UNIDO Policy Document

Policy Advisory Services in Biomass Technology in PakistanPOLICY ON BIOMASS ENERGY TECHNOLOGY VERSION - FINAL Submitted to UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION Submitted by DEVELOPMENT ENVIRONERGY SERVICES LTD 819, Antriksh Bhawan, 22 Kasturba Gandhi Marg, New Delhi -110001 Tel.: +91 11 4079 1100 Fax : +91 11 4079 1101; www.deslenergy.com May 2017

DISCLAIMERThis report (including any enclosures and attachments) has been prepared for the exclusive useand benefit of the addressee(s) and solely for the purpose for which it is provided. Unless weprovide express prior written consent, no part of this report should be reproduced, distributed orcommunicated to any third party. We do not accept any liability if this report is used for analternative purpose from which it is intended, nor to any third party in respect of this reportClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 2 of 59

ACKNOWLEDGEMENTThis document has been prepared for the United Nations Industrial Development Organization(UNIDO) under the project title “Policy advisory services (Biomass Energy Conversiontechnologies)” under the SAP ID 100333: “Promoting sustainable energy production and use forbiomass in Pakistan”.Development Environergy Services Ltd. (DESL) acknowledges the support provided by thefollowing UNIDO officials:Mr. Alois Mhlanga, Project ManagerMr. Ali Yasir, National Project Manager, Sustainable Energy, Biomass - PakistanMr. Masroor Ahmed Khan, National Project Manager, Sustainable Energy RE & EEStudy Team Dr. GC Datta Roy Mr. R Rajmohan, Biomass technology expertTeam Leader Mr. Qazi Sabir, National expertTeam member(s)Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 3 of 59

CONTENTS1 BACKGROUND ..........................................................................................................................................................82 STATUS QUO...........................................................................................................................................................10 2.1 MACRO PERSPECTIVE.........................................................................................................................................10 2.2 ARE DEVELOPMENT PERSPECTIVES .....................................................................................................................11 2.3 BIOMASS ENERGY POTENTIAL & MARKET.............................................................................................................13 2.4 POLICY & REGULATORY INITIATIVES.....................................................................................................................17 2.5 TARGET & ACHIEVEMENT ...................................................................................................................................20 2.6 SUMMARIZING...................................................................................................................................................203 BARRIERS AND CHALLENGES...............................................................................................................................22 3.1 RESOURCE AVAILABILITY & PRICE........................................................................................................................22 3.2 TECHNOLOGY & BUSINESS MODELS.....................................................................................................................23 3.3 POLICY & REGULATORY UNCERTAINTY.................................................................................................................24 3.4 ACCESS TO FINANCE ...........................................................................................................................................25 3.5 SUMMARIZING...................................................................................................................................................254 GLOBAL CASE STUDIES .........................................................................................................................................27 4.1 MACRO-PERSPECTIVE.........................................................................................................................................27 4.2 ILLUSTRATIVE CASE STUDIES................................................................................................................................30 4.3 SUMMARIZING...................................................................................................................................................365 POLICY RECOMMENDATIONS .............................................................................................................................39 5.1 BASIC FRAMEWORK............................................................................................................................................39 5.2 HARMONIZATION OF INSTITUTIONAL PROCESSES..................................................................................................40 5.3 PROGRAM PLANNING.........................................................................................................................................40 5.4 TECHNOLOGY DEVELOPMENT.............................................................................................................................40 5.5 FISCAL & MONETARY INCENTIVES........................................................................................................................41 5.6 REGULATIONS....................................................................................................................................................42 5.7 PROJECT FINANCING...........................................................................................................................................43 5.8 PROJECT DEVELOPMENT.....................................................................................................................................44 5.9 CAPACITY BUILDING...........................................................................................................................................45 5.10 SUMMARIZING...................................................................................................................................................466 ANNEXES..................................................................................................................................................................49 6.1 ANNEX 1- TERMS OF REFERENCE AND STAKEHOLDERS CONSULTED......................................................................49 6.2 ANNEX 2- BIOMASS RESOURCES AVAILABILITY.....................................................................................................51 6.3 ANNEX-3 BUSINESS CASE EXAMPLES..................................................................................................................57Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 4 of 59

LIST OF TABL ESTABLE 1: BIOMASS ENERGY ECONOMIC BENEFITS....................................................................................................................12TABLE 2: LCOE POWER FROM DIFFERENT SOURCES ................................................................................................................13TABLE 3: AVAILABLE BIOMASS FOR ENERGY GENERATION ........................................................................................................14TABLE 4: BIOMASS ENERGY POTENTIAL ESTIMATE ...................................................................................................................15TABLE 5: SUITABILITY OF TECHNOLOGIES FOR DIFFERENT MARKETS..........................................................................................16TABLE 6: ARE ACHIEVEMENT-2015.......................................................................................................................................20TABLE 7: BARRIER ANALYSIS...................................................................................................................................................25TABLE 8: POLICIES IMPLEMENTED BY VARIOUS COUNTRIES15....................................................................................................29TABLE 9: FINANCIAL INCENTIVE SCHEMES IN CHINA.................................................................................................................31TABLE 10: FINANCIAL INCENTIVE............................................................................................................................................33TABLE 11: BIOMASS POWER IN INDIA.....................................................................................................................................35TABLE 12: SUMMARY OF POLICIES IN SELECT COUNTRIES ........................................................................................................37TABLE 13: SUMMARY OF RECOMMENDATIONS.......................................................................................................................46TABLE 14: SOURCE OF INFORMATION FOR THE FEEDSTOCK FOR BIOMASS POWER GENERATION IN PAKISTAN .............................51TABLE 15: SOURCE OF CROPS PRODUCED IN PAKISTAN...........................................................................................................53TABLE 16: CRR VALUES FROM DIFFERENT SOURCES ................................................................................................................54TABLE 17: CALCULATION OF ESTIMATED ANNUAL SURPLUS BIOMASS PRODUCTION...................................................................54TABLE 18: CALCULATION OF ESTIMATED ANNUAL SURPLUS BIOMASS PRODUCTION...................................................................55TABLE 19: WOOD BASED RESIDUE..........................................................................................................................................55TABLE 20: TOTAL SURPLUS BIOMASS AVAILABLE....................................................................................................................56LIST OF FIGURESFIGURE 1: ENERGY MIX IN POWER GENERATION IN PAKISTAN ..................................................................................................10FIGURE 2: DIFFERENT TYPES OF TECHNOLOGIES AVAILABLE FOR CONVERSION OF BIOMASS TO ENERGY ......................................14FIGURE 3: PROJECT DEVELOPMENT PATHWAY.........................................................................................................................45FIGURE 4: FEEDSTOCK FOR BIOMASS POWER GENERATION ......................................................................................................51FIGURE 5: SEQUENTIAL STEPS FOR THE ESTIMATION OF SURPLUS BIOMASS...............................................................................53Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 5 of 59

ABBREV IATIONS ADB Asian Development Bank AEDB Alternative Energy Development Board AJK Azad Jammu & Kashmir AMC Annual Maintenance Contract ARE Alternative & renewable energy BCT Biomass Combustion Technology BET Biomass Energy Conversion Technologies BGT Biomass Gasification Technology CHP Combined heat and power CDM Clean Development Mechanism CHP Combined Heat & Power CPP Captive power plant CRR Crop Residue Ratio DESL Development Environergy Services Ltd. DISCOs Distribution Companies DG Distributed generation ESMAP Energy Sector Management Assistance Program FBR Federal Board of Revenue, Government of Pakistan FiT Feed in Tariff GEF Global Environment Facility GOP Government of Pakistan GDP Gross Domestic Product IA Implementation Agreement IEA International Energy Agency IEP Integrated Energy Plan INR Indian Rupee IPP Independent Power Plant LNG Liquefied Natural Gas LCOE Levelized cost of energy MTDF Medium Term Development Framework NEPRA National Electric Power Regulatory Authority NGO Non-governmental organization NTDC National Transmission and Dispatch Company O&M Operation & Maintenance PLF Plant Load Factor PKR Pakistan Rupee PPA Power Purchase Agreement PPIB Private Power and Infrastructure Board PPP Public private partnership R&D Research and Development RE Renewable EnergyClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 6 of 59

RET Renewable energy technologyREC Renewable Energy CertificateRPS Renewable Portfolio StandardsSME Small & Medium EnterprisesSRO Statutory NotificationTHB Thai BahtUSC US centsUSD US DollarUNFCCC United Nations Framework Convention on Climate ChangeUNIDO United Nations Industrial Development OrganizationVAT Value Added TaxWAPDA Water and Power Development AuthorityUNITS OF MEASUREMEN TS UOM kCalParameters kWKilo CalorieKilo Watt kWhKilo Watt HourMega Watt MWGiga Watt Hour GWhThousand Metric TonTons per year ‘000t TPYClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 7 of 59

1 BackgroundWith a large population of over 182 million1 and a rapidly developing economy, Pakistan’s energyneeds are potentially huge. The country, historically a net energy importer, is confrontingperpetual energy shortages as its economy and population grow. Pakistan is facing a demand-supply gap of 4,500 to 5,500 MW 2. The stability of the power system is being maintained byresorting to load shedding, often extending to 12 to16 hours. A large number of industries inPakistan are currently dependent on liquid fuels for meeting their electricity and heating needs.Universal energy access is also a major issue in the country. Over 20,920 villages in the countryare yet to be electrified3. Government of Pakistan (GOP) has identified alternative andrenewable energy (ARE) as one of the options for bridging the demand supply gap. AREresources would also help in diversifying the resource base. Pakistan plans to add a minimum of9,700 MW of renewable energy generation capacity by 2030 as per the Medium TermDevelopment Framework (MTDF)4. GOP has initiated number of policy and institutionalmeasures for promoting ARE technologies in the different sectors of economy.Ninety percent (90%) of the entrepreneurs in the industrial sector classified under the SMEsector account for 80% of the employment outside of agriculture and contribute over 40% of thecountry’s GDP5. Shortage of energy, more specifically power has been having major impact ontheir operation and global competitiveness. Large numbers of these units depend uponexpensive and polluting diesel generation units for meeting their power requirement. Industriessuch as rice mills, wood processing mills, brick kilns etc also require heat energy. They are oftenburning fossil fuel/biomass in inefficient ways. SMEs are now looking for alternative ways forimproving their energy security based on locally available energy resources, such as biomass anddeployment of efficient biomass-energy conversion technologies (BET). Such technologies havebeen successfully deployed in a large number of countries such as China, India, Thailand, etc.UNIDO with funding support from GEF is working with GOP or promoting efficient and marketbased biomass energy technologies (BET, excluding biological processes) in industries in Pakistan.Preparation of a set of policy recommendations for promoting BET in industries is a componentof the UNIDO program for which DESL has been contracted as Consultant through aninternational competitive bidding process.The objectives of the consulting assignment are two-fold, viz. review of the current policies onARE and recommendations on specific measures for promoting BET and preparation of a draft ontechnical quality standards for BET for sustainable performance of such technologies (importedas well as locally manufactured) in the country.1 World Bank Data for 20132 National Power Policy 2013, Government of Pakistan3 Energy Access Assessment Punjab (Pakistan), ADB, December 20144 Policy for development of renewable energy for power generation, Government of Pakistan, 20065 TOR of the present projectClient Name UNIDO DESL Project No. 9A0000005647Project Name Policy advisory services in Biomass gasification technology in Pakistan Version 5 -FinalReport Title Recommendations- policy on biomass gasification and combustion technology Page 8 of 59

