The State Bank of Pakistan, in light of the global initiative to reduce the impact of climate change has been taking a few steps. One of these includes the “State Bank of Pakistan’s financing scheme for Renewable Energy Projects”. This scheme was made public mid of 2016 and started to fully be used from 2017.
The scheme has two major advantages for Pakistan; it not only addresses the foreign exchange deficit problem of the country but, it also holds the potential to defer significant capital investments required in the aging electrical network. Additionally, it has two categories:
- system sizes ranging from 1MW to 50 MW
- system sizes ranging from 4 kW to 1000 kW
The second category is more relevant to the commercial and industrial sector of Pakistan, as it solves the more pressing challenges faced by the country.
Under the scheme, industries can borrow up to 100% of the cost for installing solar and wind projects. The interface for the commercial/industrial entity is the commercial bank that gets funds at the borrowing rate of 2% from SBP. This is after all due technical and commercial documents have been provided. The commercial bank and the industry then have a spread of 4% from which they get to negotiate and close. The financing rate can be locked at anything between 2.5 % to 6 % depending on the bankability of the industrial client and their relationship with the commercial bank.
The financing must be paid back within 10 years, as no grace period is provided for the construction of the project which can be anything from 4 to 5 months for a 1 MW plus project. However, the best thing about this scheme is that the borrowing is available at fixed rate instead of being KIBOR indexed considering that our current inflation rate is already close to 4%.
This allows the industries/commercial entities to hedge their energy rates for the next 25 years which otherwise are at the mercy of rising oil and gas prices and the US dollar. More so, this is particularly important for industries/commercial entities which are exporting goods or services and are competing with global market players.
This scheme is now aggressively being used as its proving to be a win-win for the industrial clients, our country and for the local banks. However, it works on a first come first serve basis and is set to expire in June 2019. Lastly, industries with gas generation are now also going with distributed solar PV generation to reduce gas consumption.
Hence, the key is to get a reliable & bankable EPC solar company which is experienced in installing large MW scale projects and understands the SBP scheme process. Since once the EPC company is decided, the commercial bank and the EPC company must collectively work to get the funding approved.