project sponsors, listing relevant corporate experience, personnel, and financial capacity
2. Project name and ARET classification (i.e., wind, solar, small hydro, etc.)
3. Project location in compliance with grid compatibility criteria under section 3.1.2 of this Policy
4. Proposed net installed capacity (MW)
5. Basic outline of plant and structures
6. Summary implementation plan, milestones for project preparation, implementation and completion 
7. Any other information or data deemed relevant by the sponsors for             consideration of the AEDB.

4.5.2.2           Evaluation of Unsolicited Proposals

Proposals for unsolicited projects on raw sites will be examined by a Project Committee appointed by the AEDB in the first instance, and if found appropriately qualified, AEDB in consultation with the provincial/ AJK/ GB agencies concerned, process the case for issuance of LOI.

4.5.2.3           Issuance of LOI; Extension

LOIs for raw sites shall include relevant project details and milestones and lay down the mechanism or procedure for monitoring progress by AEDB. AEDB shall specify initial validity period of the LOI depending upon the size, schedule and other relevant considerations regarding the project, however, initial validity period of the LOI shall not exceed 24 months from its effective date. AEDB shall issue LOI against a bank guarantee in favour of AEDB and in the amount specified in Section 4.7.1. The said bank guarantee shall be issued by an ‘A’ rated scheduled bank in Pakistan and shall be valid for a period not less than six (6) months in excess of the initial validity period of the LOI.

AEDB may allow one-time extension in the validity period of the LOI on a case-by-case basis, but such extension shall not be for a period more than 06months from the scheduled date of its initial expiry. Such extension shall be subject to and become effective upon the sponsors submitting another bank guarantee valued at twice the original amount (i.e., USD 1,000 MW), which shall be valid for a period six(6) months in excess of the extended validity period of the LOI.  The earlier bank guarantee shall be returned to the sponsors upon submission of the subsequent bank guarantee of the abovementioned enhanced value.

In during the currency of the LOI, a project sponsor wishes to withdraw from the project, the extent to which the Bank Guarantee amount shall be encashed will be in proportion to the time elapsed such the issuance of the LOI with respect to the total period of the LOI. However, in the event, the project sponsor opts to withdraw from the project due to non-acceptance of tariff as determined by NEPRA, the Bank Guarantee shall be returned by AEDB.

4.5.2.4           Feasibility Study

The sponsors shall enjoy exclusive rights to carry out a feasibility study at a given raw site within the specified period.

The feasibility study will be reviewed by a ‘Panel of Experts’ (“POE”) appointed by AEDB.  If at any time during the feasibility study period, the POE determines that the sponsors have failed to adhere to relevant milestones or rectify such deviation, or are not diligent, the AEDB may serve a notice to the LOI holder to rectify the situation within the period recommended by the POE, failing which the LOI shall be deemed terminated and AEDB shall be deemed authorized to encash the Bank Guarantee.  In such a case, the sponsors will have no claim for compensation against AEDB or any of the federal/ provincial/ AJK/ GB agency concerned.

Feasibility studies undertaken by the public sector and donor agencies will be made available to all interested private entrepreneurs by the AEDB upon payment of nominal administrative fee or a service charge to be prescribed by the AEDB. The full cost of the feasibility study (up to a reasonable ceiling and as reflected on the books of the concerned agency as being the actual cost of the feasibility study), shall be indicated in the LOI and shall be charged to the project developer at the time of issuance of the LOS, and shall be reimbursed to the agency which originally conducted the study, except in the case where such study was conducted under grant financing (e.g., donor funding, etc.).  Wherever the GOP or a provincial government/ AJK/ GB agency has obtained such a feasibility prepared by the public or private sector, preference would be given to the award of these projects through international competitive bidding (“ICB”). For studies furnished to the private sector by the AEDB or any public sector organization, investors shall be responsible for verifying any or all aspects of the relevant feasibility study, and would be encouraged to carry out additional or alternative project appraisal of the site on their own. In case the feasibility has been completed by the public sector or private sponsor but the unsolicited proposal does not materialize for any reason whatsoever, and the AEDB wishes to invite bids using the same feasibility study, then the cost of feasibility study (up to a reasonable ceiling and as per proper audit) will be recovered from the successful subsequent bidder, if any, and be reimbursed to the public sector entity or sponsor who originally paid for, or conducted, the study.