The scope of work of this assignment, and stakeholders consulted before finalization of thereport are included as Annex-1.This report has been prepared on policy recommendations and structured under the followingsections: • Status quo • Barriers & challenges • Global review-successful case studies • Policy recommendationsThe section ‘status quo’ has been prepared highlighting the current energy scenario and theGOP’s policy initiatives for promotion of ARE technologies. The potential of BET has beenassessed based on the data available from the recently concluded study on biomass availability inthe country. Overall achievement against the set target indicates very low level of diffusion ofARE technologies in the country. A number of barriers & challenges have been identified basedon review of the various policy documents, published papers and articles on BET market inPakistan and informal interaction with few stakeholders. Review of case studies on BETproliferation in China, India and Thailand has helped in identifying specific institutional and policymeasures that can help Pakistan in overcoming the barriers and challenges. Specific policyrecommendations have been prepared taking into consideration the existing policies forpromotion of ARE and lessons learned from successful implementation of BET in the above-citedcountries.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 9 of 59

2 Status quoCurrent overall energy scenario, ARE & BET potential, policies for promotion of ARE technologiesand the actual achievement of ARE capacity against the set target have been discussed in thissection as follows.2.1 Macro perspectiveFossil fuels account for 64% of power generation in Pakistan, followed by 31% from hydrosources and the remaining 5% from nuclear and renewable energy. The Renewable Energy Policyof 2006 had envisaged contribution of about 10% (about 2,700 MW) from renewable resourcesby 2015. However, only a small capacity has so far been added based on wind, solar and bagasse-based power generation. The country is still heavily dependent on imported oil for generation ofpower. Most of the energy intensive industries have captive power generation plants based onoil6. Nuclear LNG Renewables 3% 4% 2% Gas Oil 21% 39% Hydel 31% Figure 1: Energy mix in power generation in Pakistan 7Water and Power Development Authority (WAPDA) of Pakistan indicate that it would not betechnically and economically feasible to expand the national rural networks to large number ofunelectrified villages8. Renewable energy can be used effectively for improving electricity accessin these areas. The proportion of unelectrified villages (as on 2012) is almost 77% in Sindh, 17% inBalochistan, and 3% each in Punjab and KPK.Similarly, high cost of power is adversely affecting the competitive position of the SME industries.The cost of generation from diesel based system is touching over PKR 26/kWh against about PKR5/kWh for the cheaper alternative based on local gas. Government has set a target of reducing6 DESL r esearch7 Power sector in Pakistan – Moving towards stability, presentation by Secretary, Ministry of Water &Power, GOP, at OCCI, Karachi, 8 December, 20158 Energy crisis mitigation through available Energy potential in Pakistan, Waqas Nawaz et al.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 10 of 59

the cost of generation to about USC 10/kWh by 2017 by moving towards cheaper fuel includinglocally available coal and biomasses.Pakistan is richly endowed with renewable resources. Opportunities for solar energy exist all overthe country; wind energy in Sind and Balochistan provinces; Hydropower in north of Pakistan;bio-energy also in all provinces (though limited in Balochistan and KPK). The federal governmentand some of the provincial governments have been working on development andimplementation of appropriate market conditions for promoting renewable energy. The Quaid-e-Azam Solar Park in Punjab province is a major accomplishment of these developmental efforts.Many of the development challenges such as development of technology and local capacity,appropriate tariff, access and cost of finance and other regulatory issues remain largelyunresolved.In case of BET, there is additional challenge of lack of information on availability of resources andtechnology. The recently published biomass atlas with support from ESMAP would help inreducing the information gap. Similarly, the feasibility studies carried out on application ofbiomass gasification technologies (BGT) in rice mills and wood processing in Punjab province inthe recent past would help in specifically target the industries for promotion of BET.With proper policy and coordinated actions from various institutions engaged in development ofpower and renewable energy sectors in Pakistan, it would be possible to rapidly develop the AREmarket including market for BET in the country.2.2 ARE development perspectivesPakistan is abundantly endowed with renewable resources including solar, wind, biomass andothers. Until recently, reliable data and information on resource availability was not available.AEDB with support from bilateral and multilateral agencies have undertaken survey of solar, windand biomass resources in the country. The survey work has been completed and data are beingprocessed for finalizing the resource estimate. Biomass atlas has been very recently released.This would help in assessment of BET potential in the country. Meanwhile, some idea can be hadfrom the following macro level information on the renewable energy potential in the country.Text box 1 : Renewable resource potential • Wind: 340,000 MW (Theoretical)* 1760 MW in pipeline and abundant potential for development • Solar: 2,900,000 MW (Theoretical)* • Hydro (small/mini) 3,000 MW (Approx.) • Bagasse Cogeneration: 2,000 MW (Approx.) • Waste to Energy: 1,000 MW (Approx.) • Geothermal Studies underway • Alternative Fuels Potential being determined*Initial macro level assessment by NREL, USA in 2006AEDB-June 2015Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 11 of 59

The policy makers in Pakistan have long recognized the need for development of ARE. Benefitsare well acknowledged, more so considering the resource rich and energy starved situation. Theintegrated energy plan 2009-2022 (IEP) has highlighted the following benefits from developmentof ARE technologies in Pakistan9.• Energy security & independence• Diversity of supplies• Social cohesion (by deployment in remote, off-grid areas)• Environmental benefits• Job creation• Growth of local engineering industry• Image-building of the country as a socially conscious / responsible nationSimilarly, the policy for development of renewable energy for power generation 2006 (RE policy)has also highlighted role of ARE technology in enhancing:• Energy security• Economic development• Social development &• Environmental improvementThe following table illustrates the magnitude of potential impact of BET system on localeconomic and social development in a resource rich and energy starved country, estimatedbased on a case study from India10.Table 1: Biomass energy economic benefitsParticulars Million PKR /year RemarksRural income-biomass sale & 230,000 INR 1,500 -2,000/T of biomass (Fuel sale plusemployment 140,000 logistics); 2 to 4 man days/year/T of biomassFuel substitution-Agri pumps Estimates by Petroleum Planning and Analysis Cell of Diesel consumption in agriFuel substitution-lighting 140,000 pumps in India NSSO Survey of kerosene based lighting inCarbon monetized 40,000 IndiaReduction in utility T&D loss Not quantified Corresponding to around 200 million tCO2eqReduction in health cost Not quantifiedTotal - 550,000 -9 Integrated Energy Plan-EAC, Ministry of Finance, GOP, March 200910 Draft Biomass energy roadmap-Ministry of New and Renewable Energy, Government of India, 2011Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 12 of 59

The levelised cost of energy from BET system often provides the least cost solution as would beseen from the following table assessed for India.Table 2: LCOE power from different sourcesTechnology LCOE-delivered electricity (PKR/kWh)Small Hydro 7.2Biomass 8.95-11. 72Wind 9.5Solar PV 31.56Diesel 33.41Greater use of indigenous biomass resources can help diversify Pakistan’s energy mix and reducethe country’s dependence on any single source, particularly imported fossil fuels, therebymilitating against supply disruptions and price fluctuation risks.When properly assessed for their externalities, BET options can become economicallycompetitive with conventional supplies, on at least cost basis. This is particularly true for themore difficult, remote, and under developed areas, where biomass can also have the greatestimpact and the avoided costs of conventional energy supplies can be significant.Local environmental and health impacts of unsustainable and inefficient traditional biomass fuelsand fossil fuel -powered electricity generation can be largely circumvented through clean, BETalternatives. Similarly, displaced greenhouse gas emissions carry significant global climate changebenefits, towards which Pakistan has pledged action under the UN Framework Convention onClimate Change (UNFCCC) including, recently ratifying the Paris Climate Change Agreement.2.3 Biomass energy potential & market2.3.1 Availability of biomass resourcesPakistan is richly endowed with biomass resources, though overall energy potential is yet to bescientifically determined. Biomass (other than habitat and animal wastes) resources aregenerated from agricultural, agro industrial and forestry operations. The main constituents fromthe different sources are: • Agricultural-Stalk, straws & trashes • Agro-industrial-Bagasse, paddy husks & shells • Forestry-Wood chips, barks & trims and river side greensMethodologies for assessment of available surplus from the different sources are now wellestablished. Data on actual production of crops, crop residue ratio and current uses of theresidues are used for determination of surplus biomass from the agriculture. Generation of agro-industrial residues such as husk and wood chips can be computed taking into account the actualproduction and the normative residue generation ratios. It would be necessary to carry outClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 13 of 59

primary survey for assessment of availability of riverside green and statistical information onproduction of this may not be available.Energy Sector Management Assistance Program (ESMAP) of the World Bank has carried outdetailed resource mapping for wind, solar and biomass resources. DESL has estimated theavailable surplus biomass, which can be utilized for energy production taking into accountproduction estimates in the ESMAP report and applying various validation factors based on DESLproject experiences. The following table shows the estimate of available biomass for powergeneration.Table 3: Available biomass for energy generationBiomass type Availability (000 tons)Agricultural waste 20,494Agro industrial waste 25,271Wood Based Residue 1,121Total 46,886This estimate has been determined taking into account the information available from thebiomass atlas and the methodology used by DESL for assessment of surplus biomass for energy.Details are provided at Annex-2. This methodology can be used by AEDB and prospectivedeveloped of BET projects for assessment of biomass availability in a particular project area andconfiguration of the plant capacity.2.3.2 Biomass energy conversion technologiesFollowing chart shows different types of technologies for conversion of biomass to differentforms of energy. Technologies for biomass to energyBiochemical Conversion Thermochemical ConversionAnaerobic Ethanol Lignocellulosic Combustion Biomass Biomass PyrolysisDigestion Fermentation Conversion Gasification Figure 2: Different types of technologies available for conversion of biomass to energyIn the context of the current project, combustion and gasification are more relevant. Almost alltypes of biomasses can be utilised as fuel in the combustion based projects. Woody biomass suchas husks and wood chips are good fuel for gasification. Some of the semi woody biomass such ascorncobs and corn stalks can also be used for gasification. Leafy biomass such as straw and stalks,on the other hand, would have to be densified (pellets) for gasification.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 14 of 59

