7.1. Background
Initially, during the post-deregulation of electricity markets in the US (1990s) and the EU (2000s), the focus was on structural reform and establishing instruments to make the markets more transparent and competitive. In the US, this was driven by FERC Orders 719, 888, 889, 890, and 2000, while the EU implemented the First and Second Energy Packages. The aim was to enhance market efficiency and integration, particularly within the EU, which sought greater cohesion among member states' energy policies. In the 2010s, after the foundational rules were established, attention shifted towards enhancing transmission infrastructure and regional integration. This phase saw the issuance of US FERC Orders 825 and 1000, alongside the EU's Third Energy Package. These initiatives aimed to improve grid reliability and support the seamless transmission of electricity across regions. By the late 2010s, the focus further evolved to prioritize the integration of renewables and other green solutions. This was marked by US FERC Orders 841 and 2222 and the EU's Clean Energy Package, reflecting a global commitment to reducing carbon emissions and promoting sustainable energy sources. During this period, the US transitioned from coal to gas as the primary source of generation [
49], while the EU maintained a diverse mix of electricity sources, including nuclear, coal, gas, and hydropower, varying across countries due to geographical, policy, and historical factors. [
50]
In Pakistan, the partial deregulation of the electricity sector began in the 1980s, transitioning from a monopoly to multi-generation players. Significant milestones included The Water and Power Development Authority (WAPDA) privatization plan in 1992 and the establishment of National Electric Power Regulatory Authority (NEPRA) in 1997 to regulate the market. The formation of the Central Power Purchasing Agency (CPPA) by the National Transmission and Despatch Company (NTDC) in 2002 for procurement and billing evolved into the Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) in 2009, which the NEPRA recognized as the Market Operator in 2017. In 2019, NEPRA approved the Competitive Trading Bilateral Contract Market (CTBCM) to enhance market efficiency. Additionally, Pakistan introduced the Alternative and Renewable Energy (ARE) Policy 2019, focusing on competitive bidding for renewable generation and procurement based on the least cost, aligned with the Indicative Generation Expansion Plan (IGCEP).
After the Paris Agreement in 2015 [
51], renewable-based resources started gaining significant attention, leading to the deployment of renewable plants in the US, EU, and Pakistan. This trend accelerated further after 2020 when the levelized cost of electricity from renewable sources dropped significantly. Additionally, the prices of fossil-based resources increased in the EU due to the Russia-Ukraine war and in Pakistan due to currency depreciation and rising inflation. Both Pakistan and the EU experienced a rise in behind-the-meter solar generation installations in response to high electricity tariffs, while the US saw major investments in utility-scale solar projects.
7.2. Stages of Renewable Integration
Renewable energy auctions, a competitive process for procuring electricity generated from renewable sources, evolve through distinct stages as depicted in [
52].
In the initial stage, simple energy-only auctions focus on awarding power purchase agreements (PPAs) based on the lowest energy bid to demonstrate market interest and facilitate price discovery, often transitioning from administratively set feed-in tariffs (FITs) to competitive bidding. The US and EU have utilized these early-stage auctions to attract investment into the power sector, starting with small capacity quotas, similar to Pakistan's current phase.
The second stage addresses grid integration challenges by adding requirements related to energy output timing and desired renewable locations, with significant investments in modernizing and digitizing grids. For example, the US identifies specific geographic zones for renewable capacity, sometimes necessitating new transmission infrastructure, while the EU stipulates energy supply during particular times of the year and specific hours of the day. Renewables-plus-storage solutions are increasingly adopted to enhance dispatchability and improve energy value.
In the third stage, renewable energy is integrated into electricity markets using mechanisms like feed-in premiums (FIP) and contracts for difference (CFD), requiring renewable generators to sell directly into wholesale markets and participate in ancillary services and balancing markets. This approach, seen in various EU countries, minimizes public subsidies and provides clear market signals for renewable energy.
The fourth stage involves commercial and industrial (C&I) power purchase agreements (PPAs), where C&I consumers procure power directly from renewable plants. In the US and EU, corporations are motivated by climate commitments, hedging against market fluctuations, and supply security. Auctions are used to secure the best prices, with both state utility and corporate auctions impacting competition levels and pricing. This stage benefits from technical assistance and supportive regulatory environments to facilitate corporate auctions.