4.5.2.5           Determination of Tariff

Upon completion, the feasibility study will be reviewed by the POE, and if approved, the project sponsors will be expected to apply to NEPRA for obtaining generation license and determination of tariff within a period not exceeding 02 calendar months from the date of approval of feasibility study by AEDB. In case if NEPRA has notified the feed-in tariff, the tariff process would likely be significantly shorter. Refer to tariff annex here

4.5.2.6           Letter of Support; Performance Guarantee

Subsequent to the determination of tariff by NEPRA and acceptance by the project sponsor, it shall be required to post a performance guarantee in favour of AEDB and in the amount specified in Section 4.7.1, which shall be valid, initially, for a period of 6 months in excess of validity of the period of the LOS.  Upon submission of the said performance guarantee, the LOS shall be issued to enable the project to achieve financial close and the original bank guarantee furnished at the time of issuance of LOI shall be released.  The LOS shall exclusively govern the project and supersede all previously issued letters and instruments until the project achieves the financial closure.

4.5.3.1           Process Flow

Proposals for projects at pre-selected sites may be solicited by AEDB through public advertisement.  These may include sites/projects for which feasibility studies have already been completed in the public sector, as well as ‘raw sites’ not yet fully investigated.  Such projects will be processed according to the steps and schedule given in Exhibit 5.

Exhibit 5:  Schedule for Solicited Grid-Connected ARE-IPPs

4.5.3.2           Raw Sites

For raw sites, AEDB shall invite an Expression of Interest (“EOI”) and make available to the investors the relevant ARET, location, and other preliminary information. Successful bidder shall be awarded the LOI for the project.  The rest of the process for proposal submission and evaluation shall be identical to that described for unsolicited proposals (see previous section).

4.5.3.3           Other Sites

For sites in respect of which feasibility studies may have been completed prior to bid solicitation, specific tender documents will be prepared and bids will be invited for the sale price of electricity (against NEPRA’s indicative tariff or Feed-in tariff if announced as a benchmark, using the same parametric formulation to allow for a standardized comparison basis).  The successful bidder shall be awarded the LOS to help achieve financial close.  The schedule of activities leading to issuance of LOS will be as give in Exhibit 5.  AEDB may, however, where deemed appropriate for sake of efficiency seek proposals through advertisement in two envelopes; one containing the technical bid and the other financial bid.  The said financial bids shall be opened for bidders whose technical bids are qualified.

4.5.3.4           Request for Proposal (RFP)

The RFP for solicited projects will contain all project specifications, components, and requisite details necessary for the preparation of a proper technical and financial bid.  The documents will also explain the evaluation criteria to be employed in scoring the bids.If necessary, AEDB may hold a pre-bid conference to facilitate exchange of information with qualified sponsors, giving equal and adequate opportunity to all prospective bidders to seek clarification on project requirements.

4.5.3.5           Bid Bond, Letter of Support and Performance Guarantee

A bid bond based on the project’s installed generation capacity shall be required from each bidder at the time of submission of bids.  After selection of the successful bidder, the bid bonds of all bidders other than the sponsors of the successful bid shall be returned, and the successful bidder will be required to post a performance guarantee based on project capacity in favour of the AEDB for issuance of the LOS, and which shall be valid, initially, for a period of 06 months in excess of validity of the LOS.  After submission of the performance guarantee by the successful bidder, the bid bond shall be returned and the LOS issued to enable the project to achieve financial close.  The LOS shall exclusively govern the project and supersede all previously issued letters and instruments until the project achieves the financial closure.

