Law, Policy and Regulation of Solar Power (as a type of renewable energy) in Pakistan

Update : As of 2023  upon promulgation of Private Power and Infrastructure Board (Amendment) Act, 2023 notified through Gazette of Pakistan, Extraordinary, Part-1, as an Act No. XXVI of 2023 dated 10th June 2023, the Alternative Energy Development Board (AEDB) has merged with Private Power and Infrastructure Board (PPIB), consequently, the Alternative Energy Development Board Act, 2010 (Act XIV of 2010) stands repealed/dissolved henceforth.

The Private Power and Infrastructure Board (PPIB) Act of 2012 underwent significant amendments as per the Act No. 10(VI) of 2023, which received presidential assent on May 31, 2023. These amendments, published for public information on June 10, 2023, in the Extraordinary Gazette of Pakistan, highlight the integration of the Alternative Energy Development Board (AEDB) into PPIB. This merger was initiated to consolidate similar mandates of both bodies, aiming to streamline the implementation of various policies, programs, and projects in the field of Alternative or Renewable Energy Technologies.

Key amendments include the transfer of all resources, grants, rights, powers, funds, liabilities, etc., of the dissolved AEDB to PPIB. The act also redefines the role of PPIB, expanding its mandate to include the development of transmission, distribution, and generation of conventional and alternative or renewable energy. Additionally, the act introduces new provisions for the establishment of organizations and an institute under PPIB for promoting alternative or renewable energy technologies.

The act provides for the dissolution of the AEDB, transferring its assets, liabilities, and staff to PPIB. It also addresses the financial aspects, including tax exemptions for PPIB and its entitlement to receive policy directives from the Federal Government. With these changes, the Alternative Energy Development Board Act, 2010 (XIV of 2010), stands repealed.

The consolidation under this act aims to create synergy in Pakistan’s power sector, promoting sustainable economic growth with a focus on diverse energy generation and the development of indigenous technological bases. This legislative action represents a significant step towards streamlining and enhancing the efficiency of renewable energy initiatives in Pakistan.

PEPCO is responsible for managing the country’s electricity distribution network and ensuring that solar power is integrated efficiently and effectively into the overall energy mix. Furthermore, the National Electric Power Regulatory Authority (NEPRA) regulates the tariff and pricing mechanisms for solar power generation. NEPRA sets the rates at which electricity generated from solar power sources can be sold to the national grid, which helps to incentivize the development of solar power projects in the country. Overall, the regulation of solar power in Pakistan is aimed at promoting the development of renewable energy sources and reducing the country’s reliance on fossil fuels.

The basic laws, policies, and regulations pertaining to solar power in Pakistan are as follows.

1. Alternative Energy Development Board (AEDB) Act, 2010 (now repealed): This act established the AEDB, which is responsible for promoting and developing alternative and renewable energy sources in Pakistan.

2. National Energy Efficiency and Conservation Act, 2016: This act aims to promote energy efficiency and conservation measures and sets targets for the reduction of energy consumption in Pakistan.

3. National Electric Power Regulatory Authority (NEPRA) Act, 1997: This act established NEPRA, which is responsible for regulating the power sector in Pakistan, including solar power projects. 4. Renewable Energy Policy, 2006: This policy outlines the government’s strategy for promoting renewable energy sources, including solar power, and provides incentives for their development.

5. Net Metering and Net Billing Regulations, 2015: These regulations provide a framework for the installation of solar power systems and the sale of excess electricity generated by them to the national grid.

6. Alternative and Renewable Energy Policy, 2019: This policy outlines the government’s updated strategy for promoting alternative and renewable energy sources, including solar power, and sets targets for their development.

7. Pakistan Solar Quality Passport: This is a certification scheme for solar power systems that meet certain quality standards.

8. Punjab Solar Energy Policy, 2019: This policy outlines the government’s strategy for promoting solar energy in the Punjab province and provides incentives for its development.

9. Khyber Pakhtunkhwa Solar Energy Policy, 2019: This policy outlines the government’s strategy for promoting solar energy in the Khyber Pakhtunkhwa province and provides incentives for its development.

10.Private Power and Infrastructure Board (Amendment) Act, 2023

These laws, policies, and regulations provide the legal framework for the development and promotion of solar power in Pakistan. They aim to increase the use of renewable energy sources, reduce reliance on fossil fuels, and promote sustainable and environmentally friendly energy practices.

The Alternative and Renewable Energy (ARE) Policy 2019 has several key aspects concerning solar power. Some of the notable elements include:

1. Technology Coverage: Solar power, both photovoltaic (PV) and thermal, is explicitly covered under the ARE Policy 2019. The policy encompasses technologies that use heat and/or light from the sun to generate electricity.
2. Targets for Renewable Energy: The policy sets ambitious targets for renewable energy generation, with a goal of achieving at least 20% on-grid renewable energy generation by capacity by 2025 and at least 30% by 2030. This includes solar power as a significant contributor.
3. Competitive Bidding for Procurement: The procurement of solar and other renewable energy projects is proposed to be done through auctions, preferably on an annual basis. This competitive bidding process aims to ensure transparency and cost-effectiveness in the development of solar power projects.
4. Tariff and Fiscal Incentives: The tariffs for solar power projects will be denominated in Pakistan Rupees, and the policy indicates a shift from upfront or cost-plus tariffs to competitive bidding for mature technologies like solar power. Incentives include exemption from corporate income tax, import duties, and provision for 100% foreign ownership with the allowance for repatriation of dividends and disinvestment proceeds.
5. Indigenization and Local Content: The policy aims to promote local manufacturing capabilities in alternative and renewable energy technologies, including solar power. It discusses import duty exemptions and incentives for local manufacturing to encourage the development of domestic solar power technologies and components.
6. Simplification of Regulatory and Contract Frameworks: The policy outlines the need to simplify the regulatory and contractual frameworks to promote the development of solar power projects. It suggests a review of existing contract structures and a move towards leaner contracts that integrate the regulatory framework.
7. Empowerment of Municipal Authorities and Off-Grid Solutions: The policy recognizes the potential of off-grid solar solutions and empowers municipal authorities to develop solar power projects, such as solar parking lots and municipal lighting, under public-private partnership models.
8. Carbon Credits: The policy encourages solar power project developers to apply for procuring carbon credits, facilitating participation in global carbon crediting markets and environment and climate funds.

These components of the ARE Policy 2019 demonstrate a comprehensive approach to promoting and regulating the development of solar power in Pakistan, encompassing technological development, fiscal incentives, competitive procurement, and environmental sustainability.

The ARE Policy 2019

Legal Note: State Bank of Pakistan Financing Scheme for Renewable Energy

Background

The State Bank of Pakistan (SBP), in its commitment to environmental sustainability and green banking, revised its Financing Scheme for Renewable Energy on June 20, 2016. This revision is aimed at promoting renewable energy projects in Pakistan, attracting significant interest from banks, Development Finance Institutions (DFIs), and project sponsors.

Objectives

The scheme addresses Pakistan’s critical challenges of energy shortages and climate change impacts. It aims to promote the use of indigenous renewable resources, ensuring sustainable banking and development. The revised scheme is a response to stakeholder feedback, focusing on concessionary financing for both large-scale renewable energy projects and smaller renewable solutions.

Scope

The scheme covers power generation from alternative/renewable sources like solar, wind, hydro, biogas, etc. It is categorized into three segments:

1. Renewable energy power projects ranging from more than 1 MW to 50 MW.
2. Installation of renewable solutions for electricity generation up to 1 MW.
3. Financing for vendors/suppliers certified under AEDB Certification Regulation 2018 for installation of wind and solar systems.

Grant of Refinance

SBP provides refinance to banks/DFIs under Section 17(2)(d) read with Section 22 of the State Bank of Pakistan Act 1956. Refinance is allocated based on submitted documentation, including project specifics.

Participating Financial Institutions

All commercial banks and DFIs are eligible for financing under this scheme.

Bank/DFI-wise Refinance Limits

Yearly limits are allocated to each bank/DFI for each fiscal year. Banks/DFIs must apply for these limits and provide details of expected disbursements. Unutilized limits may be reallocated.

Category I of the Scheme

This category focuses on projects ranging from 1 to 50 MW. The scheme offers financing up to Rs. 6 billion per project, with service charges fixed for the loan duration. The financing terms include a maximum period of twelve years with a grace period depending on the project type.

Category II of the Scheme

This category supports projects up to 1 MW. The consolidated borrowing under this category is capped at Rs. 400 million. The loan term is a maximum of ten years, with interest rates and repayment schedules specified.

Category III of the Scheme

This category is for vendors/suppliers certified for renewable energy equipment leasing or energy sale. The borrowing limit is Rs. 1 billion, and loans are repayable over ten years.

Repayment and Fines

Repayments are scheduled as per the agreement, and early repayments must be adjusted within three working days. Fines are imposed for late adjustments and violations of the scheme’s terms.

Period of Scheme

The scheme is applicable for projects achieving financial closure and new sanctions up to June 30, 2022.

Conclusion

The SBP’s Financing Scheme for Renewable Energy represents a significant step towards fostering sustainable energy solutions in Pakistan. Through providing financial support and incentives, the scheme aims to encourage the adoption of renewable energy, thereby contributing to the country’s environmental and economic sustainability.

About Renewable Energy in Pakistan

Legal Definition of Renewable Energy  The NEPRA Act 1997 articulates ‘renewable electricity’ as electricity generated from sources such as wind, solar, biomass, ocean, geothermal, hydroelectric, or hydrogen derived from renewable biomass or water using energy sources outlined above. The AEDB Act categorizes ‘alternative or renewable energy’ as energy produced from natural, non-depleting, non-polluting, and environmentally friendly alternative or renewable resources, distinct from conventional energy sources.

Regulatory and Legal Framework for Renewable Energy Projects The development, financing, operation, and sale of power and ‘environmental attributes’ from renewable energy projects were governed by the RE Policy 2006 until it lapsed in 2018. This policy facilitated renewable independent power producers (IPPs) by offering tax benefits, assured returns, and mandatory offtake agreements. The more recent ARE Policy 2019, which will govern future projects, outlines the procurement processes for renewable energy via public utilities or private consumers through competitive bidding, government-to-government arrangements, and unsolicited projects. The policy requires the Central Power Purchasing Agency (CPPA) to enter energy purchase agreements with independent power producers, underwritten by the Government of Pakistan (GoP). Additionally, the ARE Policy 2019 mandates national and distribution utilities to provide transmission and distribution facilities for varied electricity services, ensuring mandatory offtake of renewable energy.

