The World Bank

Sindh Solar Energy Project (P159712)

ANNEX: ECONOMIC AND FINANCIAL APPRAISAL

Introduction
1. The economic analysis is consistent with the Bank’s “Guidelines for Economic Analysis - Power
Sector Investment Projects and Social Value of Carbon in Project Appraisal,” 2014.

Methodology
2. The economic feasibility of the proposed project is assessed using a standard cost-benefit analysis.
Net benefits for the components are calculated using the total system costs (excluding tax and financial
costs) and the total benefits from the avoided cost of generating the same unit of energy from marginal
generation sources. The economic discount rate used was 6 percent, which complies with the WB
guidelines on estimating discount rates.1 A project is marked economically feasible when the economic
rate of return (ERR) exceeds the hurdle rate of 6 percent.
3. GHG accounting has been undertaken for this project to calculate the avoided cost of
environmental damage.2 The analysis used the WB’s 2017 projected carbon shadow price to calculate the
environmental costs avoided to calculate the ERR with environmental benefits.
4. The financial analysis was conducted using a discounted cash flow analysis for the components
based on the revenues, capital, O&M expenses, and debt service cost to calculate the financial NPV
(FNPV), financial internal rate of return (FIRR), and return on equity (where applicable). The project is
marked feasible when the project FIRR exceeds the weighted average cost of capital (WACC) with
satisfactory returns to the equity holders (where applicable).
5. Details of the counterfactuals, assumptions, results, and sensitivity analysis for each of the
components are described in the following sections.

Component 1: Utility-Scale Solar

Economic Analysis
6. An illustrative economic analysis was carried out for a 50 MW utility-scale solar PV plant to
validate the economic viability of the plant. For this analysis, only the cost of the 50 MW plant is accounted
for, not the portion of WB financing to be used for the development of the shared infrastructure relating
to the overall target of 400 MW through development of solar parks. Project-specific economic analysis
may be carried out at a later stage once project sites are identified and actual costs can be determined.
7. The economic cost for Component 1 captures the economic cost of the plant (EPC cost, land
development cost, grid integration cost, physical contingencies, and O&M cost). The cost assumptions are
taken from a prefeasibility study for one of the proposed sites. The CAPEX for this plant is assumed at
$0.8/W, which is consistent with the recently awarded solar IPP projects in Pakistan.3 A summary of the
assumptions and the results for the economic analysis is presented in Table 1.

1
Discounting Costs and Benefits in Economic Analysis of World Bank Projects, OPSPQ, 2016.
http://intresources.worldbank.org/INTOPCS/Resources/380831-1360104418611/Discount_Rate_TechnicalNote.pdf.
2
GHG emissions were calculated using “Guidance Note on Shadow Price of Carbon in Economic Analysis,” World
Bank 2017, and “IFI approach to GHG accounting for renewable energy projects,” World Bank 2015.
3
Solar IPP petitions at NEPRA.
The World Bank
Sindh Solar Energy Project (P159712)

Table 1: Economic Analysis Assumptions and Results for 50 MW Solar PV Plant

Assumptions
PV system CAPEX $0.81/W
PV plant OPEX $ 0.002/kWh
Capacity factor 21.6%
Degradation of PV output 0.5% p.a.
Lifetime 20 years
Avoided fuel cost of LNG $0.044/kWh
Avoided fuel cost for HFO $0.079/kWh
Capacity credit of solar 0%
Curtailment risk factor 10%
Fuel price CAGR 1%
Emission factor for LNG 0.35kg/kWh
Emission factor for HFO 0.63kg/kWh
Economic/social discount rate 6%
Results
EIRR 11.7%
EIRR (with environmental externalities) 16.7%
GHG emissions 714,120 tons
ENPV $26.5 m
ENPV (with environmental externalities) $51.1 m

8. The counterfactual is defined as the weighted average cost of generating the same energy using
liquefied natural gas (LNG) and heavy fuel oil (HFO) plants with a 50:50 split. HFO and LNG were chosen
as the marginal energy sources based on the merit order dispatch in Sindh Province.4 The analysis takes a
conservative approach to developing the counterfactual scenario: the capacity credit for the solar plant is
assumed to be zero percent, and hence it is assumed that the energy produced by the solar plant will
replace only the fuel cost from the HFO and LNG plants. It is assumed that the transmission and
distribution losses for the solar plant and those of the alternative sources are the same. The analysis also
assumes 10 percent curtailment of the variable solar energy in the base case. The energy balance for the
first five years, including the construction year, is shown in Table 10.