2.3.3 Biomass energy potentialThe energy conversion potential has been assessed considering the following assumptions11:• Harvesting & logistics efficiency: 70%• GCV: 4,000 kCal/kg on dry basis: 3,000 kCal/kg on as received basis• Specific fuel consumption-gasification: 1.8 kg/kWh on as received basis• Specific fuel consumption-combustion: 1.6 kg/kWh on as received basis• Average plant load factor-gasification: 60%• Average plant load factor-combustion: 75%Assuming a ratio of 70:30 between gasification and combustion overall potential has beenestimated as shown in the following table.Table 4: Biomass energy potential estimate Units Values Mn TPY 47Particulars Factor 0.7Biomass surplus estimate Mn TPY 33Harvesting, logistics efficiency Mn TPY 23Net available for conversion Mn TPY 10Gasification@70% GWh/yCombustion@30% GWh/y 12,767Energy-gasification GWh/y 6,156Energy-combustion 18,923Energy-total MW 2,429Power-gasification MW 937Power-combustion MW 3,366Power-totalThe potential from biogas and waste to energy has been assessed at 1,000 MW. Bagassecogeneration potential (partially included in the estimate at table above) has been assessedbetween 1,000-3,000 MW as per different reports12. The above estimate includes rice husk,which can alone contribute around 375 to 850 MW power after meeting the captive demand ofthe farmers and rice mills13. Considering all the different resources including bagasse, other agroand agro-industrial residues and biogas, the overall BET potential is likely to be 4,000 to 6,000MW.11 DESL database on BET projects12 As per discussion with PSMA, out of 86 sugar mills in Pakistan, crushing around 50 million tons of caneper year, 5 are reported to be operating with high pressure systems. 20 mills are reported to be in variousstages of implementation.13 UNIDO Contract No 3000021581 (Amir Rice Mills) and 3000021527 (KDC Plywood)Client Name UNIDO DESL Project No. 9A0000005647Project Name Policy advisory services in Biomass gasification technology in Pakistan Version 5 -FinalReport Title Recommendations- policy on biomass gasification and combustion technology Page 15 of 59

2.3.4 Biomass energy marketThe market for biomass energy includes:• IPPs• Captive power, cogeneration and CHP in industries• Captive heating for industries• Grid connected& off-grid distributed energy systemThe market and business model for bagasse cogeneration has been established in most of thecane sugar producing countries including Pakistan. As per latest information available in thepublic domain, three such projects with combined capacities of over 50 MW are alreadyoperating. Project capacity of as low as 1 (One) MW can be a viable option under IPP model. 10(ten) MW is usually the higher limit taking into account the fuel logistics and hence delivered costof fuel. Technologies and business models for such IPPs based on straw and stalks have been wellestablished in China and India and can be easily replicated in Pakistan.The energy demand for SME industries like rice mills, plywood-processing industries in Pakistanwere evaluated by the consultant under a previous assignment from UNIDO. The followingproject modules were identified as feasible option based on gasification technology.• Rice milling industry: 25 kW -1,050 kW• Plywood industry: 100 kW – 300 kWElectricity demand for villages has been assessed considering average 50-60 households pervillage and electricity consumption of 50 to 120 kWh/day14. The capacity of a BGT system to suittheir requirements has been estimated to range from 25 to 75 kW. Thus, the BET market is likelyto be quite diverse in nature with individual project capacities ranging from 25 kW to over 1 MWand based on both combustion and gasification technologies.Table 5: Suitability of technologies for different marketsMarket segment Typical size of power demand (kW) Technology suitability BCTIndependent power plants Minimum size for BCT 1 MW BGT & BCTIndustries (Captive power Rice mill – 25 - 1,050 kW BGTdemand) Plywood Industry – 100 - 300 kWUn-electrified villages 25-75 kW/villageIn the short-term period, it is expected that the uptake of the BGT/BCT technologies would takeplace in the industries generating biomass resources (like rice mills, wooden furniture/plywoodindustry etc.). Diffusion of BGT for rural distributed generation (DG) system on the other hand14 Energy Access Assessment Punjab (Pakistan), ADB, December 2014 and “Electrification of villages: A casestudy of Mastung village near Quetta (Pakistan)”, Syed Zafar Ilyas, S.M. Nasir and S. M. Raza, ResearchGate, April 2015Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 16 of 59

may take time and would be largely governed by support from the government and the NGOcommunity and rural energy supply companies, which may get formed with fund support fromglobal donor communities.2.4 Policy & regulatory initiativesPolicy makers in Pakistan have duly recognized the important role of renewable resources andARE technologies. This is evidenced by the continued development of the institutional and policyand regulatory processes for promoting ARE technologies. Some of the key initiatives include:• NEPRA Act-1997• Policy for development of renewable energy for power generation-2006• Bagasse cogeneration policy-2008• Integrated energy plan-2009-2022• AEDB Act-2010• Framework for Cogeneration-2013• Provisions in the Finance Act-20152.4.1 Institutional mechanismThe roles and responsibilities of the various players involved in developing the energy system inthe country and promotion of ARE technologies have been clearly defined in the various Acts &policy documents. These are briefly summarized as follows.Ministry of Water & PowerThe federal Ministry of Water and Power is the GOP’s executive arm for all issues relating toelectricity generation, transmission & distribution, pricing, regulation, and consumption in thecountry. It exercises this function through its various line agencies as well as relevantautonomous bodies. It also serves to coordinate and plant the nation’s power sector, formulatepolicy and specific incentives, and liaise with provincial governments on all related issues.National Electric Power Regulatory AuthorityThe National Electric Power Regulatory Authority (NEPRA) was established under an act of theParliament (Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997,also known as the ‘NEPRA Act’) to function as an independent regulator and ensure atransparent, competitive, commercially oriented power market in Pakistan.The authority’s main functions include, inter alia, issuing licenses for generation, transmissionand distribution of electric power; establishing and enforcing standards to ensure quality, safetyand proper accounting of operation and supply of electric power to consumers; approvinginvestment and power acquisition programs of the utility companies; and determining tariffs forbulk generation and transmission and retail distribution of electric power.Alternative Energy Dev elopment BoardAlternative Energy Development Board (AEDB) is the sole representing agency of the FederalGovernment. AEDB was established in May 2003 with the main objective to facilitate, promoteClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 17 of 59

and encourage development of renewable energy in Pakistan and with a mission to introduceAlternative and Renewable Energies (AREs) at an accelerated rate. The administrative control ofAEDB was transferred to Ministry of Water and Power in 2006.AEDB is tasked with implementing government policies and plans, developing projects,promoting local manufacturing, creating awareness and facilitating technology transfer,channeling international assistance, and coordinating all associated activities as the nationalfacilitating agency for development of renewable energy in the country.Private Power In frastructure BoardThe Private Power and Infrastructure Board (PPIB) was created in 1994 as \"one windowfacilitator\" to promote private sector participation in the power sector of Pakistan. PPIBfacilitates investors in establishing private power projects and related infrastructure, executesImplementation Agreement (IA) with project sponsors and issues sovereign guarantees onbehalf of the Government of Pakistan.Provincial and AJK AgenciesProvincial and Azad Jammu and Kashmir (AJK) governments support the implementation ofrenewable energy projects within their geographical jurisdiction. In most of the provinces,institutional structure is well established and working on target oriented programs. Some ofthese programs are initiated at the province level or in collaboration with the AEDB.Power UtilitiesElectricity utilities in Pakistan comprise four generating companies (Southern, Central, Northern,and Lakhra), WAPDA Hydel wing and ten separately corporatized distribution companies(DISCOs: Lahore, Gujranwala, Faisalabad, Islamabad, Multan, Peshawar, Hyderabad, Quetta,Sukkur and Tribal Areas) serving different regions of Pakistan and a private integrated company,the Karachi Electric Supply Corporation (KESC), serving the Karachi metropolitan area.2.4.2 Transparency in regulationsEstablishment of NEPRA and promulgation of NEPRA Act 1997 has cleared the pathway forregulation of the power sector in the country in a transparent manner. Promulgation of AEDB Act2010 has further clarified the processes for regulation of the development of ARE technologies.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 18 of 59

Text box 2 : Regulations & incentives • Resource Risk is not shifted to Project Sponsor • Guaranteed Electricity purchase • Grid provision is the responsibility of the Power Purchaser • Protection against political risk & change in law • Attractive Tariffs – Cost Plus and Upfront Tariff Regimes • Guaranteed Return on investment is between 17% to 18% (IRR) • No Import Duties on Equipment • Zero Sales Tax • No Income Tax / withholding tax / turnover tax • Convertibility of PKR into USD AEDB-June 2015Regulatory processes have been well established for determination of tariff for different types ofARE projects. Feed-in-tariffs for smaller scale solar PV projects have been notified by the NEPRA.Utilities are now mandated for purchase of all the energies available from the renewableresources. Regulations on grid connectivity, wheeling and banking of power too have beennotified. Net metering has been notified for solar PV projects.Monetary & fiscal incentivesThe integrated energy plan, 2009-20229 had recommended creation of an alternative energyfund and development of soft financing scheme for ARE projects. It also recommended incentivesto the provincial, city and local governments for development of ARE projects.The Renewable Energy Policy, 2006 foresees that a market would be developed in the long runfor ARE technologies, which would be competitive against the conventional energy projects ontheir own merits. However, in the shorter term it provides for incentives consisting of:• Risk mitigation against resource uncertainty (particularly for wind projects)• Production incentives beyond benchmark output• Facilitating monetization of carbon• Payment securitization by the Government of Pakistan for the private sector investors• Permitting generating companies to issue corporate bonds• Permitting issuance of share at discounts to equity investors/venture capitals• ARE technologies have also been exempted from custom duty, sales tax, income tax including turnover tax and withholding tax on imports.The Financing Act 2015 provides for duty free import of large number of equipments andcomponents for development of ARE projects in the Solar, Wind & Geothermal segments. It alsoprovides for concessional duty for some equipment such as harvesting, threshing and storageequipments, which are normally required for larger scale BET projects. The Act also provides forinclusion of any other item approved by AEDB & concurred by FBR.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 19 of 59