Selling Environmental Attributes Currently, there is no specific national legal framework for selling environmental attributes. Nevertheless, as a signatory to international accords like the Kyoto Protocol and the Paris Agreement, Pakistan can access global carbon credit markets and environmental funds. The ARE Policy 2019 charges the AEDB with assisting renewable projects in acquiring carbon credits.

Government Incentives for Renewable Energy Development The GoP has been proactive in promoting renewable energy projects since 2006, offering incentives under various policies. The previous RE Policy 2006 allowed investors to benefit from fixed rates of return, upfront tariffs, and long-term energy purchase agreements. The ARE Policy 2019 continues to provide incentives, including tax exemptions, import duty waivers, full foreign ownership rights, legal and expropriation protections, and international arbitration mechanisms. However, it suggests a reduced concession package with a shorter compulsory purchase obligation for the market operator. Renewable energy plants are prioritized in central dispatch orders, and the State Bank of Pakistan offers refinancing for renewable project loans at lower rates.

Renewable Energy Policy and Incentive Structure

National-Level Establishment of Renewable Energy Policies: Renewable energy policies and incentives in Pakistan are primarily established at the national level. The development of these policies involves collaborative efforts from all provinces, coordinated through the Council of Common Interest. This council includes representatives from each province. Notably, every province contributes to energy policy formulation through their respective departments, such as the Punjab Power Development Board, the Pakhtunkhwa Energy Development Organization, and the Energy Departments of Sindh and Balochistan. Similarly, Gilgit Baltistan and AJ&K have their dedicated Water and Power Department and AJK Electricity Department and Power Development Organization respectively. Provinces are empowered to institute their specific incentives.

Provincial Incentives: An example of provincial initiative is Punjab’s policy, which supplements federal tax and duty concessions by accepting unsolicited proposals for hydropower projects, allowing investments on a Build-Own-Operate-Transfer (BOOT) basis or via public-private partnerships. Provincial energy departments and agencies also provide land concessions for establishing renewable energy projects.

Legislative Proposals in Renewable Energy

Recent and Upcoming Legislative Changes: In 2018, Pakistan amended the NEPRA Act 1997, highlighting its commitment to climate change and renewable energy. Anticipated changes include liberalizing the electric power market, endorsing the Competitive Trading Bilateral Contract Market (CTBCM) model, and implementing power wheeling regulations. The Alternative and Renewable Energy (ARE) Policy 2019, introduced by the federal government, aims to achieve 20% renewable energy capacity by 2025 and at least 30% by 2030.

Auto Industry Development and Export Policy: The Auto Industry Development and Export Policy (AIDEP 2021–2026) was formulated to advance new technologies in the auto sector, offering substantial tax incentives for electric vehicles.

Dispute Resolution Framework in Renewable Energy Sector

Contractual Disputes: Renewable energy market participants typically resolve contractual disputes through standard legal and arbitration channels. Power purchase agreements usually contain multi-tiered dispute resolution mechanisms, including a 30-day negotiation window, followed by expert determination or international arbitration, primarily under the London Court of International Arbitration rules.

Resolution of Non-contractual Disputes: For non-contractual issues, market participants holding licenses may approach the National Electric Power Regulatory Authority (NEPRA) for resolutions related to tariffs or licensing. Additionally, parties can seek redressal from the courts for public law or constitutional matters.

A note on security/contractual documents

Performance Guarantee (PPIB-SOLAR POWER)

Context and Purpose:

This Performance Guarantee is a legally binding document executed by a Bank]  in the favor of the Alternative Energy Development Board (AEDB) (now PPIB after 2023) and the respective provincial government department. It is designed to ensure the fulfillment of the obligations by the Project Company and the Sponsors under the Letter of Support (LOS) and other related project agreements, including the Implementation Agreement (IA), the Energy Purchase Agreement (EPA), and the Land Lease Agreement (LLA).

Key Provisions:

Obligation to Pay: The Guarantor is bound to pay the Guaranteed Sum or part thereof to AEDB upon first written demand, without protest or demur, should the Project Company and/or the Sponsors fail to perform any of the Guaranteed Obligations.

Irrevocable and Unconditional: The Performance Guarantee is irrevocable and unconditional, and the Guarantor is obligated to honor AEDB’s first written demand within two working days.

Validity Period: The Guarantee remains valid until the specified expiry date and covers any demands made up to the Guaranteed Sum during this period.

No Set-off or Counterclaim: The Guarantor agrees to make all payments in full, without set-off or counterclaims, and free of any deductions or withholdings, in immediately available funds.

Representations and Warranties: The Guarantor confirms it has the necessary authority and approvals to issue this Guarantee and that its obligations are enforceable under Pakistani law.

Governing Law: The Performance Guarantee is governed by the laws of Pakistan.