Table 10: Energy Balance for 50 MW Solar PV Plant

Energy Balance
2019 2020 2021 2022 2023 2024
Installed Capacity [MW] 50.00
0.00
Capacity Factor [units] 0.216
Energy Produced [GWh] 85.15 84.72 84.30 83.88 83.46
0.00 0.00 0.00 0.00 0.00
Total Energy Produced [GWh] 85.15 84.72 84.30 83.88 83.46
Energy displaced from LNG [GWh] 1002.862 42.57 42.36 42.15 41.94 41.73
Energy displaced from HFO [GWh] 1002.862 42.57 42.36 42.15 41.94 41.73
Total Energy displaced from alternative
[GWh]source 85.15 84.72 84.30 83.88 83.46

9. The ERR calculated from this illustrative economic analysis of the 50 MW plant is estimated to

4
Merit order dispatch is indicative of the least-cost generation plants to be dispatched in the Sindh Province in a
defined period.
The World Bank
Sindh Solar Energy Project (P159712)

be 11.7 percent, which increases to 16.6 percent when the cost of carbon is incorporated. The economic
net present value (ENPV) for this component is estimated at $26.5 million, and with externalities the net
benefit increases to $51.1 million. Error! Reference source not found. shows the NPV values of the total
cost and benefit over the project lifetime and the yearly economic flows for the first five years.

Table 11: Economic Flows for 50 MW Solar PV Plant (first 5 years)

Economic Analysis
NPV 2019 2020 2021 2022 2023 2024
Cost of Solar Plant
EPC Cost [$US thousands] 35,000.00
Non EPC cost [$US thousands] 1,827.50
Pre-COD insurance [$US thousands] 472.50
Project Development Cost [$US thousands] 1,000.00
Other costs [$US thousands] 2,450.00
Total O&M cost [$US thousands] 757.81 754.02 750.25 746.50 742.77
Total Costs [$US thousands] 47,181.24 40,750.00 757.81 754.02 750.25 746.50 742.77

Avoided costs of alternative source

Capital Cost - LNG [$US thousands] - - - - - -
Avoided Fuel and O&M cost - LNG [$US thousands] 27,338.33 2,236.77 2,225.59 2,214.46 2,203.39 2,192.37
Capital Cost - HFO [$US thousands] - - - - - -
Avoided Fuel and O&M cost - HFO [$US thousands] 46,350.65 3,792.33 3,773.37 3,754.50 3,735.73 3,717.05
Total Economic Benefits [$US thousands] 73,688.98 6,029.10 5,998.96 5,968.96 5,939.12 5,909.42
Net Economic Benefits [$US thousands] 26,507.74 (40,750.00) 5,271.29 5,244.94 5,218.71 5,192.62 5,166.66
ERR [%] 11.7%
Avoided GHG Emissions [$US thousands] 24,567.48 1,622.18 1,655.46 1,688.36 1,720.89 1,753.06
Net Economic Benefits (including
externalities) [$US thousands] 51,075.23 (40,750.00) 6,893.47 6,900.39 6,907.07 6,913.51 6,919.71
ERR (including externalities) [%] 16.6%

Financial Analysis
10. The financial analysis of Component 1 shows that the Project is financially feasible, with a project
FIRR of 9.0 percent, which is above the WACC of 7.6 percent for a power purchase agreement (PPA) tariff
of $0.04 per kWh. The tariff of $0.04 per kWh meets the minimum equity IRR requirement of 15 percent,
leading to a FNPV of $5.8 million. Additional assumptions used for the financial analysis of Component 1
are shown in Table 12.
11. The minimum debt service coverage ratio (DSCR) for this project was calculated to be 1.18,
indicating that the project will be able to pay all current debt obligations. It is assumed that the 50 MW
plant will be financed with 25 percent equity and 75 percent debt and that the debt portion will be split
between debt from development finance institutions (DFIs) with a 6 percent interest rate and DFI-
provided blended finance with a 4 percent interest rate. The PPA tariff and other costs for the plant are
inflated at 3.6 percent.5

Table 12: Financial Analysis Assumptions and Results for 50 MW Solar PV Plant
Assumptions
Equity portion 25%
Expected Return on Equity 15%
Debt portion 75%
Debt Terms Loan A (DFIs): 6.15%, 12 years & 1-year grace period
Loan B (IFC Blended Finance): 4%, 18 years & 1 year grace period
WACC 7.6%

5
World Bank Data https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG.
The World Bank
Sindh Solar Energy Project (P159712)

Deflator 3.6%
Results
Project FIRR 9.0%
Equity IRR 15%
PPA Tariff $0.04/kWh
FNPV $5.8 m