Recent Initiatives
In September 2023, EU Parliament endorsed a new goal to achieve 42.5% of energy from renewable sources by 2030, while EU member states are encouraged to aim for 45%, a target also supported by the Commission as part of its REPowerEU initiative [
53]. Recent initiatives include REPowerEU (May 2022), Net-Zero Industry Act (March-2023), Critical Raw Materials Act (March-2023), EU electricity market design reforms to boost Renewables (march 2023) [
54], and The European Green Deal (March 2023) [
55] all aiming at promoting clean technologies enhancing manufacturing capacity for technologies crucial to the clean energy transition.
From the US, different states have varying target years and percentages for renewable energy goals, as shown in
Table 2. This diversity in standards and goals reflects the varied approaches and timelines states are adopting to transition towards renewable and clean energy. [
56]
Renewable Portfolio Standards (RPS) and Clean Energy Standards (CES) are regulatory mechanisms that mandate specific percentages of energy to come from renewable or clean sources, with RPS focusing primarily on renewable energy and CES encompassing a broader range of clean energy technologies. Both RPS and CES are legally binding, with clear targets and penalties for non-compliance. In contrast, Clean Energy Goals are typically aspirational targets that set broad, long-term objectives for achieving a cleaner energy mix but may lack the strict legal enforceability of RPS and CES. The primary purpose of RPS and CES is to directly drive the integration of clean energy into the grid, whereas Clean Energy Goals provide a strategic vision for future energy transitions.
FERC Order No. 2023 [
57] aims to streamline the connection process for renewable energy projects to the transmission system, enhance certainty in interconnection procedures managed by multiple transmission providers nationwide, and ensure equitable access for new technologies to the grid. FERC Order No. 2222 [
58] focuses on facilitating the participation of distributed energy resources (DERs) in regional electricity markets administered by grid operators.
Recently Pakistan has also introduced various policies to facilitate the smooth transitioning to the clean and affordable generation technologies. National Electricity Plan 2023-2027 envisage renewable generation capacity of 40% of total generation capacity by FY-2025 and 60% of total generation capacity by FY-2030. Also, it establishes policy guidelines for promotion of hybrid renewable based generation to tackle intermittency, future participation of distributed renewable based generation, regional interconnectivity, transmission and distribution expansion and digitalization [
59]. Fast Track Solar PV Initiatives 2022 [
60] promotes solar PV Generation on 11 kV Feeders and solarization of Public Buildings.
In 2022, Pakistan introduced microgrid policy which paved the way for the establishment of microgrids in Pakistan with the power rating up to 5MW. This policy is inspired from the "the Alternative and Renewable Energy Policy 2019" which envisages the development of microgrids in the country to provide renewable based power to the far-flung isolated communities. [
61]
Renewable based generation trends
The US power market is undergoing substantial changes, driven by the increasing integration of renewable energy sources and adjustments in fossil-based generation. From 2014 to 2028, wind and utility-scale PV generation capacities have shown significant growth. Wind capacity increased from 64,303.9 MW in 2014 to an operational capacity of 155,900.2 MW by April 2024, with planned projects pushing it to 171,867.2 MW by 2028. Utility-scale PV capacity exhibited rapid growth, rising from 8,988 MW in 2014 to 128,950.9 MW by April 2024, and is projected to reach 182,111.9 MW by 2028. Net-metering PV also showed substantial growth from 7,096.83 MW in 2014 to 47,000 MW by 2023. These trends can be seen in
Figure 9.
Source: Author’s own illustration based on [
62,
63]
Between 2020 and 2024, there were significant fossil-based retirements amounting to 62,339.4 MW, with fossil-based additions totaling 31,668.3 MW. These changes reflect the ongoing transition from traditional fossil fuels to cleaner energy sources as depicted in
Figure 10. Additional fossil fuel-based plant additions are projected: 7,044 MW in 2025, 4,574.7 MW in 2026, 3,487.3 MW in 2027, and 1,101.5 MW in 2028. These additions indicate continued investments in fossil-based generation, albeit at a reduced rate compared to renewable energy investments. CAISO and ERCOT are leading the market in terms of renewable based generation.
Similar trend can be overserved in case of EU. In 2023, the EU electricity market experienced notable changes, highlighted by a 3.4% decrease in electricity demand due to high gas prices. Despite the 2022 energy crisis setbacks, the transition to clean energy gained momentum, driven by the REPowerEU commitment and the new 2030 renewable energy target of 44.5%. Renewable energy generation reached 1,200 TWh, surpassing fossil fuel generation at 788 TWh and accounting for 45% of total electricity generation. This growth was powered by an 18% surge in solar power and wind energy surpassing gas and coal generation for the first time as shown in
Figure 11.
