IEEFA Calls for Higher Solar Tariffs and Stronger Guarantees in Pakistan Auctions

Pakistan's move toward competitive bidding for renewable energy must be accompanied by a realistic benchmark tariff and strengthened financial guarantees to restore investor confidence, according to a new report by the Institute for Energy Economics and Financial Analysis. The analysis was prompted by the failure of the country's first reverse auction for solar power, which attracted no bids despite multiple deadline extensions.

IEEFA energy finance analyst Haneea Isaad modelled various financing conditions to determine an optimum benchmark tariff for Pakistani solar projects, arriving at a range of 4.3 to 5.8 US cents per kilowatt-hour. The existing benchmark of 3.41 USc/kWh was assessed as insufficient given elevated domestic policy lending rates and broader financial instability. Isaad also recommends that shorter power purchase agreements of 15 to 20 years, rather than the current 25-year standard, could offer developers quicker debt repayment and higher short-term returns, while giving the government greater flexibility to renegotiate rates as renewable costs decline.

The report identifies the financial health of the Central Power Purchasing Agency and a shortage of foreign exchange as structural risks that undermine the appeal of Pakistan's renewable energy auctions regardless of tariff levels. The abrupt shift from fixed tariff regimes in 2016 without a transition mechanism damaged investor confidence and left approximately 7 gigawatts of solar and wind projects in limbo for years. Isaad emphasises that good auction design alone cannot substitute for broader market risk mitigation, including credible offtaker guarantees and stable macroeconomic conditions.

Looking ahead, the report argues that as Pakistan's economic credibility improves and the market matures, competitive pressure will naturally drive down bids — removing the need for government support over time. For now, the government must signal its commitment through substantive stakeholder engagement, a pragmatic tariff that allows a reasonable margin for returns, and a balanced risk-sharing arrangement between the Central Power Purchasing Agency and project developers embedded in future power purchase agreement designs. Countries like South Africa and India have achieved strong renewable growth through reverse auctions only after first establishing stable risk environments.

Key figure — 4.3–5.8 USc/kWh — IEEFA's calculated optimum benchmark tariff range for solar power projects in Pakistan