Sensitivity Analysis
12. A sensitivity analysis was conducted to calculate the switching values for the key cost and benefit
drivers in the economic analysis: (a) CAPEX of 50 MW solar plant; (b) fuel price of the alternative power
source (HFO and LNG plant); and (c) curtailment risk. The sensitivity analysis indicates that the CAPEX has
a switching value of US$1.5/W; that is, the investment is highly robust in case of potential cost overrun by
up to 100 percent. It is also highly robust with the fuel price for both LNG and HFO: for the ENPV to become
negative, their respective prices need to become -$0.05 and -$0.02 per kWh, which is highly unlikely. The
investment ceases to be economically feasible when the curtailment factor reaches 61 percent. However,
given the degree of underserved demand in Sindh and the low cost of power from this investment, such
high curtailment is unlikely.
13. A sensitivity analysis on the component’s financial feasibility was conducted to analyze the
maximum interest that makes the investment financially viable if blended finance at 4 percent interest is
not available. The switching value on the interest rate is 7.5 percent from a base value of 4 percent,
meaning that other forms of DFI financing will make this investment financially feasible. The switching
values are summarized in Table 13.

Table 13: Switching Values for 50 MW Solar PV Plant

Base Value Switching Value
EPC cost $/W 0.70 1.50
LNG price $/kWh 0.0440 -0.05
HFO price $/kWh 0.078 -0.02
Interest rate for Loan B 4% 7.50%
Curtailment risk 10% 61%

Component 2: Distributed Solar

Economic Analysis
14. The counterfactual for distributed solar was assumed to be the same marginal generation source:
HFO- and LNG-based plant. However, the transmission loss avoided was taken into account in the
economic benefits calculation. The capacity credit was again assumed to be zero percent to keep the ERR
and ENPV estimates conservative. The energy balance for the first five years after installation is shown in
Table 14.
The World Bank
Sindh Solar Energy Project (P159712)

Table 14: Energy Balance for 20 MW Distributed Solar

Energy Balance
2019 2020 2021 2022 2023 2024
Installed Capacity [MW] 20.00
Capacity Factor [units] 0.190
Energy Produced [GWh] 29.96 29.81 29.66 29.51 29.36
Transmission loss avoided [GWh] 3.33 3.31 3.30 3.28 3.26
Energy displaced from alternative source [GWh] 33.29 33.12 32.96 32.79 32.63

15. The economic analysis for 20 MW of distributed solar indicates that the investment is
economically viable with an ERR of 20.5 percent. The CAPEX for the distributed solar was assumed to be
$1.03/W6 with a capacity factor of 19 percent.7 The key assumptions used are shown in Error! Reference
source not found.. After accounting for the cost of avoided GHG emissions, the EIRR further increases to
27.7 percent. The lifetime GHG emission reduction is projected to be 435,180 tons of CO2e. The net
economic benefit (with externalities) for this component is estimated at $33 million.

Table 15: Economic Analysis Assumptions and Results for 20 MW Distributed Solar
Assumptions
PV system CAPEX $1.03/W
OPEX (% of CAPEX) 2%
Capacity factor 19%
Degradation of PV output 0.5% p.a.
Transmission loss avoided 10%
Lifetime 20 years
Economic/social discount rate 6%
Results
EIRR (without environmental externalities) 20.5%
EIRR (with environmental externalities) 27.7%
GHG emissions 435,187 tons
ENPV $21.8 m
ENPV (with externalities) $33.0 m

Financial Analysis
16. The financial analysis of Component 2 from the perspective of the public sector building owners
indicates that distributed solar component of this project is financially viable, with a project FIRR of 22.3
percent. The revenue assumed for the financial analysis is the economic savings from not using the grid
electricity, which is $0.16/kWh.8 The component is assumed to be fully IDA-financed. Additional
assumptions for the financial analysis are shown in Table 16. The financial NPV of the component over 20
years is estimated at $26.7 million.

Table 16: Financial Analysis Assumptions and Results for 20 MW Distributed Solar
Assumptions

6
Estimated based on “NEPRA Generation License Application” and “IRENA Cost Reduction Potential to 2025.”
7
The capacity factor for rooftop solar is assumed to be slightly lower than the utility component because of soiling,
dusting, and shading.
8
Retail tariff as indicated by K-Electric.
The World Bank
Sindh Solar Energy Project (P159712)

Equity portion 0%
Debt portion 100%
Debt terms 3.3%, 20 years tenor, 5-year grace period
WACC 3.3%
Grid electricity tariff avoided $0.16/kWh
Roof lease paid to the building owner $0.01/kWh
Deflator 3.6%
Results
Project FIRR 22.3%
FNPV $26.7 m