Repatriation of equity and dividends are freely allowed subject to approval of State Bank ofPakistan.2.4.3 Project development alternativesPolicy on development of projects under different modes (IPP, grid connected CPPs, off-grid CPPs& other projects) has been clearly outlined in the RE policy 2006. Currently, only IPPs requirelicensing from government. The policy also provides for de-licensing of small-scale projects (<5MW for small hydro and <1 MW net export for others).Development options for IPPs too have been well structured under the solicited and unsolicitedcategories. AEDB has been empowered to provide one-window facility for project developmentand regulatory powers for the same subject to approval of the rules from the Government.The integrated energy plan envisages initiatives from public sector for development of pilot anddemonstration projects as well as off-grid projects for rural electrification. AEDB too has beenempowered for setting up such projects on its own or through PPP models.Procedure and processes for bid evaluation, selection and implementation of bid projects havebeen established and several projects already implemented.2.5 Target & achievementThe Integrated Energy Plan 2009-22 envisaged achieving 12% of the energy pie from therenewable resources by 2012 and induction of 17,400 MW power to the grid from solar and windpower by 2022. The policy for development of renewable energy for power generation (2006)had fixed a more modest target of 9,700 MW by 2030 in the medium term framework. As againstthese targets, about 400 MW projects have been set up by 2015 contributing to about 1.6% ofthe overall installed capacity.Table 6: ARE achievement-2015Source MW GWh % (MW) % (GWh) 32,074 28.3% 33.50%Hydro 7,115 58,177 66.1% 60.77% 4,996 3.9% 5.22%Thermal 16,600 457 1.0% 0.48%Nuclear 987 26 0.4% 0.03% NA 0.2%ARE 95,730 100% NA 483 1.6% 100%Wind 256 0.5%Solar 100Bagasse 51Total 25,109ARE-total 4072.6 SummarizingIt can be concluded that large number of policy and regulatory measures have been initiated fordevelopment of the ARE technologies in the country. The institutional framework is also there fordevelopment of the sector. The focus of the various measures so far has been solar and wind.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 20 of 59

Even for solar and wind, actual achievement so far is very small compared to the potential. Thebiomass energy is yet to make a beginning. The current scenario in Pakistan is not unique. Almostall countries have faced similar situations in the initial phase of development due to number ofbarriers faced against development of market for ARE technologies. Some of the barriers areuniversal and some country specific. It becomes critically important to identify such barriers in anongoing manner and take action for overcoming the same.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 21 of 59

3 Barriers and challengesMajor barriers & challenges are faced in developing market for ARE technologies, more so forBETs due to number of real and perceived risks such as: • Resource availability & price • Untested technology & business models • Policy & regulatory uncertaintyBET projects are also considered less attractive by Bankers/Equity & Venture funds due to severalfactors such as: • Lower scalability • Smaller project investment size • Higher cost of transaction for loan processingMajor financing barriers are therefore, faced by BET project developers. Text box 3 : Financing barrier Different RETs have different degrees of exposure to the various identified barriers and risks. Barriers are created by underdeveloped financial markets. Examples of barriers include lack of long-term loans, high financing costs, high transaction costs, and poorly capitalized developers. Risks refer to the high risks and costs of RETs. They include cost competitiveness, technology risks, regulatory risks specific to making RETs competitive, and resource risks. The paper considers how well different financing instruments address different barriers and risks. The list of instruments covered includes grants, equity, debt, asset-backed classes, guarantees, and insurance as well as more targeted categories such as results-based financing, carbon financing, and small-scale project financing. Financing renewable energy-World Bank/Climate investment fundsFor Pakistan, these issues have to be contextualized better for development of targeted policyand regulatory measures for promotion of BETs.3.1 Resource availability & priceRisk profile of a biomass project varies widely depending upon the biomass sourcing option andquantitative requirement. It is negligible for bagasse cogeneration project as the entire quantityof resources is available from internal operation. This would be somewhat true for rice mills solong the entire requirement is met from the internal milling operation. For smaller villageprojects, too, the risk is low as the requirement can be mostly met locally, though pricing issuescould arise. For the IPPs, on the other hand, this risk is high as the entire quantity of fuel issourced from outside and mostly through informal arrangement. Seasonality of availability ofagricultural residues poses yet another challenge. The requirement for the entire year has to beClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 22 of 59

procured in a short time during the harvesting season and stored for utilization during the wholeyear.Almost the entire quantity of paddy husks and wood chips are being currently utilized in boilersand furnaces in the SME industries in Pakistan. Surplus from these sources can be generated onlyby improving efficiencies of the existing systems. Opportunities for the same exist but wouldrequire investment in upgradation.Plentiful straws and stalks are available. Harvesting and logistics management systems for thesewould have to be developed. In absence of an existing market, farmers are unlikely to makeinvestment for this. IPP projects would have to therefore, take into account investment in fuelmanagement system in addition to the power plants. This would potentially increase the riskprofile of the projects.IPPs therefore, face multiple risks such as availability, management of logistics, price escalationand storage degradation. The Consultants has prepared and submitted a separate report onbiomass management and pricing.3.2 Technology & business modelsBiomass combustion technologies for fuels such as paddy husk and wood chips are matured andlarge numbers of such plants are operating all over the world. SME industry in Pakistan too isusing these fuels in low-pressure boilers, though at much lower efficiencies. Gasificationtechnology for wood chips is well established. Technology for gasification of husks has also beendeveloped and numbers of such plants are operating in China, India, and Thailand. Technologyfor stalk gasification has been developed mainly in China. Very large numbers of rural energyprojects are being operated for supply of heat and a few supplying both heat and power.Technology for energy production from straw is still going through the learning curve. The firstsuch commercial project on straw outside of Europe was developed in India about a decade back.Few such projects are operating mostly in the northern States of Punjab and Haryana. In therecent past, China has made rapid stride in developing straw firing technology. Large numbers ofsuch projects with individual capacity ranging from 8 to 12 MW have been operating successfullyin paddy and wheat growing provinces.Strong collaboration between the research & development institutions and the localmanufacturing industries with support from Governments has been mainly responsible forsuccess in developing such technologies in China, India & Thailand. Such collaborationarrangements have also helped in developing local capacity for servicing such projects, one of thekey condition precedents for sustainability of operation.Business models for IPPs have been well established in Pakistan. It should be possible to replicatethe same for BET based IPPs too. However, such models do not exist for other types of projects.This would require development of technical and financial capacities of all the stakeholdersinvolved in promoting and developing BET businesses.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 23 of 59

Rural distributed generation projects would face even more challenges as have been experiencedin India. Some of the major issues that have to be addressed are: • Ownership models • Operation models • Regulations • Pricing of resources & delivered energy • Affordability • Willingness to pay • Cash flow3.3 Policy & regulatory uncertaintyReview of the policy and regulatory framework indicates existence of few gaps that have to beaddressed for faster diffusion of ARE & BET. Tariff issue may remain as the single most importantregulatory barrier. Government seems to have the final say in determination of tariff as would beseen from the following provision of the NEPRA Act 1997 on power of the NEPRA.Section 7 (3) (a)“Determine tariff, rates, charges and other terms and conditions for supply of electric powerservices by the generation, transmission and distribution companies and recommend to theFederal Government for notification”.Similarly, the provincial Governments have been empowered to notify tariff for projectsimplemented within the jurisdiction of Provinces.Feed-in-tariff (FiT) has been notified only for solar and bagasse cogeneration projects. Theupfront tariff for bagasse based cogeneration is fixed the price of bagasse linked to imported coalbased on the BTU value of each fuel. Imported coal is known to have volatile price movements.If the same principle is applied to biomass, this can create both economic and social problem-feeling of uncertainty amongst investors in projects and non-acceptance of reduction in price byfarmers.Transparent guideline of process of tariff determination and regulations are yet to beestablished. This issue would be even more complex for BET projects. Regulators would find itdifficult to determine the fuel prices for BET projects in absence of a formal market for biomassresources.AEDB Act 2010 does not provide enough administrative and financial power to the Board forpromoting ARE technologies. AEDB can as best play the role of a facilitator. IPP projectdevelopers would have to go through the existing procedures and processes applicable forconventional projects. Developers of small-scale BET projects would find it extremely difficult andcumbersome to go through such processes for getting various permits and clearances.Historically, power purchase agreements are reported to be abruptly terminated, and developerswould like all uncertainties about reliability of agreements to be removed.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 24 of 59

The mechanisms for inter-institutional coordination have not been articulated in the relevantdocuments. This concern has been highlighted in the IEP document-“If a Ministry of Energycannot be formed then a high powered body with legislative powers, authority and necessaryempowerment and resources should be established at the earliest to drive Pakistan’s energydevelopment in the right direction and in the most optimum way possible”.It has also been highlighted that most of the institutions involved in developing the ARE marketdo not have adequate capacity to undertake the policy development and implementation relatedactivities.3.4 Access to financeBET project developers in Pakistan would find it difficult to finance such projects even if all thepolicy and regulatory aspects are addressed. This has been the experience in both China andIndia in the initial development stages.The IEP9 had made several recommendations for creating an enable environment for financingof such projects. These included both financing and market mechanisms such as: • Financing mechanisms o Alternative energy fund for setting up pilot projects & soft financing of demonstration & R&D projects o Monetary incentives to provincial, city and local governments for RET projects • Market instruments o RET obligation for utilities o RPS for DISCOs o Mandatory use of feasible RET projects in the Government & public sector buildingsAEDB Act has also provision for implementation of projects by AEDB on its own or in partnershipwith private sector. These policy- intents are yet to be converted to implementable actionagenda.3.5 SummarizingDESL has been involved in policy related as well as project development work in the BET domainglobally including in China and India. The potential impact of the barriers discussed above on theimplementation front has been assessed for Pakistan as shown in the following table.Table 7: Barrier analysis Off-Grid rural electrification IPP using Captive power generation using BGT BCT using BGTParameters Medium High MediumResources (Biomass) High Low HighAvailability &certaintyTechnology AvailabilityClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 25 of 59

Parameters Off-Grid rural electrification IPP using Captive power generation using BGT BCT using BGT Service High Low MediumBusiness modelsPrice of High High Lowelectricity/tariffCash flow High Medium LowPolicy & regulatory High High Low Processes Low High Low Regulatory High High MediumAccess to financeHistorically, every country has faced similar barriers. The following section of the report providesa highlight on how different strategies have been adopted all over the globe for addressing suchbarriers and challenges.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 26 of 59