Expiration: The Guarantor’s liability under this Guarantee is limited to the payment of claims lodged on or before the expiry date.

Additional Provisions: The document includes clauses related to the discharge of the Guarantor’s obligations after the expiry date, consents and approvals required for payment, and definitions of capitalized terms.

Execution:

The Performance Guarantee should be executed with the signatures of the authorized signatory(ies) of the Bank, stamped, and witnessed by two adult male witnesses, providing their full names, National Identity Card numbers, and addresses.

Conclusion:

This Performance Guarantee serves as a financial assurance for AEDB, ensuring that the Project Company and Sponsors fulfill their obligations under the LOS and related project agreements. It underscores the commitment of the parties involved and provides a measure of security in the execution and completion of the project.

The Standard Solar Energy Purchase Agreement (EPA) with Upfront Tariff 2016

The Standard Solar Energy Purchase Agreement (EPA) with Upfront Tariff 2016, for projects with their own land, is a detailed legal contract outlining the terms and conditions for the sale and purchase of solar power between two main parties: the Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) and the Seller, a private or public limited company. This agreement is fundamental in establishing a framework for solar power generation, sale, and regulation in Pakistan.

Key Features of the Agreement:

Parties Involved:

CPPA-G: Acts as an agent for and on behalf of the Principal Distribution Companies (DISCOs) in Pakistan.

Seller: The entity responsible for the design, engineering, construction, commissioning, operation, and maintenance of the solar power facility​​.

Purpose and Scope:

The Seller agrees to construct and operate a solar power facility and sell the generated energy to CPPA-G.

The project is backed by support from the Alternative Energy Development Board (AEDB) and follows a Tariff Determination by the National Electric Power Regulatory Authority (NEPRA)​​.

Definitions and Interpretation:

Detailed definitions are provided for technical and contractual terms such as ‘Abandonment’, ‘Actual Annual Energy’, ‘Affiliate’, ‘Agreement Year’, ‘Ambient Site Conditions’, etc., to ensure clarity in interpretation and execution​​.

Contractual Obligations and Provisions:

Performance Guarantee: As per the Implementation Agreement, a guarantee is required from the Seller to assure performance under the EPA.

Pass-Through Items: Certain identified costs are designated as pass-through items in the agreement, implying they are recoverable from CPPA-G under specific conditions​​.

Principal DISCOs: The agreement lists the main distribution companies in different regions of Pakistan, highlighting the widespread applicability of this agreement across the country​​.

Tariff and Payment Structure:

The agreement details the calculation of tariffs, adjustments, and payments for the energy supplied, including provisions for changes in law and other unforeseen events that might impact costs.

Regulatory Compliance:

The agreement is subject to NEPRA’s regulations and tariffs, ensuring that the project aligns with national energy policies and legal frameworks.

Dispute Resolution and Force Majeure:

Provisions are included for handling disputes and unforeseen circumstances (Force Majeure events), offering mechanisms to address such situations effectively.

Termination and Exit Clauses:

Conditions under which either party can terminate the agreement and the implications of such termination are specified.

Legal Implications and Considerations:

Risk Allocation: The agreement outlines the distribution of risks between the Seller and CPPA-G, including financial, operational, and regulatory risks.

Regulatory Adherence: Compliance with NEPRA’s regulations and the AEDB Act is crucial for the legality and smooth operation of the project.

Financial Security: The Performance Guarantee serves as a financial assurance for the fulfillment of the Seller’s obligations.

Flexibility and Adaptability: The agreement contains provisions to accommodate changes in laws, market conditions, and unforeseen events.

Conclusion:

This EPA represents a comprehensive legal framework essential for fostering the growth of solar energy in Pakistan. It addresses key aspects of solar power generation, distribution, and regulation, balancing the interests of the Seller, the purchasing agency, and the regulatory bodies, while aligning with national energy policies. The agreement stands as a testament to Pakistan’s commitment to renewable energy and sustainable development.

Schedule 10 of the agreement, titled “NPMV Measurement Protocol,” outlines the methodology for calculating the Non-Project Missed Volume (NPMV). NPMV refers to the volume of Net Delivered Energy that the Complex fails to deliver during operating hours due to Non-Project Event(s). The operating hours are defined as the period between sunrise and sunset when minimum solar radiation is available for power generation, verified by meteorological data or Ambient Site Conditions as per the Irradiation Measurement Protocol in Schedule 6.

Legal Note: Schedule 1 – Tariff, Indexation, and Adjustment

Document Title: Schedule 1 – Tariff, Indexation, and Adjustment

Associated Agreement: Energy Purchase Agreement (EPA)

Context and Structure:

Schedule 1 forms an integral part of the EPA, detailing the calculation methods for various financial aspects related to energy pricing, liquidated damages, supplemental tariffs, and additional payments. It comprises five parts, each addressing specific components of the EPA’s financial structure.

Key Components:

General Overview (Part I):

Purpose: Establishes methods for calculating monthly energy prices, pass-through items, supplemental tariffs, liquidated damages, indexation, adjustments, and degraded annual benchmark energy.

Billing and Payment Procedures: Adheres to Article IX of the EPA, except where specified otherwise in Schedule 1.

