The recent upsurge in circular debt (CD) accumulation coincided with the signing of “take-or-pay” contracts for imported coal and RLNG-based plants. These contracts, intended to address energy shortages, came with volatility and a hefty price tag.
This escalation in electricity generation costs has severely impacted Pakistan’s transition to renewable energy by diverting financial resources away from potential investments in renewables and locking the country into long-term dependencies on fossil fuels.
The persistent rise in circular debt (CD) within the power sector, currently amounting to PKR 2.6 trillion, is fueled by a multitude of factors, including high transmission and distribution (T&D) losses, inefficiencies within power distribution companies (Discos), and unbudgeted energy subsidies.
Frequent hikes in electricity tariffs aggravate Pakistan’s CD by increasing non-payment rates and T&D losses, as these losses are calculated as a percentage of the tariff. Instead of temporary fixes, policies must address the root causes of this debt.
For instance, transmission and distribution losses stood at 16.45% in FY 2022-23, while the inefficiencies and low collection rates of DISCOs have led to significant commercial losses, with outstanding debt from defaulters exceeding PKR 900 billion.
According to World Bank, Pakistan’s high energy subsidies to the domestic sector, currently estimated at PKR 976 billion (0.9 percent of GDP) for FY 2024, further strain the financial system. This explains the increasing financial burden on the power sector, highlighting the urgent need for a shift towards lower cost energy sources.
By reducing dependence on imported fossil fuels, where long-term forex-based prices are currently rising and unpredictable, Pakistan can alleviate some of these financial pressures, stabilize power prices, and pave the way for a more sustainable and economically viable energy future through indigenization and the induction of a local supply chain and renewables.
However, the current fossil fuel-based power plants should be retired, potentially through public debt financing, to address overcapacity issues and reduce the CD crisis. Advancing the planned retirement of outdated and inefficient power plants while ensuring that new additions focus exclusively on renewable energy is need of the hour.
Investing in renewable energy not only offers a sustainable solution to the circular debt crisis but also brings numerous economic and environmental benefits. Renewable technologies, such as solar and wind, have near-zero marginal costs of production, which can significantly lower overall electricity generation costs. This makes renewables highly competitive in the long term.
For example, the International Energy Agency (IEA) reports that new solar projects are now the cheapest source of power on a levelized cost of energy (LCOE) basis, with solar energy costing around $60 per MWh, while gas is $20 more expensive at $80 per MWh. Redirecting funds from LNG and coal infrastructure to renewable energy projects aligns with global trends favoring climate-friendly investments and will ensure a resilient energy future for Pakistan.
But where do we stand in terms of renewable energy in the country? Pakistan’s energy production and consumption landscape is predominantly fueled by fossil fuels. As of recent data, thermal sources—comprising natural gas, oil, and coal—contribute to nearly 60% of the country’s total installed capacity. Specifically, natural gas accounts for approximately 33%, oil for 15%, and coal for about 12% of the energy mix.
In contrast, renewable energy sources such as hydropower, wind, solar, and biomass make up a smaller fraction of Pakistan’s energy portfolio. Hydropower constitutes around 30% of the installed capacity, while wind and solar energy contribute approximately 4% and 2%, respectively.
Despite the declining costs of renewable technologies and the substantial potential for clean energy, the pace of renewable energy development has been insufficient to offset the use of fossil fuels to any significant extent. As of 2023, the total installed capacity of renewable energy sources, including hydropower, wind, solar, and bagasse/biomass, exceeds 13,000 MW out of 45,885 MW.
The truth is Pakistan’s current energy mix has significant environmental impacts. The extensive use of natural gas, oil, and coal contributes to high levels of carbon emissions and air pollution has adverse effects on public health and the environment.
While Pakistan emits less than 1% of the world’s planet-warming gases, its emissions are insignificant on a global scale, yet Pakistan suffers disproportionately from the outcomes. For instance, power plants burning fossil fuels are major sources of sulfur dioxide (SO?), nitrogen oxides (NO?), and particulate matter, leading to respiratory illnesses and other health problems among the population.
Lahore is already bearing the brunt of it, ranked 5th in the 2023 IQAir World Air Quality Report. The city frequently experiences severe air pollution, directly linked to emissions from these power plants, resulting in increased cases of asthma, bronchitis, and other respiratory conditions. Fossil fuel extraction and combustion contribute to soil and water pollution, further degrading the country’s natural resources.
Economically, the high costs associated with fossil fuel imports place a substantial burden on Pakistan’s financial resources. The country spends a significant portion of its foreign exchange reserves on importing oil and gas (roughly one-quarter of Pakistan’s imports are oil and gas), which makes its economy vulnerable to global price fluctuations.
In fiscal year 2022-23, energy imports accounted for a large share of the total import bill, intensifying the country’s trade deficit. Socially, the energy crisis in Pakistan leads to widespread energy access issues, with many rural and remote areas lacking reliable electricity supply. This energy insecurity affects education, healthcare, and overall quality of life, hindering social and economic development.
Switching to renewable energy in Pakistan offers numerous benefits across environmental, economic, and social dimensions. Environmentally, renewable energy significantly reduces greenhouse gas emissions and mitigates climate change impacts. For instance, projections indicate a potential 50% reduction in projected emissions by 2030, with a 35% reduction contingent on international grant finance and a 15% reduction from the country’s own resources.