4 Global case studies4.1 Macro-perspectiveGlobal renewable energy markets have grown rapidly in the past decade. Renewable energyprovided an estimated 19.1% of global final energy consumption in 20134. This growth has beendriven by supportive national and local policies. Declining costs have also played a significant rolein the expansion of renewable energy deployment in recent years. The global policy landscapehas driven the expansion of renewable energy technologies by attracting investment andcreating markets that have brought about economies of scale and supported technologyadvances.Since 2004, the number of countries promoting renewable energy with direct policy support hasnearly tripled, from 48 to over 140, and an ever-increasing number of developing and emergingcountries are setting renewable energy targets and enacting support policies. The mostcommonly used policies and their scope in brief are as follows15:• Resource mapping: Use of technology for real time mapping of available energy resources• Regulatory instruments o Feed-in premium: a type of feed-in policy, where producers of electricity from renewable sources sell electricity at market prices, and a premium is added to the market price to compensate for higher costs and, thus, to mitigate the financial risks of the production from renewables. o Feed-in tariff: the basic form of feed-in policies, where a minimum price (tariff) per unit (normally kWh or MWh) is guaranteed over a stated fixed-term period when electricity can be sold and fed into the electricity network, normally with priority and guaranteed grid access and dispatch. o Net metering: a regulated arrangement in which utility customers who have installed their own generating systems pay only for the net electricity delivered from the utility (total consumption minus on-site self-generation). o Mandate/obligation: a measure that requires designated parties (consumers, suppliers, generators) to meet a minimum, and often gradually increasing, target for renewable energy, such as a percentage of total supply or a stated amount of capacity.• Market instruments o Renewable energy certificate (REC): a certificate awarded to certify the generation of one unit of renewable energy (typically 1 MWh of electricity, but also less commonly of heat).15 KPMG:Taxes, incentives for renewable energy, 2014Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 27 of 59

o Renewable energy target: an official commitment, plan or goal set by a government (at the local, state, national or regional level) to achieve a certain amount of renewable energy by a future date. o Renewable portfolio standard (RPS): an obligation placed by a government on a utility company, group of companies or consumers to provide or use a predetermined minimum renewable share of installed capacity, or of electricity or heat generated or sold;” RPSs often include tradable certificates, and they are referred to as tradable green certificates (TGC systems) in Europe• Monetary & fiscal incentives o Capital subsidy: a subsidy that covers a share of the upfront capital cost of an asset (such as a solar water heater). o Fiscal incentive: an economic incentive that provides individuals, households or companies with a reduction in their contribution to the public treasury via income or other taxes, or with direct payments from the public treasury in the form of rebates or grants. o Investment tax credit: a taxation measure that allows investments in renewable energy to be fully or partially deducted from the tax obligations or income of a project developer, industry, building owner, etc. o Production tax credit: a taxation measure that provides the investor or owner of a qualifying property or facility with an annual tax credit based on the amount of renewable energy (electricity, heat or biofuel) generated by that facility.A study on ‘Taxes, incentives for renewable energy’ by KPMG describes the taxes and incentivesprovided by various countries around the world to promote renewable energy from wind, solar,biomass, geothermal and hydropower. These policies also support other areas such as increasedenergy efficiency, smart-grid management, bio-fuels, carbon capture systems and storagetechnologies. It includes an introduction about global trends in renewable energy, a summary ofinvestments in renewable energy, and a brief outline of renewable energy promotion policies inthe countries.[The policies implemented by the countries are classified into five sections, High Income Countries,Upper Middle Income, Lower Middle Income, Low income countries along with policies in sixSouth Asian Countries. This is based on World Bank’s classification of world's economies on theestimates of gross national income (GNI) per capita for the previous year that determines thelending eligibility. As of 1 July 2015, low-income economies are defined as those with a GNI percapita of $1,045 or less in 2014; middle-income economies are those with a GNI per capita ofmore than $1,045 but less than $12,736; high-income economies are those with a GNI per capitaof $12,736 or more. Lower-middle-income and upper-middle-income economies are separated ata GNI per capita of $4,125.]The incentives to deploy renewable technologies depend in part on a country’s socio-economicsituation. Industrialized and emerging economies may be keen to de-carbonize their energyClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 28 of 59

system or to improve energy security. Least Developed Countries, whilst sharing suchmotivations, are likely to be more concerned with improving human development, whichinvolves increasing rates of energy access. Many Least Developed Countries have deployed RETsas a cost-effective means of electrifying parts of their territoryThe following table encloses the policies implemented by various countries:Table 8: Policies implemented by various countriesType of Incentive No. of countries with full/partial (% of population) High Upper Lower Low South Pakistan Yes Income Middle Middle Income Asian Yes Yes Countries Income Income Countries Countries (43) Countries Countries (24) (6) (41) (30)Renewable energy 41 (95%) 34 (83%) 25 (83%) 17 (71%) 6 (100%)targetsRegulatoryPoliciesFeed-in-tariff/ 27 (63%) 21 (53%) 16 (53%) 5 (21%) 4 (67%)premium paymentElectric utility 16 (37%) 6 (15%) 6 (20%) 1 (4%) 2 (33%)quotaobligation/RPSNet Metering 17 (40%) 13 (32%) 13 (43%) 0 (0%) 3 (50%)Tradable REC 20 (47%) 3 (7%) 3 (10%) 0 (0%) 1 (17%)Tendering 21 (49%) 18 (44%) 13 (43%) 3 (13%) 3 (50%)Heat obligation/ 10 (23%) 5 (12%) 3 (10%) 1 (4%) 1 (17%)mandateBiofuels 29 (67%) 18 (44%) 9 (30%) 7 (29%) 2 (33%)obligations/mandateFiscal incentivesand publicfinancingCapital subsidy or 28 (65%) 13 (32%) 11 (37%) 6 (25%) 4 (67%)rebateInvestment or 15 (35%) 11 (27%) 9 (30%) 2 (8%) 2 (33%)production taxcreditsReductions in 28 (65%) 24 (59%) 20 (67%) 19 (79%) 3 (50%)sales, energy, CO2,VAT and othertaxesEnergy production 9 (21%) 5 (12%) 6 (20%) 2 (8%) 2 (33%)paymentPublic investment, 25 (58%) 21 (51%) 12 (40%) 9 (38%) 5 (83%)Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 29 of 59

Type of Incentive No. of countries with full/partial (% of population)loans or grants High Upper Lower Low South Pakistan Income Middle Middle Income Asian Countries Income Income Countries Countries (43) Countries Countries (24) (6) (41) (30) • At least 164 countries had renewable energy targets. • At least 145 countries had renewable energy support policies in place. • Low income, lower middle income as well as upper middle-income countries feature fastest policy uptake during the last decade.4.2 Illustrative case studiesDevelopment in China, India and Thailand has been taken up for more detailed analysis for theirrelevance for developing BET in Pakistan.4.2.1 ChinaChina leads the world in total non-hydropower renewable energy capacity, with 70 GW installednation-wide (excluding hydropower) by the end of 2011. The incredible growth of China’srenewable energy sector is due in large part to intentional and calculated action and will on partof the government. Government of China has catalyzed the development by undertaking severalactions in parallel. Major interventions include setting a legal framework through the 2006renewable energy law, articulating time-bound goals on RE deployment including diversifying itsenergy mix, developing technology and manufacturing base, remunerative tariffs and payment offair price to the biomass producers.In 2005, the government sent a clear signal that renewable energy development was a priority bysetting a target of 30GW of renewable energy by 2020. More recently in 2011, after farsurpassing its 30GW target, the government has reconfirmed its dedication by increasing thenumber of its technology specific installation targets.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 30 of 59

Text box 4 : Biomass power in ChinaBased on the medium- to long-term development planning of renewable energy, Chinese CentralPeople’s Government has proposed the development goals for biomass power generation: by2010, its installed capacity would be 5.5 GW (equivalent to generating capacity of 27.28 billionkWh); by 2020, its installed capacity will be 30 GW (equivalent to generating capacity of 148.8billion kWh). According to the “12th Five-Yea r Plan” of renewable energy, the development goal ofbiomass power generation capacity has been determined, to be 13 GW during the next 5 years(2010–2015). Based on the target of the planning, biomass power generation is more popular thanphotovoltaic power generation in China In April 2011, the Ministry of Finance People’s Republic ofChina (MFPRC), the National Energy Bureau (NEB) and the Ministry of agriculture of the People’sRepublic of China (MAPRC) together issued the “In terim Measures on assistance fund managemen tof green en ergy demonstration counties”. According to the Interim Measures, all of the “greenenergy demonstration counties” will be subsidized with a total of $ 3.9 million, mainly for biogasgeneration, biomass power generation projects and so on. According to the goal of “building 200green energy demonstration counties by 2015”, biomass industry will receive a huge investment ofmore than $ 3.1 billion.Development goal of China’s 30 GW Biomass po wer-Science direct, Sept 2013Technology development is a thrust area in the BET program in China. Every province has atechnical institute dedicated to development of technologies for conversion of locally availablebiomasses and transfer of these technologies to the manufacturing companies. This has helpedChina to become the most advanced technology supplier for BETs including for combustion,gasification and waste-to-energy technologies. Financial incentive has been used as a strongpolicy tool by China as would be seen from the following table.Table 9: Financial incentive schemes in ChinaYear Law & Regulation Project1999 Notice on issues of Infrastructure loan for power generation 2% Finance discount further supporting the projects of renewable energy which are Free funding ;development of arranged by bank Interest payment on loans (interestrenewable energy rate<3%)2006 Renewable Energy Projects of poor profitability and strong Establishing the Law public welfare. The projects in the guiding relevant special fund for developing catalogue for industrial development of circular economy national renewable energy or the item meeting the credit qualifications2009 Circular Economy Comprehensive utilization andPromotion Law of the development of straw and gasPeople’s Republic ofChinaSnapshot of the various components of China’s policy is as under:Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 31 of 59

Administrative • Mandatory market share (MMS): The National Development & Reform Commission (NDRC) introduced mandatory market share (MMS, or “renewable portfolio standards”. In regions served by centralized power grids, the share of power generation form non- hydro renewable sources should reach 1% of the total by 2010 and 3% by 2020 according to the plan. • Renewable Energy Targets: Significantly increased renewable energy targets would be set for grid companies to provide more incentives to purchase renewable electricity. • The National Energy Administration (NEA) was given the responsibility of monitoring compliance on a monthly basis.Fiscal/Monetary • Government financial support for renewable energy projects: The Chinese government also supports renewable energy projects by providing financial subsidies. Financial funds/allowance: Special funds are made available to facilitate the development of renewable energy relating to the following activities: o Scientific and technical research, standardization processes and model engineering projects o Renewable energy projects in rural and pastoral areas o Construction of stand-alone electricity generation system in remote areas and islands o Renewable energy resource surveys, evaluation and construction of information systems o Localization of manufacturing facilities used in the renewable energy sector.  Financial subsidies for the development of “Model County for Green Energy” program for the following qualified projects in rural areas: o Concentrated provision of methane gas projects o Biomass gasification projects o Biomass briquette projects o Other projects that develop and utilize renewable energies o Rural energy service system. • China is encouraging local renewable equipment manufacturers through a range of tax exemptions as well as direct financial support • Corporate Income Tax (CIT): A reduced CIT rate of 15 percent is granted to qualified advanced and new technology enterprises. • The Clean Development Mechanism (CDM) Fund is exempted from CIT on some specific IncomeRegulatory • Tariff based support mechanisms for power generation from renewable energy sources: Two main methods have been adopted—competitive tendering (government- guided pricing; an auction mechanism) and FiTs (government-fixed pricing).Market mechanismClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 32 of 59