Energy Price and Liquidated Damages (Part II):

Energy Price Calculation: Methodology for calculating the monthly energy price (EPrcm) based on operational and maintenance costs, insurance, return on equity, and debt servicing, as per NEPRA’s determinations.

Liquidated Damages: Provisions for penalties in case of delayed commissioning or shortfall in energy production, with specific formulas for calculating damages.

Supplemental Tariffs (Part III):

Context: Addresses payments due to political events or changes in law impacting the project.

Calculation: Methodology for determining supplemental tariff payments, considering restoration costs and recovery rates.

Additional Payments (Part IV):

Pass-Through Items: Lists specific costs incurred by the seller that are reimbursable by the purchaser, including taxes, sales tax, insurance, and system upgrade costs.

Indexation and Adjustment Factors (Part V):

Adjustment Mechanisms: Outlines procedures for adjusting prices based on index changes, foreign exchange variations, and interest rate changes.

NEPRA’s Role: NEPRA’s determinations are crucial for indexation and adjustments.

Annexes to Schedule 1:

Includes reference to NEPRA’s Tariff Determination and a table detailing the Degraded Annual Benchmark Energy for the duration of the agreement.

Conclusion:

Schedule 1 provides a comprehensive framework for financial transactions between the purchaser and seller under the EPA. It meticulously outlines the calculation of tariffs, adjustments due to external events, and penalties for non-compliance, ensuring clarity and predictability in the financial dealings of the project. This schedule is critical for the smooth financial operation and risk management of the energy project under the EPA.

Schedule 1 of the Standard Solar Energy Purchase Agreement (EPA) 

Schedule 1 of the Standard Solar Energy Purchase Agreement (EPA) with Upfront Tariff 2016, for projects with their own land, specifically outlines the “Specified Consents” necessary for the operation of a solar power project in Pakistan. This schedule is divided into two parts, detailing the consents required before and after financial closing.

Part I – Consents Required for Financial Closing:

Foreign Exchange Transactions Consent (SBP):

Issued by the State Bank of Pakistan (SBP).

Relates to permissions for conducting transactions in foreign exchange as per Article X of the Implementation Agreement.

Foreign Currency Availability Commitment (SBP):

Also issued by the SBP.

Ensures the availability of foreign currency necessary for payments under the Implementation Agreement.

Regulatory Consents (NEPRA):

Issued by the National Electric Power Regulatory Authority (NEPRA).

Covers various consents, authorizations, and permissions needed under the 1997 Regulation of Generation, Transmission, and Distribution of Electric Power Act and related rules and regulations.

Statutory Notifications/Import Permits (MOC/FBR):

Issued by the Ministry of Commerce (MOC) and/or the Federal Board of Revenue (FBR).

Concerns import permits, licenses, and other consents for importing necessary plant, machinery, equipment, spare parts, materials, and supplies for the project.

Part II — Consents Required After Financial Closing:

Special Sanction for Earthing Connection (GOPb):

Issued by the Government of Punjab (GOPb).

Pertains to permission for connecting the solar power complex to the earth under the Electricity Act, 1910.

Local Government Approval (LG):

Necessary approval from relevant local government bodies regarding the erection of the solar power complex.

Firearm Licenses for Security (GOPb):

Issued by the Government of Punjab.

For obtaining licenses for firearms needed for the security of the complex.

Certificate of Stability (GOPb):

Also issued by the Government of Punjab.

Under the Factories Act, 1934 and Factories Rules, 1975, certifying the stability of the solar power complex.

Factory Registration Certificate (GOPb):

Required under the Factories Act, 1934 for the registration of the solar power complex.

Special Order Exemption (GOPb):

Issued by the Government of Punjab.

Exempts the Seller from the application of Section 30 of the Electricity Act 1910.

Legal Implications:

Compliance: Ensuring all necessary consents are obtained is critical for the legal operation of the solar power project.

Regulatory Adherence: Adherence to national and provincial laws and regulations is mandatory for project viability.

Operational Viability: These consents cover key operational aspects like import of equipment, construction, and security, essential for the project’s success.

Financial Closing Prerequisite: Obtaining these consents is a prerequisite for financial closing, emphasizing their importance in project development.

Conclusion:

Schedule 1 of the EPA provides a comprehensive guide to the necessary legal and regulatory consents required for the establishment and operation of a solar power project in Pakistan, highlighting the importance of regulatory compliance and governmental approvals in the renewable energy sector.

The Standard Implementation Agreement for Solar Power Projects 

The Standard Implementation Agreement for Solar Power Projects outlines the legal framework and obligations for the development, commissioning, operation, and maintenance of solar power complexes in Pakistan. Key provisions of the agreement include:

Treatment as Essential Service: The agreement specifies that the Seller (the entity undertaking the solar power project) will be treated on par with public sector power stations or similar entities that provide essential services under the Pakistan Essential Services (Maintenance) Act 1952​​. This treatment could grant the Seller certain privileges and responsibilities in line with those of essential service providers.