Sensitivity Analysis
17. A sensitivity analysis was conducted to assess the robustness of the economic feasibility of
distributed solar in terms of its CAPEX. The switching value for the CAPEX is $2.11/W, indicating that the
investment is economically highly robust in case of cost overrun by over 100 percent.
18. To assess the financial feasibility of the investment, a sensitivity analysis was conducted on (a) the
Interest rate of the debt, and (b) the avoided grid electricity tariff. Results show that the switching value
of the interest rate on the debt is 16.5 percent, indicating that once the pilot has been established and
the necessary technical capacity has been built, distributed solar could easily leverage commercial
financing at higher interest rates. The results on the sensitivity to avoided electricity tariff indicate that
the component becomes financially nonviable if the grid electricity tariff drops by 25 percent to
$0.119/kWh from a base value of $0.16/kWh. The summary of the sensitivity analysis is shown in Table
17.

Table 17: Switching Values of 20 MW Distributed Solar

Base Value Switching Value
EPC cost 1.03 2.11
Interest rate 3.3% 16.51%
Grid Tariff 0.16 0.119

Component 3: Solar Home Systems

19. The economic analysis for the SHS component indicates that the component has high economic
returns, with an ERR of 17.1 percent and net economic benefit of $97.6 million. The analysis assumes an
SHS cost of $360, which the consumers are to pay off to the SSPs over 24 months. The difference between
the price of the system and the current energy cost of the end user will be covered by the IDA credit. For
this analysis, the grant amount is assumed to be $120 per system.
20. The calculation of the economic benefit is based on the beneficiaries’ willingness to pay for
electricity, which is conservatively estimated to be equal to $10 per month9 based on their current average
expenditure on energy (kerosene lamps, candles, battery torches, and diesel generators). The analysis
assumes a system replacement cost of 60 percent of the initial CAPEX every five years as per the product

9
Based on the Lighting Pakistan Survey report.
http://www.ifc.org/wps/wcm/connect/d72aa0004886746d8388f7299ede9589/Pakistan+Solar+Consumer+Study+
Overview_26thMay2015_LQ.pdf?MOD=AJPERES.
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Sindh Solar Energy Project (P159712)

specifications of Lighting Global. Table 18 lists the key assumptions and the results of the economic
analysis. The energy balance and the economic flows for the first five years and the net economic benefit
over the project lifetime are further illustrated in Tables 19 and 20.

Table 18: Economic Analysis Assumptions and Results for Solar Home System
Assumptions
Cost of solar home system $360/system
Grant per system $120/ system
Number of households 200,000
Capacity of each system 35W
Replacement cost (% of CAPEX, every 5 years) 60%
O&M (% of CAPEX) 10%
Lifetime 20 years
Alternative fuel consumption Kerosene (41.4%), candles (38.9%), battery
torches (0.8%), and diesel generator (14.2%)
Average spend per household on alternative fuel $10/month
Results
EIRR (without environmental externalities) 17.1%
ENPV $97.6 m

Table 19: Energy Balance for Solar Home Systems

Energy Balance
2019 2020 2021 2022 2023 2024
Capacity installed [MW] 7
Energy Produced [GWh] 10.73 10.65 10.56 10.48 10.39 10.31
Energy displaced from Diesel Generator [GWh] 1.52 1.51 1.50 1.49 1.48 1.46
Unmet Demand [GWh] 9.21 9.13 9.06 8.99 8.92 8.85
Total Energy displaced from alternative[GWh]
source 10.73 10.65 10.56 10.48 10.39 10.31

Table 20: Economic Analysis of Solar Home System

Economic Analysis
NPV 2019 2020 2021 2022 2023 2024
Cost of Solar Systems
CAPEX [$US thousands] 72000
Replacement Cost 43200
Total O&M cost [$US thousands] 7200 7200 7200 7200 7200 7200
Total Costs [$US thousands] 238,407.98 79,200.00 7,200.00 7,200.00 7,200.00 50,400.00 7,200.00
Yearly cost savings from alternative fuel [$US thousands] 278,964.87 24,321.43 24,321.43 24,321.43 24,321.43 24,321.43 24,321.43
Net Economic Benefits [$US thousands] 97,628.57 (54,878.57) 17,121.43 17,121.43 17,121.43 (26,078.57) 17,121.43
ERR [%] 17%

21. The analysis did not require a separate financial analysis for the end consumers, since their total
spending on energy remains unchanged because the IDA-financed grant will close the gap between the
cost of their current primary energy source and that of the SHS.
22. A sensitivity analysis on the economic feasibility of the SHSs indicates that if consumers’ current
spending on alternative energy sources, which is also a measure of their willingness to pay, is lower than
$8.1 per month as opposed to the base assumption of $10 per month, the SHSs will not be economically
viable. This will be factored into the targeting of the grant scheme and the level of grant to be offered.