• Renewable energy certificates would be used to track the fulfillment of targets, but the certificates had not yet been made tradable.4.2.2 IndiaIndia has made rapid stride in developing renewable energy with over 28GW of installed capacity(excluding hydropower) and representing the world’s 3rd largest renewable energy market (USAand China being the first and second). India is the only country in the world to have a dedicatedministry (Ministry of new and renewable energy-MNRE) to deal with development of RETs acrossthe country. The provinces have also their own designated renewable energy developmentagencies, who work closely with MNRE for development of RETs in the respective provinces.India has also a specialised financial institution, Indian renewable Energy Development Agency(IREDA) directly under MNRE for funding of RET.MNRE has been working with various technical and management institutes for resourceassessment studies and development of technologies. Amongst the major initiatives in the BETdomain, include: • Preparation and regular updating of biomass atlas for the entire country • Spearheading several technology development programs such as biomass gasifiers, biogas, biofuels • Development of demonstration and pilot projects in cooperation with global agencies • Supporting development of innovative business models for rural distributed generation system • Supporting development of energy crops/plantation pilotAt the national level, renewable energy generation is facilitated through a combination ofincentive mechanisms, which include tax incentives, generation based incentives, capitalsubsidies, grants, rebates, public investment. Government of India has been providing financialincentive (though much lower compared to China) for promoting RE market particularly in theremote areas. The incentives offered by Government of India for BGT based off-grid ruralelectrification projects are as follows:Table 10: Financial incentive16 Incentive INR 15,000 per kW Parameters To the project developer INR 150,000 per 50 kW Distributed / off grid power projects in rural areas and grid connected power projects with 100% producer gas engines or biomass based combustion projects Biomass gasifier projects for distributed / off-grid for rural areas and grid connected16 “Biomass Gasifier based Programmes”, Government of IndiaClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 33 of 59

Parameters Incentivepower projects for ensuring regularavailability of biomass, provision ofcollection, processing and storage andO&M including compulsory AMC for 5years after guarantee period.Support towards lighting devices and Financial support to a maximum of 3 km i.e.distribution network INR 300,000 per project (@ INR 100,000 per km).To the project developer and otherstakeholders:Support towards project formulation Financial incentives of INR 5,000 per project to the banks /financial Institutions, manufacturers, promoters, consultants & service providers for developing firmed up and bankable proposals for a minimum of 10 projects or above.Service charges for Verification and INR 10,000 per 100 kW subject to maximum ofCertification INR 100,000 for a project of 1 MW capacity. Minimum service charge -INR 10,000/- per siteHRD & Training• O&M Technician’s Course - @ INR 200,000 per course• Gasifier Entrepreneur - @ INR 300,000 per course Development Course - Maximum upto INR 300,000• Awareness promotions such as organization of seminars, business meets, workshops etc.Support for gasifier manufacturers / INR 500,000 (One-time funding)suppliers for establishing service centers inareas where cluster of systems, minimum10, have been set up in one district /region.Under the Decentralized Distributed Generation program, the villages declared to remain as off-grid would be planned for off-grid electrification on solicited basis with an incentive of 90% of thecapital cost. Under this scheme, there is more clarity about the coverage of electrification in theproject (i.e. households and common facilities like street lights, schools, community buildingsPanchayat Bhawans, etc.17 Renewable energy development in the country has been guided bytargets set forward in Five Year National Plans, as well as the National Action Plan on ClimateChange (NAPCC). For the 12th 5-year plan (2012-2017), a target of an additional 30 GW of grid-interactive renewable power has been put forward. Biomass power sector had also been growingrobustly until about 2012. There has been slow down after that due to collapse of the CDM17 Guidelines for village electrification through Decentralised Distributed Generation (DDG)– Scheme ofRural Electricity Infrastructure and Household electrificationClient Name UNIDO DESL Project No. 9A0000005647Project Name Policy advisory services in Biomass gasification technology in Pakistan Version 5 -FinalReport Title Recommendations- policy on biomass gasification and combustion technology Page 34 of 59

market as well as poor off-take of RECs by the Utilities. Current installed capacity is close to 6000MW including power and heat and estimated off-grid system of total capacity close to 1000 MW.Table 11: Biomass power in India 18 Achievements (capacity in MW)Sector (as on 31.03.2016)I. Grid Interactive Power (Capacities in MW) 4,831. 33Biomass Power (Combustion, Gasification and Bagasse Cogeneration) 115.08Waste to Power 4,946.41Sub-total Grid InteractiveII. Off-Grid / Captive Power (Capacities in MWe) 651.91Biomass (non bagasse) CogenerationBiomass Gasifiers 18.15· Rural 164.24· Industrial 160.16Waste to Energy 994.46Sub-total Off-Grid 5,940.87Total Biomass Based PowerIndia’s Electricity Act, 2003 has laid a very strong foundation for development of market forrenewable energy and energy efficiency technologies. The Regulators have been empowered totake required measures for promoting RETs independent of Government. The central electricityregulatory commission (CERC) in India has taken many pro-active measures for promoting BETmarket in India. These include:Regulatory • Upfront feed-in-tariff for different types of RETs • Determination of long term tariff guidelines and regulations for RE projects • Biomass pricing mechanism for determination tariffMarket instruments • Renewable purchase obligations (RPO) for utilities and designated consumers • Renewable energy certificates (RECs) for solar and non-solar RE RPO • Facilitating development of trading platform for RECsRobust and transparent systems have been developed for resolution of various issues from timeto time through stakeholder’s consultation processes.18 Overview of biomass power in India-Biomass knowledge portal, MNRE, Government of IndiaClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 35 of 59

4.2.3 ThailandThailand is considered one of the most successful countries in developing renewable energyincluding biomass energy evidenced by19 achievement of: • 2,451 MW biomass power capacity in 2014 against the target of 2,451 MW by 2012 • 11.9% in the country’s overall energy basket has been contributed by RE in 2014, one of the highest globallyThai program is characterized by simplicity in the institutional arrangement, clear target andstrong monitoring system and financial incentives. The Ministry of Energy through its departmentof alternative energy development & efficiency directly manages the program. The various policyand regulatory measures include:Administrative  Thailand Alternative Energy Development Plan (AEDP 2015-2036)  Renewable energy Development Plan (REDP)2008-2022  Renewable Energy TargetFiscal and Monetary • Financial incentives in the form of grants and low-interest loans. • Grants are sourced from the Energy Conservation Fund, which also provides low-interest loans up to a maximum of B50 million and 7 years in support of small and medium-sized projects. • Another financial mechanism is the Equity Fund, which allows renewable energy developers to opt for credit guarantees or government shareholder participation of up to a maximum of THB50 million in either case. • Tax incentives for renewable energy projects include exemption from or reduction of import duties on machinery and essential materials, exemption from or reduction of income tax, and special corporate tax allowances.Regulatory  Feed-in Tariff for Renewable Power  Small and Very Small Power Purchase AgreementsMarket instruments  Renewable purchase obligation-5% for the power utilities4.3 SummarizingSuccessful development of renewable energy all over the world has depended upon thepromotional policies, enabling regulatory framework and access to commercial finance.Illustrative examples of China, India and Thailand indicate that every country has developed its19 Department of alternative energy development & efficiency -Thai-German technology conference,Bangkok June 8, 2015Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 36 of 59

own framework taking into consideration the local requirement and global experiences. A fewillustrative business case studies are included in Annex-3.The following highlights illustrate some of the common and differentiated features adopted bythese countries and having relevance for Pakistan.The common features: • Institutional clarity • Clarity in respect of available resources & resource utilization • Clear technology specific targets (Biomass combustion, gasification, biogas, biofuel, etc) • Periodic plan, annual implementation and monitoring • Established and tested tariff & regulatory mechanisms • Financial incentives • Enabling financing mechanismsThe unique country-specific features: • China o Top down approach (NDRC) o Research & development o Highly attractive incentives including tariff • India o Institutional linkage-federal & provinces o Dedicated ministry and financial institutions for RE technologies o Robust and independent system of regulation o Operating tradable certificate market • Thailand o Mission mode o Simplicity o Single point responsibility-ministry of energyThe scenario in Pakistan has been reviewed against the backdrop of the different policy andregulatory framework in these three countries to identify the gaps. The findings are summarisedin the following table.Table 12: Summary of Policies in select countriesType of Incentive China India Thailand Pakistan Clear Simple Not clearInstitutional process Top driven YesResource availability-monitoring Strong Yes Yes Macro assessmentprocess Strong Yes just completedTechnology development Yes NoClear target for different technologies Yes Yes Only for bagasse cogenClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 37 of 59

Type of Incentive China India Thailand PakistanMonitoring system Strong Yes Strong NoRegulatory PoliciesRegulatory institution No Strong Yes YesRegulatory processPower Purchase Agreement Yes Strong Yes WeakFeed-in-tariff/ premium payment Yes Yes Yes Yes Yes Regulatory Yes Wind, Solar andElectric utility quota obligation/RPS Bagasse onlyNet Metering process NoTradable REC/Green Certificate No Yes YesMonetary & fiscal YesAccelerated Depreciation Tax Benefit No Yes No NoFiscal incentives and public financing No Yes NoCapital subsidy or rebateInvestment or production tax credits Yes Yes Yes YesEnergy Production payment Strong Yes Strong Yes High Low High NoPublic investment, loans or grants YesProject development methodology Yes Yes Yes No No Optional No for wind No Yes Yes Yes Yes No Yes YesConsiderable gaps are there almost in all the critical areas. It is likely to take time to bridge all thegaps. However, some actions are required on priority for achieving early success, which cantrigger parallel development of the market for private sector participation. Recommendations onthe policy and regulatory measures for the same have been prepared as follows.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 38 of 59

5 Policy RecommendationsThe policy recommendations for developing market for BET in Pakistan have been developedtaking into account the current scenario and the relevant learning from the global experiences.Specific recommendations have been provided for each of the following actionable areas: • Basic framework • Harmonization of institutional processes • Program planning & implementation • Monetary & fiscal incentives • Project financing • Project development5.1 Basic frameworkThe proposed policy for promotion of BET is envisaged as an addendum to the existingRenewable Energy Policy 2006, and taking into considerations the provisions in the other Actssuch as NEPRA Act 1997, AEDB Act 2010 and Integrated Energy Policy (IEP), 2009-2022.The existing RE policy 2006 specifically mentions small hydro, wind and solar technologies (BETexcluded-text box below). While the addendum (‘Framework for Power Cogeneration 2013),expands the scope of the 2006 to include Bagasse / biomass / Waste-to-Energy, Bioenergy, thecoverage is limited only to high pressure cogeneration projects. AEDB should work with theGovernment to get a clarificatory order issued for inclusion of BET and other ARE technologies inthe policy. Text box 5: Coverage under RE policy 2006 “Other RE power generation technologies—such as those based on municipal waste and landfill methane recovery, anaerobic or pyrolytic biomass gasification, co firing or cogeneration utilizing agricultural crop residues, biofuels, wave, tidal, geothermal energy, and fuel cells—are also relevant to current and future renewable energy use in Pakistan. However, these are not dealt with in this document” Coverage under “Framework for Power Cogeneration 2013 Bagasse and Biomass’ This framework shall be effective for all high-pressure cogeneration projects utilising bagasse and biomass.Currently, NEPRA has only recommendatory power on upfront tariff for bagasse cogeneration. Inthe long run, the power to set tariff for power generation from all resources including BET andother ARE technologies should rest with NEPRA as also has been recommended by the IEP 2009-22. However, this would require amendment of the NEPRA Act 1997. Pending such amendment,Government should issue a clear and transparent guideline on procedure on tariff notification byGovernment post receipt of draft notification from NEPRA. The methodology and process ofregulation for development of ARE in general and BET in particular and the roles andresponsibility of NEPRA for the same should be reviewed and notified.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 39 of 59