Responsibilities of the Seller: The Seller is responsible for designing, procuring, constructing, installing, commissioning, operating, and maintaining the solar power complex. Although the Seller may contract these tasks to an Engineering, Procurement, and Construction (EPC) Contractor and an Operations and Maintenance (O&M) Contractor, the ultimate responsibility and liability remain with the Seller​​. This clause ensures that the Seller cannot evade its obligations by delegating them to third parties.

Liability Limitations: The agreement stipulates that neither party shall be liable to the other for indirect, consequential, incidental, punitive, or exemplary damages in contract, tort, warranty, strict liability, or any other legal theory. However, it clarifies that agreed-upon compensation amounts, indemnities, and other payments under the agreement are not excluded under this limitation​​. This clause aims to balance the risk between the parties while ensuring that direct and agreed-upon liabilities are enforceable.

Overall, the Standard Implementation Agreement for Solar Power Projects in Pakistan establishes a comprehensive legal structure for solar power projects. It details the responsibilities of the Seller, provides a framework for risk and liability sharing, and aligns with essential service regulations, ensuring both operational efficiency and legal accountability.

Schedule 2 of the Implementation Agreement 

Schedule 2 of the Implementation Agreement provides detailed guidance on the compensation amounts payable by the Government of Pakistan (GOP) in the event of the termination of the Implementation Agreement under various specified conditions. This schedule is crucial for understanding the financial implications of different termination scenarios for both the seller (the solar power project company) and the GOP.

Part I of Schedule 2 – Compensation Table:

This part outlines different termination events and the corresponding compensation payable by the GOP. The compensation elements are labeled as a, b, c, d, and e, and are detailed in Part II. The scenarios include termination due to the seller’s default, GOP’s default, changes in law, political events, and other specified conditions.

Key Compensation Scenarios:

Seller Event of Default: The GOP may elect to purchase the Complex following a termination due to the seller’s default (excluding a Restoration Schedule Default).

GOP Event of Default or Change in Law: Compensation includes various elements like equity investment, debt, additional equity for specific events, etc.

Termination due to Political Events: Different compensation structures are provided based on whether restoration is feasible, financing availability, and diligence in restoration schedule adherence.

Restoration Schedule Defaults and Other Specific Conditions: These include scenarios where the energy purchase agreement is terminated under specific conditions relating to restoration schedules and political events.

Part II of Schedule 2 – Compensation Elements:

This part defines and quantifies the compensation elements (a, b, c, d, and e) mentioned in Part I, providing a detailed breakdown of how each compensation amount should be calculated in the event of a termination.

Element “a” (Debt and Interest Component):

Element “a” represents the total amount of principal and interest or markup on the debt outstanding under the financing documents. It includes various sub-elements like fees, out-of-pocket expenses, payments made by the Purchaser or GOP, etc.

This element ensures that the project’s financial obligations to lenders are covered in the event of termination.

There are specific calculations for determining the maximum amounts payable and adjustments for interest accrued after default by the Seller, unless such default results from a GOP or Purchaser Event of Default.

Element “b” (Equity Investment Component):

Element “b” covers the actual equity investment in the project, adjusted based on the project’s operational timeline and maintenance costs.

This component aims to compensate for the equity invested by the shareholders of the Seller in the project.

Element “c” (Return on Equity Component):

Element “c” relates to the return on equity, calculated either based on NEPRA’s assumed annual amount (pre-first anniversary of the Commercial Operations Date) or the project’s net cash flow (post-first anniversary).

The calculation includes a discounting factor to present value, ensuring a fair compensation for the equity investors based on the project’s profitability.

Element “d” (Additional Equity Contributions):

Element “d” includes any additional equity contributions made by the shareholders for specific events described in the agreement, reduced on a straight-line basis to the end of the Term.

Element “e” (Restoration Related Equity):

Element “e” covers the equity contributions related to restoration events leading to termination, including both the additional and original equity contributions, adjusted for the project timeline.

General Provisions:

The schedule specifies that calculations and verification of compensation amounts should be done by an international accounting firm.

The GOP’s obligation to pay these amounts is contingent upon specific termination scenarios as detailed in the Implementation Agreement.

Legal Implications:

The schedule provides a clear framework for financial settlements in case of termination, protecting both the Seller’s and the GOP’s interests.

By outlining detailed compensation mechanisms, it offers a degree of predictability and financial security to investors and stakeholders involved in the solar power project.

This structured approach to handling terminations ensures transparency and fairness, thereby encouraging investment in the renewable energy sector while safeguarding governmental and public interests.

Letter of Support by AEDB (This may change after the new PPIB Act in 2023)

This Letter of Support (LOS) issued by the Alternative Energy Development Board (AEDB) to the Main Sponsor of a solar power generation facility project outlines the terms and conditions for the establishment of a renewable electricity generation facility.

The key aspects of the LOS are as follows:

Background and Preconditions: The LOS references the Project Company’s receipt of a Letter of Intent, a Tariff Determination, and a Generation License from NEPRA, which are foundational documents and approvals for the project.

Support and Permissions: AEDB expresses its support for the development, design, engineering, manufacture, procurement, financing, construction, testing, commissioning, insurance, ownership, operation, and maintenance of the Complex.

Performance Guarantee: The Project Company has posted a bank guarantee in favor of AEDB, which is irrevocable, unconditional, and on demand. This guarantee is to ensure the execution of the Project Agreements, achieve Financial Closing, and pay the Termination Amount as per the terms of the LOS.