The said performance guarantee will secure the successful bidder’s obligations to execute the security package and other relevant agreements and achieve financial close within the specified time period.  In addition, the sponsor may also be required to reimburse the cost of feasibility study utilized (if so indicated in the bidding documents).  The said performance guarantee shall be in the form of an irrevocable, direct-pay letter of credit, issued by a scheduled local or foreign bank acceptable to, and in favour of, the AEDB.  If the performance guarantee is not furnished within the specified period, the LOS shall lapse automatically, and neither the sponsor nor the project company shall have any claim for compensation or damages against each other or any agency of the federal, provincial/AJK/GB government or any of their respective departments or organizations.

For supply of power to the national grid, ARE-IPPs will be required to form a company under the Companies Ordinance, 1984, having the sole object of power generation and obtain a generation license from NEPRA. However, ARE DGs shall not be required to register as a company under the Companies Ordinance, 1984.  ARE DGs can install plants for their dedicated use without getting a license from NEPRA. Such ARE DGs can also avail accelerated depreciation on their plants and equipment.

The “main sponsor” must hold issued and paid up shares in the project company of not less that 20% of the authorized capital at the time of grant of LOS, subject to the aforesaid minimum paid up capital. The “main sponsors” and the “initial shareholders”, together must hold a minimum of 51% equity in the project company up to the commercial operations date.

The security package for grid-connected ARE-IPPs will comprise of Implementation Agreement (IA), Energy Purchase Agreement (EPA), and Water Use License Agreement (WUL), and any other agreement as applicable.

EPA with ARE-IPPs for sale of all power to the grid system may be implemented through contracts forming a part of the security package having a validity period of not less than 20 years.

For the other type of projects, no such contracts shall be required.  Instead, for projects availing buy back mechanisms, separate contractual arrangements will be required between the parties dealing with matters such as metering, maintenance of interconnection, system protection, and billing of net sales and purchase, wheeling, and banking charges/tariffs, etc. to be notified by NEPRA.

The following fees and charges are payable to AEDB by the sponsors of grid-connected ARE Projects. All fees are subject to revision by the AEDB from time to time, and these are in addition to any other fees and charges payable for development of the project by the sponsors/project sponsors to other federal, provincial/ AJK/ GB agencies.

Exhibit 6: Fee & Financial Charges for Grid-Connected ARE-IPPs

Note: Upon financial close, the ARE-IPP will provide a letter of credit to the power purchaser as performance guarantee as specified in the EPA (US$ 3/kW per month), subsequent to which the original Performance Guarantee furnished at the time of issuance of the LOS shall be released.

CHAPTER V                STANDALONE APPLICATIONS

GOP designates AEDB to assist all concerned authorities at the provinces, AJK and GB in the development and implementation of off-grid electrification of rural areas using ARETs. GOP is committed to continue schemed deregulation and simplification of off-grid power generation wholly for captive or dedicated use or for supply to local communities through small, isolated distribution lines and stand alone systems. 

GOP is committed to utilizing ARE resources to match the diverse energy needs of the men and women both in urban and rural population at affordable costs; while retaining primary focus on energy conservation and income generation by providing sufficient access to modern energy services for different applications including but not limited to, lighting and computer facilities in academic buildings, water pumping for irrigation and drinking purpose, water heating, fruit drying, refrigeration, cottage industries, and local communication centers. To this end, the AEDB as the GOP designated entity shall take measures:

• To prepare in collaboration with the federal, provincial/ AJK/ GB agencies concerned an appropriate “Rural Energy Services Vision” Plan and a master plan for implementation on balanced geographical bases with, among others, a view to minimize total costs of supply, and develop adequate monitoring of the integration of ARE programs in the national grid extension programs.
• To encourage private sector, particularly small-medium scale enterprises, in the promotion of ARE systems for rural applications as part of an integrated national plan for off-grid technologies and models for service delivery, and the special incentives that may be given to ARE rural energy service delivery;
• To develop in collaboration with federal, provincial/ AJK/ GB and other stakeholders relevant technical standards, codes and guidelines and the development of effective legal and regulatory enabling framework;
• To initiate capacity building programs to aid in the implementation of ARE strategy and plan; and
• To deploy ARETs for conservation of conventional fuel and energy and to combat deforestation.