Ministry of Water & Power, Government of Pakistan may be requested for issuing specificnotification empowering AEDB with financial and administrative power for setting up BETprojects. Provision for the same should be included in the budget and Finance Act every year.The role of provincial Governments would be critical, more so as they are empowered for bothadministrative and regulatory approvals for projects within the provinces. Most of the BETprojects are likely to be developed under the jurisdiction of provincial governments. It wouldtherefore, be desirable to develop a uniform administrative and regulatory process, which wouldbe followed by provincial Governments, NEPRA and AEDB. Indian system provides a goodtemplate for this.5.2 Harmonization of institutional processesThe following key stakeholders would be involved in development of the BET market in Pakistan:• Ministry of Water & Power, Federal Government• Energy departments, Provincial Governments• Agriculture departments, Provincial Governments• NEPRA• AEDB• State Bank of Pakistan• SME industry associations• NGOs/Rural cooperativesAEDB should take initiative to institute a forum of stakeholders backed by Government order fordevelopment of methodologies and procedure, which would be acceptable to all Governmentand financing organizations for according approval and financial sanctions for BET projects.5.3 Program planningA 3 to 5- year plan on program implementation should be prepared establishing clear targets andmonitoring mechanisms. The following components should be included in the plan.• Status of availability of surplus biomass in different districts in all the Provinces• Technology deployment and absorption• Targets for combustion and gasification technologies under different business models (IPP, Captive, Off-grid)• Clearly defined roles of various stakeholders including AEDB, provincial governments to support project development• Capacity building• Monitoring & evaluation framework5.4 Technology DevelopmentBiomass assessment report prepared under the ESMAP project is now available. DESL has madean estimate on surplus availability for determination of overall BET potential in the country. ItClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 40 of 59

would be desirable to carry out a few micro level surveys to validate the estimate of surplus.Eventually, AEDB should issue guideline for locating BET projects based on biomass assessmentsurvey reports.A document on technology and standards has been prepared under this project. Plan fortechnology import and domestic development should be prepared based on this. The need forstrong collaborating arrangement between local technical institutes and manufacturers cannotbe overemphasized. Both China and India have demonstrated how such collaborations withsupport and direction from Government have helped in rapid development of an indigenous BETeco system in the respective countries.AEDB should identify few such institutes and manufacturers and develop a program withappropriate budgetary support for developing a strong manufacturing and servicing base inPakistan for BET equipment and systems. The following technology development MOU’sfacilitated under the UNIDO project, provide a starting point for the development of an actionplan: • MOU between K-Axis Engineering, Pakistan and Knoef Consultancy for facilitating design, modelling and fabrication of biomass gasifiers • Letter of intent for joint cooperation in the field of sustainable production and use of bio- energy between DBFZ, Germany and NUST • Letter of intent for joint cooperation to provide market driven services in the field of biomass to energy between Purdue School of Engineering and Technology, Indiana University and US Pakistan Centre for Advanced Studies in EnergyClear medium term and annual targets for each BET component should be set, setting the stagefor differential tariff based on component of local manufacturing. A monitoring and evaluationframework should also be developed for the entire program.5.5 Fiscal & monetary incentivesIEP 2009-2022 has made specific recommendations for providing financial incentives and softfinancing for ARE projects. It has also recommended financial support to provincial, city and localgovernment for the same. Success of BET program in China and to some extent in Thailand canbe largely attributed to financial incentives. Even in India, the capital subsidy for the BGT systemis about 27% of the normative cost20. Currently, fiscal incentives are available for notified AREtechnologies as the RE policy 2006.Various fiscal incentives as per the same policy should also be specifically extended to all types ofBET projects including captive power and cogeneration projects.20 Considering normative capital cost of BGT of 55,000 INR/kW from Central Electricity RegulatoryCommission (Terms and Conditions for Tariff determination from Renewable Energy Sources) Regulations,2012 issued on 31 March 2015Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 41 of 59

“i. No customs duty or sale tax for machinery equipment and spares (including constructionmachinery, equipment, and specialized vehicles imported on temporary basis) meant for theinitial installation or for balancing, modernization, maintenance, replacement, or expansion aftercommissioning of projects for power generation utilizing renewable energy resources (specifically,small hydro, wind, and solar), subject to fulfillment of conditions under the relevant SRO.ii. Exemption from income tax, including turnover rate tax and withholding tax on imports.iii. Repatriation of equity along with dividends freely allowed, subject to rules and regulationsprescribed by the State Bank of Pakistan.iv. Parties may raise local and foreign finance in accordance with regulations applicable toindustry in general. GOP approval may be required in accordance with such regulations.v. Non-Muslims and non-residents shall be exempted from payment of Zakat on dividends paid bythe company”.The list of items required for BET projects have been provided in the ‘Technical quality standard’document. AEDB should forward the list to FBR to get the BET project items specifically includedunder the various exemption schemes.The risk perception of BET projects are higher compared to other ARE technologies. One or moreof the following monetary incentives have helped in improving the risk profile of BET projects:• Capital subsidy• Interest rate subvention• Generation based incentive• Carbon finance including tradable certificatesChina has provided extensive financing support. Even in India, which has not been moreconservative in providing concessional finance, BGT projects have generally received about 27%capital subsidy.AEDB should develop different incentive schemes for the three kinds of BET projects, IPP, Captive& spill over captive and rural DG projects. Generation based incentive scheme with provision forupfront monetization is a very effective tool for sustainable development of BET technologies. Inaddition to power generation projects, incentives may be extended to promote localmanufacturing and biomass supply chain projects.5.6 RegulationsThe following provisions in the “RE policy 2006” should be specifically extended to BET projectsas detailed below:• Guaranteed off take of exportable energy by the utilities from both IPP and CaptiveSpillover projectsClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 42 of 59

• Utilities to provide grid connection and interface for these projects• Wheeling• Net meteringThe standard PPA document should include specific provisions for these.The net metering principle for BET projects also need to be developed, as the current policy ismore suited for solar projects. This would be more relevant for spill over projects. NEPRApromulgated the “Distributed Generation and Net Metering Regulations, 2015”, which came intoforce on 1 September 2015. Currently, the regulation is meant for providing net metering facilityfor promoting solar and wind energy based DG projects. The specific provisions for eligibilityunder net metering are: • 2 (i) “Distributed Generation Facility\" means a facility set up by a Distributed Generator using Solar or Wind energy resource for generation of electricity up to 1 MW • 2 (j) \"Distributed Generation\" means electrical power generation by solar or wind that is interconnected to the Distribution System of the Distribution Company at Interconnection PointPower demand for captive consumption in SME segments fluctuate considerably on daily as wellas seasonal basis. Captive power projects can export all the surplus power during lower captivedemand under net metering scheme. Net metering would help in increasing the viability of suchprojects by improving the PLF of the plant. This would also help in increased usage of locallyavailable biomass instead of transporting the same for other uses. The eligibility criteria for netmetering of biomass power plant should therefore, be the exportable power rather than thegeneration capacity. The relevant clauses for net metering may be amended as follows. • 2 (i) “Distributed Generation Facility\" means a facility set up by a Distributed Generator using Solar, Wind energy and biomass resources for self consumption of electricity and heat without any limit and export of surplus/spill over electricity up to 1 MW • 2 (j) \"Distributed Generation\" means electrical power generation by solar, wind and biomass that is interconnected to the Distribution System of the Distribution Company at Interconnection PointAEDB should approach NEPRA for issuing these amendments on net metering regulations.Future policy interventions once BET’s have demonstrated scaleability include renewablepurchase standards from BET for the utilities.5.7 Project financingActions on multiple fronts are required for improving access to commercial finance for BETproject developers. Financing packages provided in the RE policy 2006 are more relevant for highinvestment and long gestation projects such as hydro, wind and solar. Cash flow security plays avery important role in credit enhancement for BET projects. The general provision in the REpolicy 2006 on this is quite adequate and should be extended to BET projects.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 43 of 59

Securitization package “The power purchaser shall enter into a specific Power PurchaseAgreement (PPA)2, based on a standard model agreement, with the RE power producer. TheGovernment of Pakistan shall also enter into an Implementation Agreement (IA), which willguarantee the payment obligation of the public sector power purchaser because of power salesextending over the term of the PPA. The PPAs will be much simpler than those for thermal or largehydro IPPs, and shall be based on the purchase of all power generated at a per-kWh rate—i.e.,there will be no capacity charge, capacity testing, no risk, and no penalty conditions implied”.Following specific actions are recommended for creating an enabling environment for attractingprivate sector investors as well commercial lenders for financing of BET projects in Pakistan: • Assessment of the investment potential in the different BET segments on normative cost basis • Financing few pilot projects for direct implementation by AEDB as well as PPP projects in the SME segments to establish the technical and financial viability • Development of a harvester program for promoting fuel densification (pellets and briquettes) • Development of specific financing packages for different types of BET projects in the different segments (25% to 75% capital subsidy for different types of projects, lowest for captive followed by IPP and highest for the rural DG projects in the remote areas) • Work with State bank of Pakistan for developing special financial mechanisms for ARE in general and BET in particular, modifying the existing scheme for financing renewable energy projects (June-2016), to include gasification systems and projects for developing the biomass supply chain • Work with NEPRA for development of market instruments such as RPO/RPS/REC/Carbon trading • Undertake a capacity building program for commercial banks on appraisal of BET projects • Engage with Bilateral & Multilateral Donor agencies for funding support for BET projects5.8 Project developmentAs has been the experience elsewhere, biomass energy development in Pakistan needs to beconceived under a phased, evolutionary approach constituting a strategic policy implementationroadmap.In case of China, initial focus was on use of BGT for space heating and cooking in the rural areas.The objective was to provide clean energy in the rural areas for replacing polluting coal burningfacilities. Funding and technical supports were provided by Governments at different levels-Central, Provincial and local bodies. History of IPPs has been more of recent origin. Reducingpollution arising out of field burning of straws and increasing the share of bio-energy in theoverall energy baskets have been the main drivers. Beginning with few demonstration projectsin 2005, China is currently the leading nation in developing biomass energy projects.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 44 of 59