Supersession of Documents: The LOS and certain provisions of the Project Agreements will govern the implementation of the project until Financial Closing is achieved, after which the Project Agreements will supersede the LOS.

Authorization: AEDB permits the Project Company to implement the project. The produced electricity is to be sold to the National Transmission and Despatch Company Limited in accordance with the Generation Licence, Tariff Determination, and Energy Purchase Agreement.

Responsibilities of the Project Company: The Project Company must sign the Implementation Agreement and Energy Purchase Agreement, achieve Financial Closing, pay the processing fee to AEDB, and fulfill other necessary activities for the project.

Option to Terminate: The Project Company has an option to terminate the LOS and all Project Agreements before the Required Financial Closing Date, subject to paying the Termination Amount and processing fee.

Equity Contribution: The Main Sponsor is required to hold a significant equity percentage in the Project Company during the lock-in period, which lasts until the sixth anniversary of the Commercial Operations Date.

Termination of LOS: The LOS automatically terminates upon Financial Closing or seven days after the Required or Extended Financial Closing Date, unless extended in writing by AEDB.

General Provisions: The document outlines the joint and several responsibilities of the Project Company and Main Sponsor, the jurisdiction of Pakistani courts, and the non-assignability of the LOS without AEDB’s consent.

This LOS represents a formal and binding commitment from AEDB, outlining specific conditions and requirements that the Project Company and Main Sponsor must fulfill to proceed with the solar power project.

Review of Caselaw involving solar power 

The below cited cases reflect legal disputes and interpretations surrounding solar power projects in Pakistan, highlighting the interplay of various policies and laws. Here’s an analysis of each case with their implications:

Pakistan Television Corporation v. Commissioner Inland Revenue (2023 PTD 102 Islamabad):

Issue: The case involved the classification of technical fees charged for services, including those provided to solar power projects, and whether these constituted a franchise relationship under the Federal Excise Act, 2005.

Legal Citations: Section 2(12a) and Section 34-A of the Federal Excise Act, 2005.

Implication: This case clarifies that technical fees charged for services, like maintenance and operations of solar power projects, do not automatically imply a franchise relationship under the Federal Excise Act. It emphasizes the distinction between the nature of services provided and the legal classification of these services for tax purposes.

The Collector of Customs, MCC (Appraisement), Lahore v. Advance Energies, Gulberg, Lahore (2018 PTD 1925 Customs-Appellate-Tribunal-Lahore):

Issue: The case involved the exemption of customs duty on imported LED lights under policies promoting renewable energy technologies.

Legal Citations: Sections 19 & 20, Fifth Schedule, Item No. 24 of the Customs Act, 1969, and SRO No.568(I)/2014.

Implication: This case highlights the government’s intention to promote renewable energy technologies, including components like LED lights, under customs and tax laws. It underscores that incentives and exemptions are part of the broader policy to encourage the adoption of renewable energy technologies.

Rightway Trading Company, Karachi v. The Deputy Collector of Customs (2018 PTD 1318 Customs-Appellate-Tribunal-Lahore):

Issue: The admissibility of exemption from customs duty and taxes on imported renewable energy equipment for solar systems.

Legal Citations: Sections 18, 19, 20, 25, 32, and 80 of the Customs Act, 1969.

Implication: This case reaffirms the policy of exempting renewable energy equipment from customs duties and taxes, facilitating the import and installation of solar systems. It reflects the government’s commitment to renewable energy through fiscal incentives.

Access Solar (Pvt.) Ltd. v. Federation of Pakistan (2017 CLC 1259 Islamabad):

Issue: Refusal by the Central Power Purchasing Agency to execute a power purchase agreement based on a tariff approved by NEPRA for a solar power project.

Legal Citations: Sections 7(3)(a) and 31 of the Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997; Rules 2(m), 2(d), and 19 of the National Electric Power Regulatory Authority (Market Operator Registration, Standards and Procedure) Rules, 2015, and Regulation 2(j) of the National Electric Power Regulatory Authority Upfront Tariff (Approval and Procedure) Regulations, 2011.

Implication: This case underscores the binding nature of NEPRA’s tariff determinations for solar power projects and restricts the Central Power Purchasing Agency’s ability to negotiate or question these tariffs. It emphasizes the regulatory framework governing the establishment and operation of solar power projects in Pakistan.

Zaigham Imtiaz v. Iqbal Ahmed Ansari (2016 CLC 1145 Lahore-High-Court-Lahore):

Issue: This case dealt with the liability for defective products, specifically a solar energy system, and the definition of ‘consumer’ under the Punjab Consumer Protection Act, 2005.

Legal Citations: Sections 2(c)(i), 4, 8, 25, and 28(4) of the Punjab Consumer Protection Act, 2005; Sections 2 and 2(47) of the Punjab General Clauses Act, 1956; Article 199 of the Constitution of Pakistan.

Implication: This case highlights consumer rights in the context of solar energy products. It clarifies the definition of ‘consumer’ and ‘commercial purpose’ under consumer protection law, ensuring that users of solar energy systems for business premises are protected under consumer laws. This decision underscores the legal framework safeguarding consumers in solar energy transactions.