CHAPTER VI              ALTERNATIVE FUELS

GOP is determined to achieve greater energy security by creating an enabling environment for easing dependence on imported petroleum by encouraging and facilitating increasing reliance on Alternative fuels, which in turn will not only enhance environmental and social objectives but also result in tangible economic advantages. GOP has designated AEDB to play a vital role in integrating various initiatives within and outside the public sector with the strategic aim of realizing true potential of Alternative fuels.

This ARE 2011 Policy mainly focuses on Biogas, Biofuels (biodiesel and ethanol), Fuel from Waste (Refuse Derived Fuel, Processed Agricultural and Industrial Waste) and Hydrogen.

GOP announced its bio-diesel programme in 2008 whereunder targets have been fixed for selling bio-diesel blended diesel fuel in Pakistan. By 2015 at least five percent (5%) bio-diesel shall comprise the annual volume of diesel fuel (B5) and by 2025 at least ten percent (10%) bio-diesel shall comprise the annual volume of diesel fuel (B10), actually sold and distributed by each and every Oil Marketing Company (OMC) in conformity with the applicable fuel quality standards in Pakistan.

OGRA will announce the pricing mechanism for bio-diesel within six months of the announcement of ARE Policy 2011. The import of B100 is exempted from all taxes and duties. The GOP shall consider scaling up of further incentives for feedstock growers. The following incentives will be available:

• Mandatory purchase of B100 bio-diesel, as well as various blends, by Oil Marketing Companies from bio-diesel suppliers, such as refineries or importers;50% of the bio-diesel production shall be from indigenous resources by 2015;
• In case of shortages in local bio-diesel supply  prior to 2015, OMCs, are permitted to import volumes equivalent to shortfall, subject to certification by AEDB;
• Ministry of Petroleum and Natural Resources shall notify standards for B-100, B5, B10 and other bio-diesel blends within three months of the announcement of this policy;
• A minimum of one percent (1%) bio-diesel by volume to be blended into all diesel fuel sold in Pakistan within one year of the announcement of this policy.

GOP has issued successive polices in May 2009 and October 2009 for introduction of Ethanol-10 (E-10) for vehicular usage and OGRA has been designated as the entity to determine ex-depot and retail price of E-10. All incentives available for bio-diesel will also be applicable to Ethanol in context of gasoline replacement.

All entities involved in growing, processing, importation, and/or sale of feed stocks and biofuels (B100 & E100) shall be certified by AEDB under appropriate certification regulations. 

Hydrogen has been identified as a proven alternative fuel internationally. GOP encourages utilization of Hydrogen as one of the important alternative fuel source with promising impact on the overall energy mix in the long run. AEDB is mandated to support pilot projects for Hydrogen production in collaboration with academia and public and private sector organizations.

ARE Policy 2011 envisages to promote Biogas technology to meet the domestic and commercial energy needs through facilitation and support mechanism.

GOP appreciates the requisite attention to the environmental and potential social impacts of Alternative Fuels from procurement of raw material and production to refining and consumption.  The Pakistan EPA shall develop emissions standards for Alternative Fuels based on their emissions profiles including, but not limited to, aldehydes or the use of methanol in biodiesel production and Environmental and Social Assessment Guidelines for biodiesel plantations.  AEDB will work with MinFAL to develop guidelines for plantation in the area of marginal soil.

CHAPTER VII            ARE PROJECTS INITIATIVES

Successful implementation of ARE Policy 2011 requires dissemination of accurate information about ARE, its benefits, its impact on poverty alleviation, women empowerment and contribution to overall energy requirements of the populace. AEDB will undertake mass awareness programmes for ARET applications.  AEDB, in collaboration with relevant institutions, academia and research institutions, will continue to engage in R&D for establishing ARE technology base and requisite training of technical manpower for ARE sector in Pakistan.  Incentives, both fiscal and financial extended for ARE projects in Pakistan, shall also be available for setting up of manufacturing base for ARE plants and accessories.  

Development of commercial scale ARE projects is envisaged under the AEDB Act, additionally, it shall encourage adoption of ARE applications like solar water heaters, solar cookers and other technologies utilizing ARE sources.  