Development of BET market in India on the other hand was triggered by the oil crisis of mid 70s.Large number of industries in the SME segment depending upon fuel oil for process heatingfaced threat of closure due to increase in price of oil. Biomass gasification technology wasrapidly developed with support from Government for providing alternative gas fuel to theseindustries. During the same period, boiler technology was developed further for using variousbiomass fuels for power generation. Maturation of both gasification and combustiontechnologies provided the required fillip for simultaneous diffusion of BET in the industrialcaptive, IPP and rural DG markets. The market conditions in Pakistan are comparable to India.Pakistan can therefore, pursue similar development pathway illustrated by the following figure. •Setting up few demonstation projects in the rural DG segmentsGovernment •Provide generous financial support for development of few (say upto aggregate program capacity of 50 MW) industrial captive & CHP projects and harvester programs Attracting •Develop few IPP projects for bidding under solicited program private •Promote captive spill over projects in the SME segment •Defining site allocation and zoning requirements to ensure biomass availabilityinvestment •Support projects under both solicitated and unsolicited categoriesSustainable •Promote technology for high efficiency BET projectsBET market Figure 3: Project development pathwayThe goal and annual target for each of the activity in different phases of development should beclearly articulated in the suggested three to five years program. The procedures defined in theRE policy 2006 for implementation of solicited and unsolicited projects can be applied for BETprojects too.5.9 Capacity BuildingAs part of the long-term plan, capacity building should be undertaken for institutions and R&Dlaboratories established for testing the conformance of equipment to the standards. Apart fromimparting technical training on the various aspects of biomass project development (e.g.methodology for biomass surveys, establishment of supply chain, managing losses duringstorage, maximizing performance of plant operations, environmental performance managementof biomass based power generation and gasification plants), awareness building programs arealso required. Awareness building programs can target stakeholders (e.g. provincial government,project developers) to build investor confidence.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 45 of 59

5.10 SummarizingActions (summarized below) are required on several fronts for kick starting a BET program inPakistan.Table 13: Summary of recommendationsPolicy Area Recommendation Time frameCreating the Amendment of RE Policy, 2006: Short termbasic • Scope is extended to cover all BET’s (< 2 years)framework • AEDB is empowered with financial and administrative power for setting up BET projects, with provisions in the annual budget and Finance Act every year • Guidance issued for uniform administrative and regulatory process to be followed by provincial governments with clearly defined roles of various stakeholders NEPRA Act, 1997: Short term Amended to include all BETs. Until this can be effected, following (< 2 years) actions are recommended for the interim: • Issue clear and transparent guideline on procedure on tariff notification by Government post receipt of draft notification from NEPRA • Methodology and process of regulation for development of ARE in general and BET in particular and the roles and responsibility of NEPRA are reviewed and notifiedInstitutional Create a forum of stakeholders/ working groups for development Short termprocess of methodologies and procedure, which would be acceptable to (< 2 years) all Government and financing organizations for according approval and financial sanctions for BET projects.Program Develop a program (for upto 5 years), with clearly defined targets Short termplanning for a) improving information quality on biomass availability for (< 2 years) power generation and zoning b) supporting technology development c) targets for capacity addition at provincial level (as IPP, CPP, distributed generation) d) capacity building plan for various stakeholder groups including wider dissemination of government initiatives to increase stakeholder confidenceTechnology Carry out biomass assessment surveys to validate the estimates Short termdevelopment of surplus, develop a manual on biomass survey methodology and (< 2 years) issue guidelines on zoning and location of BET projects based on survey report. Prepare a plan for technology import and domestic development. Short term Identify a few technical institutes who can be supported for (< 2 years) developing a strong manufacturing and servicing base for BET equipment and systems Develop medium term targets for each BET component and work Medium for preferential tariff for BET projects based on domestic content. term (< 6y)Fiscal and • Extending the existing fiscal incentives under RE Policy, 2006 Short termClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 46 of 59

Policy Area Recommendation Time framemonetary to all kinds of BET projects (< 2 years)incentives • Extending the existing fiscal incentives under RE Policy, 2006 Short termRegulations to promote domestic manufacturing (< 2 years)Project Short termfinancing • Develop monetary incentive schemes for the three kinds of (< 2 years) BET projects, IPP, Captive & spill over captive and rural DG MediumProject projects term (< 6y)development Short term • Develop monetary incentive schemes for supporting the (< 2 years) development of biomass supply chain Short term (< 2 years) • Develop monetary incentive schemes for supporting local Short to manufacturing Medium term (< 6y) • Extend the provisions of RE Policy, 2006 w.r.t off-take, grid inter-connection, wheeling and net metering to RE Policy, Short term 2006 (< 2 years) • Develop standardized PPA for IPP, spillover captive and rural Medium DG term (< 6y) • Assessment of the investment potential in different BET Medium segments on normative cost basis • Financing a few pilot projects (different business models, biomass supply chain demonstration) • Development of a harvester program for promoting fuel densification • Development of specific financing packages for different types of BET projects in the different segments • Work with SBP to extend refinancing scheme for all types of BET including manufacturing of RE Equipment and supply chain projects • Work with NEPRA for development of market instruments such as RPO/ RPS/ REC/ Carbon trading • Undertake capacity building program for commercial banks on appraisal of BET projects • Engage with Bilateral & Multilateral donor agencies for funding support for BET projects Develop and implement government programs • Setting up few demonstration projects in the rural DG segments • Provide generous financial support for development of a few (say upto aggregate capacity of 50 MW) industrial captive & CHP projects and harvester programs Attracting private sector investment • Develop a few IPP projects for bidding under solicited program • Promote captive spill over projects in the SME segment • Defining site allocation and zoning requirements to ensure biomass availability Develop a sustainable BET marketClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 47 of 59

Policy Area Recommendation Time frameCapacity • Support projects under both solicited and unsolicited term (< 6y)building categories • Promote technology for high efficiency BET projects • Design and implement programs for skill building - e.g. Short to methodology for biomass surveys, establishment of supply Medium chain, managing losses during storage, maximizing term (< 6y) performance of plant operations, environmental performance management of biomass based power generation and gasification plants) • Training of institutions and R&D organizations for equipment testing • Awareness generation programs to build investor confidenceActions such as covering the BET program under RE rule 2006 should be an immediate priority.Following this, it should be possible for AEDB to recommend to FBR to extend various exemptionschemes for the BET projects, components and equipment’s as per the list provided in the reporton ‘MINIMUM QUALITY STANDARDS FOR BIOMASS GASIFICATION PLANTS’. Similarly, AEDBshould also approach NEPRA for notification of FiT for power export from the BET projects to thegrid.Medium term action would include review of the policies such as NEPRA Act 1997, RE policy2006, AEDB Act 2010, and making recommendations to the Government for amendmentsrequired for removal of various identified barriers.Development of BET technologies and local manufacturing capabilities has to be carried out in aphased manner under a longer-term plan.Few demonstration and pilot projects should be implemented at the earliest with a view todemonstrate the technical and financial viability of the different BET technologies, essential pre-requisites for attracting private sector participation.Client Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 48 of 59

6 Annexes6.1 Annex 1- Terms of Reference and stakeholders consulted6.1.1 Terms of referenceObjectives of the Study: The objective of the assignment is to provide advisory services andrecommendations for incentivizing investment in modern biomass conversion technologies,particularly Biomass Gasification Technologies (BGTs), to the Alternative Energy DevelopmentBoard (AEDB) and other relevant stakeholders and to conduct the necessary activities for theestablishment of rules and regulations for BGTs under the prevailing RE Policy 2006. Theconsultancy firm will also provide similar recommendations to be integrated in other existentpolicies/plans that could support the promotion and adoption of biomass /BGTs in differentsectors of the economy such as power generations, industrial co-generations (combined heat andpower) in SME Industries, rural electrification, etc., and the minimum quality standards forimport and local manufacture of biomass gasification equipment.Overall scope of work: The overall scope of work for the project is as below:Main Duties Measur able outputs to be achieved 1. Review of existing legislation, analysis and Preliminary drafts of IRRs, policy recommendations for formulation of preliminary drafts promotion of BGTs, minimum quality standards, recommendations on capacity building for local 2. Consultations with key stakeholders that manufacturers are prepared and shared with relevant organizations for onward discussions during the include tri-partite meetings between AEDB, UNIDO and key stakeholders and mi ssi on consultation sessions to present/ explain Mission plan including dates of meetings and the r ecommendations and collect feedback consultations with relevant stakeholders are planned from a wider range of stakeholders and arranged; 3. Preparation of second drafts of the IRRs, Collection and compilation of feedback from the relevant stakeholders during the tri-partite meetings Recommendations for other relevant and half-day sessions in the form of meeting notes and policies/ plans mission report 4. Presentation of Final Drafts during a Final drafts of the (i) IRRs, (ii) Policy recommendations and (iii) minimum quality standards (iv) National Stakeholder Workshop recommendations on capacity building for local 5. Submission of Final Policy document and manufacturers are prepared and shared with stakeholders for onward discussion during the Quality standards wor ks hop; Concept of the national stakeholder workshop prepared National Stakeholders Workshop conducted and final set of feedback from all relevant stakeholders collected Final IRRs, policy recommendations, quality standards and recommendations on capacity building for local manufacturers are prepared with all the feedback from the stakeholders incorporated for official endorsementClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 49 of 59

6.1.2 Stakeholders consultedStakeholders consulted at various stages include the following:Preliminary consultation (1st draft) Stakeholder workshop (final draft) Government, public se ctor organizations, institutions• Alternative Energy Development Board • Alternative Energy Development Board• Federal Bureau of Revenue • Federal Bureau of Revenue• Central Power Purchasing Authority • MoWP• National Electric Power Regulatory • Central Power Purchasing AuthorityAuthori ty • National Electric Power Regulatory• Energy Department, Punjab Authori ty• Agriculture Department, Government of • Energy Department, PunjabPunjab • Energy Department, Sindh• State Bank of Pakistan • Agriculture Department, Sindh• Small and Medium Enterprises • Energy and Power Department, KPK Development Authority • Agriculture Department, KPK• Pakistan Standards for Quality Control • AJK Planning Development Organization • AJK Agriculture Department As s ocia ti on • State Bank of Pakistan • Small and Medium Enterprises Development Authority • Pakistan Standards for Quality Control As s ocia ti on • MEPCO • LESCO • IESCO • NRSP • RSPN • NARC/PARC • NEECA • NFEHAcademic• National University of Science and • National University of Science andTechnol ogy Technol ogy• University of Agriculture, Faisalabad • Pakistan Council of Renewable Energy Technol ogi esIndustry and trade associations• Pakistan Agriculture & Dairy Farmers • Punjab Bio-Energy CompanyAs s ocia ti on • JDW Group• All Pakistan Textile Mills Association • Faran Sugar Mill• Pakistan Sugar Mills Association • HSML• Punjab Bio-Energy Company • DESCON• JDW Group • GFG • Islamabad Chamber of Commerce and I ndus tr yInternational organizations• GIZ • IFC • SAARC • USAID • UNRCClient Name UNIDO DESL Project No. 9A0000005647Project NameReport Title Policy advisory services in Biomass gasification technology in Pakistan Version 5 -Final Recommendations- policy on biomass gasification and combustion technology Page 50 of 59