Muhammad Athar Hafeez Khan v. Islamic Republic of Pakistan (2016 PTD 2219 Karachi-High-Court-Sindh):

Issue: The case involved the exemption of customs duty for imported air conditioners claimed to be covered under solar Air Conditioning System as per SRO 575(I)/2006.

Legal Citations: Section 81 of the Customs Act, 1969; SRO 575(I)/2006.

Implication: The judgment emphasizes the criteria for customs duty exemption for solar energy equipment. It clarifies that hybrid solar air conditioning systems must rely primarily on solar energy to qualify for duty exemptions. This case reflects the legal interpretation of policy incentives for promoting solar energy products.

Idrees Ahmed Aftab v. Government of Punjab (2015 CLC 1295 Lahore-High-Court-Lahore):

Issue: The case questioned the issuance of a Letter of Interest by the Punjab government for a solar power plant without competitive bidding.

Legal Citations: Rule 3 of the Punjab Power Generation Policy, 2006 (revised in 2009); Paragraphs 9 & 23(b) of the same policy; Article 199 of the Constitution of Pakistan.

Implication: This case highlights the procedural aspects of solar power projects under the Punjab Power Generation Policy. The court clarified that for raw sites, the policy did not necessitate competitive bidding, thus allowing direct issuance of a Letter of Interest. This case underscores the procedural and policy framework for solar power project initiation in Punjab.

Flying Cement Co. Ltd. v. Government of Pakistan (2015 PLD 146 Lahore-High-Court-Lahore):

Issue: The imposition of an equalization surcharge on electricity and its legality.

Legal Citations: Section 31(5) of the Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997; Article 199 of the Constitution of Pakistan.

Implication: This case addressed the broader context of electricity tariff structuring and government subsidies. While not directly about solar power, it has implications for the economic aspects of electricity consumption, including renewable energy. The court upheld the government’s right to impose surcharges for subsidizing electricity, which is relevant for setting tariffs that might affect solar power consumers and producers.

OGRA v. Midway II, CNG Station (2014 SCMR 220 Supreme-Court):

Issue: The case was focused on the issue of load-shedding and electricity prices, with implications for alternative energy sources like solar power.

Legal Citations: Articles 9 and 184(3) of the Constitution of Pakistan.

Implication: This case brought to the forefront the importance of alternative and renewable energy sources, including solar power, to manage load-shedding and electricity pricing issues. The Supreme Court emphasized the need for equitable distribution of electricity and promotion of renewable energy sources, underscoring the legal and policy focus on solar and other renewable energies as solutions to Pakistan’s energy challenges.

Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v. Federation of Pakistan (2014 PTD 243 Supreme-Court):

Issue: Similar to the above case, this dealt with the issue of load-shedding and electricity prices in Pakistan.

Legal Citations: Articles 9 and 184(3) of the Constitution of Pakistan.

Implication: The Supreme Court reiterated the importance of renewable energy sources, including solar power, in managing electricity issues in Pakistan. The decision highlights the judiciary’s role in advocating for sustainable and renewable energy policies and practices.

Power Links v. Directorate General of Intelligence and Investigation, F.B.R. (2014 PTD 796 Karachi-High-Court-Sindh):

Issue: The case addressed the exemption from customs duty for batteries imported for solar panels and other alternate resources of energy.

Legal Citations: Sections 32(1)(2), 32-A, and 196 of the Customs Act, 1969; S.R.O. 575(I)/2006, Serial No. 35-A(6).

Implication: This case clarified the customs duty exemptions for components crucial for solar energy systems, emphasizing the government’s policy to support solar energy through fiscal incentives. The judgment reinforces the legal framework facilitating the import of solar energy equipment in Pakistan.

Commissioner of Income-Tax v. Harnarayan Lohia & Sons (1999 PTD 154 Calcutta-High-Court-India):

Note: This case is from the Calcutta High Court in India, not Pakistan, and pertains to the depreciation of plant and machinery used in renewable energy devices.

Legal Citations: Income Tax Rules, 1962, Appendix I, Part I, Item, III-D(10-A)(vii).

Implication: Though not directly related to Pakistani law, this case indicates a broader South Asian context where renewable energy devices, including those powered by solar energy, are given fiscal benefits such as higher depreciation rates. This exemplifies the regional trend towards incentivizing renewable energy through tax policies.

Conclusions 

(1) These cases collectively indicate an increasing judicial recognition of the importance of solar power and other renewable energies in Pakistan. They highlight the legal framework’s role in fostering solar energy through policy incentives, consumer protection, and equitable electricity distribution. This trend reflects a broader shift towards sustainable energy solutions in response to Pakistan’s energy challenges.

(2) Overall, these cases demonstrate the legal complexities in the solar power sector in Pakistan, including consumer protection, customs exemptions, policy implementation, and tariff structuring. These decisions reveal how various laws and policies intersect in the growing field of solar energy.

(3) These cases collectively highlight the regulatory and fiscal aspects of solar power in Pakistan, demonstrating the interaction of various laws and policies, including those related to customs, tax, and energy regulation, in shaping the solar power landscape.