Economically, the transition creates jobs within the renewable energy sector and provides long-term cost savings compared to fossil fuels, enhancing energy independence and security. Socially, renewable energy improves public health by reducing pollution, enhances energy access in remote areas, and empowers local communities through decentralized energy systems. These combined benefits underscore the urgent need for Pakistan to accelerate its shift towards sustainable energy solutions.
Moreover, the implementation of distributed energy solutions and localized energy grids with renewables can further strengthen these benefits. By enabling DISCOs to purchase power from the grid while supplementing it through solar rooftops, particularly in areas with limited energy access, and allowing direct purchases from dedicated plants, Pakistan can ensure a more sustainable and resilient energy use that rooftop solutions alone cannot achieve.
Wind energy also presents substantial opportunities, especially in the wind corridors of Sindh and Balochistan. The Gharo-Jhimpir wind corridor alone has an estimated potential of 50,000 MW, with several successful projects already operational.
For instance, the Jhimpir Wind Power Plant, with an installed capacity of 50 MW, has been effectively harnessing wind energy and contributing to the national grid. These projects not only support energy diversification but also promote energy security and reduce carbon emissions. To further enhance resource utilisation and cost efficiency, the government should mandate that wind installations also incorporate solar power. This hybrid approach would ensure optimal use of available land and infrastructure, resulting in greater energy output and more sustainable energy solutions.
A key development in Pakistan’s renewable energy sector is the expansion of net metering. As of June 30, 2023, net metering consumers reached approximately 56,000, a nearly 50% increase from the previous year. In FY22-23, net metering generated 482 gigawatt-hours, a remarkable 220% year-on-year growth.
Despite this impressive growth, 482 gigawatt-hours represent less than 0.4% of the total energy sold/generated, highlighting its relatively small impact on the overall energy market. Rather than penalizing net metering through gross metering, which would discourage consumer participation, it is crucial to continue and support net metering policies.
The proposal for gross metering raises serious concerns. Gross metering, which requires consumers to sell all the electricity generated by their solar panels to the grid at a fixed Feed-in-Tariff (FiT) and then buy back the electricity they consume at retail rates, is a travesty of justice.
The significant rate disparity—selling electricity at 11 rupees per unit while buying it back at up to 62 rupees per unit—makes solar investments financially unsustainable. This policy shift would compel consumers to seek mechanisms to go completely off-grid, undermining the growth of renewable energy. Instead, the government should focus on revising unsound tariff structures to support renewable energy growth, consumer benefits, and grid stability.
In addition to net metering, hydropower remains a critical component of Pakistan’s renewable energy strategy, leveraging the country’s abundant water resources. The total hydropower capacity, including WAPDA and IPPs, stands at 10,635 MW as of June 30, 2023. Major projects like the Tarbela and Mangla dams continue to play pivotal roles.
Wapda plans to add up to 10 GW of hydropower capacity by 2030 through the phased completion of its under-construction projects. Future projects, including the Diamer-Bhasha Dam, are expected to add significant capacity. However, managing seasonal variability is crucial for optimizing hydropower generation. Effective water management and storage solutions are essential to balance supply during dry periods and maximize generation during peak flow seasons.
Technological innovations play a pivotal role in overcoming challenges and advancing the renewable energy sector in Pakistan. Recent advancements in solar and wind technology have significantly lowered costs, making renewable energy more competitive with traditional fossil fuels.
The average cost of solar power generation has dropped to PKR 3.67 per kWh, making it cheaper than many conventional energy sources. In addition, the development of battery storage systems and smart grid technologies is crucial for stabilizing the power supply and managing the intermittency of renewable energy sources.
Supporting the integration of renewable energy and enhancing grid flexibility is essential. The National Transmission and Dispatch Company (NTDC) is modernizing the grid infrastructure to better accommodate the distributed and variable nature of renewable energy. This includes implementing advanced forecasting tools, real-time monitoring systems, and automated control mechanisms to quickly respond to changes in power generation and demand.
Strategies such as demand response programmes, which adjust consumer power usage during peak times, and the development of microgrids, capable of operating independently or alongside the main grid, are also being adopted. These measures not only improve the resilience and reliability of the power system but also facilitate the seamless integration of renewable energy, supporting Pakistan’s ambitious goal of achieving 30% renewable energy by 2030.
Building on Denmark’s remarkable achievements in renewable energy, Pakistan can draw valuable lessons. In 2022, Denmark announced an ambitious target to achieve net-zero emissions by 2045, aiming for 110% emissions reductions by 2050.
The Danish government has strategically focused on offshore wind, biomethane, district heating, carbon capture and storage (CCUS), and hydrogen. This comprehensive approach is guided by robust energy and climate governance under the Danish Ministry of Climate, Energy and Utilities, ensuring annual policy actions and funding through the ‘year wheel’ of the Climate Act of 2020.
This strategic focus on renewable energy sources, coupled with Denmark’s technology leadership, showcases how a well-coordinated policy framework and technological innovation can drive a successful energy transition. By adopting similar best practices, Pakistan can enhance its renewable energy adoption, ensuring a sustainable and economically viable energy future.
The future of Pakistan lies in harnessing the power of the sun, wind, and water to create a sustainable and prosperous nation. By embracing renewable energy, Pakistan can address its energy challenges, improve public health, and build a resilient economy. As the famous quote goes, “The best time to plant a tree was 20 years ago. The second-best time is now.” It is time for Pakistan to plant the seeds of a renewable energy revolution.
Copyright Business Recorder, 2024