The EU has seen substantial growth in the installation of solar photovoltaic (PV) and wind systems, with a rapid acceleration in capacity over the past two decades. Countries like Germany, Spain, and Italy have been leading expansion in solar while Germany, Sweden and Netherlands leading the wind energy expansion. Projections indicate that this growth will continue especially in solar, driven by supportive policies and technological advancements, leading to higher shares of wind and solar power in the overall energy mix as depicted in
Figure 12.
Figure 12.
EU Future outlook for solar and wind cumulative installed capacity [
66].
Figure 12.
EU Future outlook for solar and wind cumulative installed capacity [
66].
As of 2023, Pakistan's renewable energy potential remains significantly underutilized as shown in
Figure 13. The country has an installed capacity of 10,663 MW from hydroelectric sources, 1,555 MW from solar power (including net-metering), and 1,845 MW from wind energy.
Figure 13.
Utility scale renewable generation potential vs installed capacity (2023).
Figure 13.
Utility scale renewable generation potential vs installed capacity (2023).
Source: Author’s own illustration based on [
16,
67]
Due to shrinkage of demand in recent years as observed in figure 6, the future scenario fell short of accommodating more renewables such as solar and wind. As the projected future demand is low so the requirements for the new RE based generation may not be increasing at high pace in future. However, government is actively planning to get rid of imported fossil-based generation due to fiscal constraints and gradually introducing incentives for solar generation [
68]. If the demand for power increases in future, the requirements for penetration of solar also increase many folds. This phenomenon can be seen in
Figure 14, which presents the year 2033-34 scenario in Pakistan. The distinction among base, medium and high demand is largely based on future GDP growth targets of Pakistan.
Source: Authors own illustrations based on [
16]
To meet future demand, hydel generation in Pakistan is progressing well and can significantly contribute to decarbonization goals. However, it has limitations due to site issues, lack of foreign investment, and seasonal variability. Hydel generation is abundant during summer peak demand but low in winter, which is not problematic due to reduced demand. However, as winter demand increases due to gas supply limitations, rising gas prices, and industrialization, Pakistan may need to rely more on solar and wind energy as solar and wind poses lowest tariffs in Pakistan (
Figure 15)
The net-metering scheme, introduced in 2015, has accelerated due to high electricity tariffs. By June 2023, net-metering-based solar installations reached 63,703, with a total capacity of 1,055.03 MW, and are anticipated to exceed 4 GW by 2033-34 [
16,
69]. However, the shift to solar and wind energy is hindered by inadequate financial incentives and inflexible power generation contracts. Current ramp rates for power plants are below international standards, limiting their adaptability to variable renewable energy sources (VRE) and their technological potential. Revising these ramp rates is essential for stable system operation, adapting to changing loads, and enhancing reserve power capacity [
31]. Additionally, speculation about switching from net-metering to gross metering to manage the capacity cost of decreasing demand from the national grid has caused confusion among small-scale investors.
Historically, till 2018, Pakistan was effectively trying to deploying renewable based generation as indicated by renewable energy country attractiveness index (RECAI) where Pakistan ranked among the top 40 countries in terms of country’s attractiveness for renewable energy investment and deployment [
70,
71,
72] but later on, the rate of deployment couldn’t keep pace with the rate observed in US and EU. This phenomenon can be observed from the
Figure 16.
Although VRE currently contribute about 5% of Pakistan's electricity generation mix, solar energy is crucial for addressing the needs of the 25% of the population lacking grid access. The private sector, particularly in rural areas, is actively deploying solar solutions, with projects like solarizing tube wells and rural electrification gaining traction. A recent 30% decline in PV module prices since Q4 2023 has enhanced solar cost-competitiveness, facilitating wider adoption of solar energy in Pakistan. [
74]
Implementing a Competitive Trading Bilateral Contract Market (CTBCM) in Pakistan can significantly address existing challenges and facilitate VRE deployment. By introducing a day-ahead market, generation companies can better project revenues and respond to competitive pressures, fostering a dynamic market environment with clear price signals that attract renewable energy investments. This competitive framework promotes efficiency and innovation, enabling renewable sources to compete equally with conventional generation. Lessons from the EU and US indicate that such competitive markets enhance the integration of VRE by providing financial incentives and encouraging technological advancements. Relying solely on long-term contracts may hinder renewable energy progress, underscoring the need for CTBCM adoption.