Financing boost under ISREP likely to cut circular debt, grid dependence: Study

KARACHI: Research by economists and academia has urged the State Bank of Pakistan (SBP) to provide more financing to individuals like housing societies, commercial buildings, and localities under the Incentive Scheme for Renewable Energy Programs (ISREP).

The 70-page study, availed by The News, said it would have several benefits in terms of improving overall efficiency like reducing the burden on the national grid, lowering the risk of circular debt, and reducing the impact of dollar conversion as contracted with the IPP mode projects, etc.

Financing of over Rs83 billion was provided through banks during 2017-21 and Rs3 billion to DFIs during 2017-20 under the ISREP.

The research on “In-Depth Analysis of the Green Banking Guidelines” of the SBP has been developed by NED University Karachi in collaboration with Indus Consortium. The study has been conducted by Professor Dr Raza Ali Khan, Chairman Economics and Management Sciences Department, Mirza Faizan Ahmed and Shabbir Ahmed, all teachers at the NED University.

Renewable energy in Pakistan shares merely 2.5 percent of total electricity generation. To increase this share, the SBP announced the promotion of renewable energy in the form of the ISREP in 2016, also amended later to improve further. The scheme comprises three categories, financing for a project (i) from 1MW to 50MW, (ii) below 1MW, and (iii) scheme for vendors/suppliers/energy sellers for the installation of wind and solar systems/solutions of up to 5MW.

The study aims to review and analyse the Green Banking Guidelines (GBG) and identify the key challenges faced by its stakeholder. It also takes into consideration the ISREP.

The study has focused on Habib Bank Limited (HBL) as a case study to analyse its portfolio and views on the implementation of the GBG and the ISREP.

Pakistan has been facing severe environmental issues even though its per capita CO2 emissions are lower than global per capita CO2 emissions. In the wake of increasing environmental degradation, the government of Pakistan has decided to restrain environmentally expensive projects, especially in the energy sector.

The SBP issued the GBG in 2017 intending to transform the country’s economy and acknowledged the role of the financial sector towards a low-carbon and climate-resilient economy. It helps bring awareness among investors, and the banking industry to make its infrastructure, operations, investments, and products sustainable.

Guidelines provide details about the responsibilities, management, and organisation for the GBG implementation and construct three themes to work upon. These include environmental risk management, green business facilitation, and own impact reduction. The key stakeholders of the guidelines are the SBP, banks / DFIs, and customers / RE developers.

Under the guidelines, the banks have taken some initiatives like the establishment of green banking offices, appointing the required staff, preparing a checklist for environmental risk identification, advisory services for green business facilitation, etc. Some of them have also initiated the environmental as well as the social management system.

HBL is one of the largest banks in Pakistan and a major financier of energy projects and has taken several initiatives in favour of the GBG. The bank has also closed the issuance of the Green Euro Bond for WAPDA, as co-manager, amounting to $500 million in 2021. It has disbursed Rs5.5 billion in 2021 under ISREP and cumulatively Rs9.5 billion during the last five years. Besides, financing renewable energy projects, the bank has also invested in two coal-related companies ie Sindh Engro Coal Mining Company and Engro Power Generation Thar Private Company Limited which the bank was committed to reducing gradually in the wake of the ‘no new coal policy 2020’.

The study suggested that the SBP could design a set of key performance indicators for the banks to be reported periodically with the consultation of relevant stakeholders and environmental experts. Besides the KPIs, the bank could also set yearly objective(s) related to green practices to help reduce the adverse environmental impact of the overall banking industry.

The SBP should encourage banks to collaborate with the industry to develop green products as they have more industry insight and access to information.

There should be a need to provide long-duration training/workshops for risk identification, assessment, and evaluation for the effective implementation of the GBG for uniformity in green practices across the banking industry.

The SBP should extend the financing window under the ISREP for five years or more only for individuals and groups of individuals like housing societies, commercial buildings, localities, etc. The extension of the financing scheme for RE developers should continue as per existing practices, the study suggested.

“The policy recommendations in favour of the ISREP and the GBG will also help the economy to achieve the targets of Renewable Energy Policy 2020 and improve sustainability in the economy,” the study said.