Risk Allocation Tool – Final Report: Sustainable Energy for Pakistan (SEP) Project

The project sought to support the Alternative Energy Development Board (AEDB), the Private Power and Infrastructure Board (PPIB), the Central Power Purchasing Agency (CPPA-G), and the National Transmission and Dispatch Company (NTDC) in identifying and managing risks, as well as allocating them to the party best able to bear them, to improve project performance and reduce final costs. The analysis focused on quantifying the Value for Money (VfM) of various options for the delivery of variable renewable energy projects with different technologies and power transmission projects. SEP developed three Microsoft Excel-based workbooks, collectively referred to as the Risk Allocation Tool, with risk matrices for renewable generation projects (solar, wind) and a representative transmission project. The tool quantifies risks (probability of occurrence and impacts), provides the capital and operating cost profiles of typical RE projects in Pakistan, including financial models to estimate the impact of appropriate reallocation of risks from the baseline to the alternate scenario situation. In the case of transmission, the analysis demonstrated that the government's risk exposure for the build own operate transfer (BOOT) case is significantly lower compared to the engineering procurement and construction case (an estimated USD 11.8 million reduction), as most of the development and operating risks are transferred from government/NTDC to the private partner. Similarly, the results of risk analysis for the solar and wind generation projects demonstrate that the government's potential risk exposure during a price discovery auction is expected to be significantly higher compared to the future competitive procurements, where further risk mitigating measures have been identified and expected to be implemented. For the solar project analysis, the government's potential exposure declined from projected USD 3.4 million to USD 0.71 million (a reduction of USD 2.69 million). For the wind project, the exposure declined from projected USD 3.355 million to USD 0.698 million (a reduction of USD 2.658 million). Through the activity, SEP trained a total of eighteen people who participated in all validation and transfer workshops: thirteen from PPIB, two from CPPA-G, and three from NTDC. The final report summarizes the following elements of the activity: conceptual assumptions, approach and implementation, risk analysis tool, and moving forward. The report outlines the conceptual assumptions made by SEP to develop the analysis, incorporate international best practices, capture the Pakistani framework, and reflect the context of policy and market reform. The report also outlines the approach and implementation of the risk tool development, including bi-lateral meetings, consultative workshops, and virtual validation sessions. The report highlights implementation challenges faced by the team during the risk tool development and how the team addressed them to achieve active stakeholder participation and successful uptake and delivery. The report provides the results of the analysis that estimate the impact of more appropriate reallocation of risks from the baseline to the alternate scenario situation. The moving forward section summarizes considerations that can be relevant for future program implementation for each entity. For example, in support of CPPA-G, which will be at the heart of market reform, PPIB, which is responsible to implement the 2015 policy for private sector engagement in transmission and is slated to play a much stronger role in project development following a merger with AEDB, and NTDC, which has a critical role in the transmission sector.