The collection of data/information relating to contribution of ARE resources to the overall energy mix has an instrumental role in the development of ARE in Pakistan.  AEDB will ensure acquisition of all relevant data pertaining to different aspects of ARE usage and penetration in Pakistan such that future policy decisions are founded on sound analytical statistics of ARE. 

GOP is conscious of the phenomenal role of women in promoting ARE. AEDB is mandated to attend to their peculiar energy needs while executing ARE promotional projects.

CHAPTER VIII  SUMMARY OF INCENTIVES

GOP has resolved to extend all existing benefits under ARE Policy 2006 to ARE Policy 2011. A complete list of these incentives is given below:

• No customs duty or sale tax for plant, machinery, equipment and spares (including construction machinery, equipment, and specialized vehicles imported on temporary basis) meant for the initial installation or for balancing, modernization, maintenance, replacement, or expansion after commissioning of ARE projects subject to fulfillment of conditions under the relevant SROs. All imported plant, machinery, equipment and specific items used in the production of Alternative Fuels shall also be exempted from Customs Duty and Sales Tax
• Parties may raise local and foreign finance in accordance with regulations applicable to industry in general. GoP approval may be required in accordance with such regulations.
• Non-Muslims and non-residents shall be exempted from payment of Zakat on dividends paid by the company.

• Non-residents allowed purchase of securities issued by Pakistani companies without State Bank of Pakistan’s permission, subject to prescribed rules and regulations.

GOP has developed a security package consistent with international best practices which offers protection against “political” risk in a manner consistent with GOP policies in other infrastructure and related projects;

• Exemption from income tax, including turnover rate tax and withholding tax on imports.
• Repatriation of equity along with dividends freely allowed, subject to rules and regulations prescribed by the State Bank of Pakistan.

• Permission for power generation companies to issue corporate registered bonds.
• Permission to issue shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk.
• Permission for foreign banks to underwrite the issue of shares and bonds by ARE-IPPs to the extent allowed under the laws of Pakistan.
• Independent rating agencies in Pakistan to facilitate informed decision-making by investors about the risk and profitability of project company’s bonds/TFCs.

Significant risks covered are:

• GOP guarantees payment obligations under the EPA in respect of projects to whom AEDB issues LOI and/or LOS;
• Safeguards in the event of privatization of any power purchaser or other constituent public sector entity;
• Protections against change in law, including tax and duty impositions;
• Foreign Exchange approvals and facilities commensurate with those in place for conventional power projects;
• Ensure convertibility of Pakistani Rupees into US Dollars at the prevailing exchange rate and the remittance of foreign exchange to cover necessary payments related to the project, including debt servicing, payment of dividends, and repatriation of equity.
• Indexation of tariff to cover exchange rate and inflation etc. consistent with that available to conventional power projects.

• No petroleum levies and duties shall be imposed upon B100 bio-diesel blend.
• Biodiesel blend petroleum products (e.g., B5, B10) and Ethanol blend petroleum products (e.g., E5, E10) shall not be liable for petroleum duties or levies on the non-petroleum portion (by volume) of their constituents.
• The import of B100 shall be exempted from Customs Duty, Income Tax and Sales Tax.
• Exemption from income tax, including turnover rate tax and withholding tax on imports.
• Parties may raise local and foreign finance in accordance with regulations applicable to industry in general. GoP approval may be required in accordance with such regulations.

• Permission to issue corporate registered bonds.
• Permission to issue shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk.
• Permission for foreign banks to underwrite the issue of shares and bonds by AFPs to the extent allowed under the laws of Pakistan.
• Independent rating agencies in Pakistan to facilitate informed decision-making by investors about the risk and profitability of project company’s bonds/TFCs.

Significant risks covered are:

• GOP guarantees purchase of various blends of bio-diesel and ethanol by Oil Marketing Companies
• GOP encourages growing feedstock for bio-fuels in marginal lands
• Safeguards in the event of any statutory change in public sector;
• Protection against “political” risk in a manner consistent with GOP policies in other infrastructure and related projects;
• Protections against change in law, including tax and duty impositions;