Pakistan stands at a crossroads in its energy future. The nation’s energy sector has long struggled with inefficiencies, dependency on fossil fuels, and unsustainable consumption patterns. Despite an increase in installed capacity by 12% to 45,662 MW in FY23, electricity generation paradoxically declined by 10% during the same period. The reliance on imported fuels, off-grid solar expansion, expensive capacity payments to Independent Power Producers (IPPs), and a declining industrial demand reveal a disturbing trend: a system struggling to sustain itself.

The expansion of installed capacity was based on a projected 6% GDP growth rate from 2016 to 2025. However, COVID-19 coupled with the unforeseen economic downturn has resulted in overcapacity, with disproportionate payments to IPPs exacerbating the financial strain. Pakistan now faces the paradox of having surplus capacity while actual demand, especially from the industrial sector, continues to decline.

Energy insecurity in Pakistan is not new. The country’s reliance on fossil fuels, which account for 52% of electricity generation, is increasingly unsustainable. With depleting natural gas reserves and an economic crunch limiting coal imports, the energy sector faces a “crisis-to-crisis” cycle. This dependence on costly and polluting fuels hinders economic growth and conflicts with global carbon reduction goals. Additionally, Pakistan’s electricity demand fluctuates sharply with the seasons, driven by increased cooling needs during the hot summer months. To meet this surge, the country requires an additional 18,000 MW of power capacity, which remains underused for the rest of the year. This inefficiency costs the national economy nearly $100 billion. As a result, capacity payments to IPPs have ballooned to over PKR 2 trillion — a heavy financial burden on an energy sector that does little to boost the country’s GDP growth.

The pricing structure with IPPs means the country pays for power even when plants produce no electricity. Coupled with an inefficient transmission system and high household cooling consumption, the outlook remains bleak.

While the world transitions towards renewable energy, Pakistan lags - caught in the complexities of infrastructure, policy inertia, and financial constraints. Pakistan’s commitment to Nationally Determined Contributions (NDC) aimed to achieve 30% renewable energy in installed capacity by 2030. However, as of now, the contribution of renewable energy (excluding hydro) stands at a mere 7%. Given the economic constraints and stalled progress, Pakistan is in the process of redefining its NDC targets, with new, more realistic goals likely to be set much lower than the original 30%.

In a recent cohort session organized by the Center for Peace and Development Initiatives (CPDI) under the Green Zameen Fellowship Programme, it was shared that the country’s Variable Renewable Energy (VRE) capacity has grown from 3,819 MW in FY18 to 6,096 MW in FY23 — a promising development, but one that needs acceleration.

The European Union’s Carbon Border Adjustment Mechanism (CBAM) poses a significant threat to Pakistan’s textile and garment exports, a cornerstone of the economy. Competing nations like Bangladesh are already investing in renewable energy to shield their industries from CBAM-related penalties. If Pakistan fails to transition to cleaner energy sources, it risks losing competitiveness in key export markets, potentially causing severe economic damage.

The need for integrated planning that bridges energy, environment, and economy has never been more critical. Conservation and efficiency measures must be prioritized. The World Bank’s willingness to fund energy-efficient fan replacement programs, which could save over 5,260 GWh annually, is a small yet impactful step in the right direction.

Adopting Energy Conservation Building Codes (ECBC-2023) can lead to a 15-20% reduction in building sector energy consumption, helping Pakistan inch closer to net-zero targets. These measures need to be paired with forward-thinking policies, such as solar rooftop integration, clean cooking solutions, and support for electric vehicles (EVs).

The energy crisis in Pakistan is worsened by the government acting as the sole buyer of electricity, creating a non-competitive and inefficient power sector. This single-buyer model fosters opaque pricing and secretive agreements with rent-seekers, preventing market-driven rates and transparency. To address the crisis, it is essential to separate the debt issue—part of Pakistan’s broader fiscal challenges—from electricity pricing. While debt concerns should be managed through restructuring and expenditure cuts, electricity prices need to reflect market dynamics. This requires replacing the single-buyer model with a competitive electricity market. Such a shift would promote transparency, efficiency, and fair pricing, ultimately resolving the systemic inefficiencies burdening consumers and discouraging investment. For Pakistan, a Just Energy Transition — one that considers the socioeconomic impacts of moving away from fossil fuels — is essential. Establishing a National Integrated Energy-Economics Plan and a working group for regional collaboration on energy transition policies can pave the way for equitable progress.

Community-driven solutions and capacity-building hubs for industries powered by renewable energy are necessary to tackle the challenges of the CBAM regime. Incentivizing private sector development through tax exemptions and regional market support can provide the economic boost the nation desperately needs.

However, these solutions require more than just well-structured plans; they demand political will and effective governance. Federal-provincial coordination, public-private partnerships, and civil society oversight are crucial to ensuring these policies do not remain paper dreams. It is time for the political discourse to integrate energy security and sustainability as non-negotiable priorities for Pakistan’s future.

Pakistan’s energy challenges are daunting but not insurmountable. By focusing on integrated planning, energy efficiency, and renewable alternatives, the country can shift from perpetual crisis to a sustainable, prosperous future. It’s time to invest in long-term solutions that prioritize not just energy, but the well-being of our environment, economy, and citizens.

 MARIUM ZAAFIR KHAN

The writer is a development sector professional, based in Islamabad.