Energy and economy are intrinsically linked when it comes to the development of any country. A growing economy directly translates to an increase in energy demand, not fulfilling which may stunt a country’s growth. At the same time, without a healthy economy, no country can keep pace with its ever-increasing energy needs.
Pakistan, in the current scenario, suffers from polycrisis in both these domains. In certain areas, in fact, the twin challenges are responsible for and feed into each other. The result, seemingly, is a Gordian Knot situation – where does one start pulling to the untangle either mess?
A recent report by Sustainable Policy Development Institute (SDPI) suggests deepening Pakistan’s existing collaboration with China on renewables presents a potential fix. Noting that China’s increasing role in global environmental governance is evident with significant investments in clean energy, it suggests that this growing leadership in renewable energy presents an opportunity for Pakistan to expand its renewable energy capacity, particularly in solar and wind.
While Pakistan’s twin energy and economic crisis has come to a head in the past few years, it has struggled with meeting its energy need’s since independence. According to publications by the Pakistan Institute of Development Economics, the country with an economy worth $376 billion and a population of around 230 million relies on imports for almost half of its primary energy supplies. This stretches the country’s meagre foreign exchange reserves beyond their capacity. The country spent $17 billion on energy imports in the 2023 fiscal year – in contrast, its foreign reserves till October 2023 were only $7.7 million. According to PIDE, heavy energy imports and global market volatility constantly threaten Pakistan’s economic and energy security.
According to the SDPI report, titled ‘Low Carbon Development In Pakistan: Opportunities and Challenges for Chinese Private Sector’, Pakistan’s financing needs to pursue low carbon development are immense: it estimates $115.7 billion is required for renewable energy transition, $18 billion for coal buyout, and $13 billion for the replacement of coal with solar needs. As much as $15.12 billion and $20.5 billion are needed for solar and wind respectively while $57 billion is required for decarbonisation of the transport sector and $15.3 billion for improving energy efficiency, the report adds.
“As Pakistan shifts to cleaner energy sources, attracting investments in renewables becomes imperative,” notes the SDPI report. “China's transition towards green investments can strategically support Pakistan's clean energy agenda within the CPEC framework, especially as CPEC enters its second phase… CPEC 2.0 offers a vital platform to prioritise renewable energy projects, thereby promoting green investments,” it suggests.
According to the report, Chinese banks and investors already play a significant role in driving renewable energy growth in Pakistan. “Chinese banks, particularly the China Development Bank (CDB) and the Export-Import Bank of China (EXIM Bank), played a significant role in financing BRI projects, including those under CPEC. Credit insurance companies, like Sinosure, provided guarantees to investors, ensuring financial security.” As such, it argues that the involvement of Chinese state-owned enterprises (SOEs) and private sector investors, due to the capital and expertise they possess, is crucial to support Pakistan’s energy transition.
China's dominance in global renewable energy is projected to increase significantly to nearly 60 per cent of the global renewable capacity by 2028, the report notes. In Pakistan, Chinese investment accounts for 87 per cent of foreign investment in solar PV.
On the flip side, the SDPI points out “Pakistan’s commitment to renewable energy, supported by favorable policies and vast potential in solar and wind, offers compelling opportunities for investment.” The electric vehicle market in the country is also expanding, presenting opportunities for local manufacturing and establishing charging infrastructure. “Strengthening collaboration between the Chinese private sector and Pakistan could be a game-changer, driving forward low-carbon energy initiatives through joint ventures in distributed generation projects and strengthening the technology supply chain,” it contends.
That said, till now, China’s private sector has faced significant hurdles in advancing renewable energy investments in Pakistan, the SDPI report notes. “The lack of coordination between federal and provincial governments, coupled with tariff renegotiations, is uncongenial to investment. The situation has further exacerbated by delayed payments to Chinese independent power producers (IPPs) with an outstanding debt of approximately Rs400 billion by December 2023. This has also shattered the investor’s confidence in the sector.”
“To encourage the adoption of renewable energy by the Chinese private sector, it is essential to establish effective communication channels involving stakeholders like NEPRA, CPPA-G, PPIB, exploring green funding mechanisms, advancing green finance policies, and championing debt-for-climate swaps,” the report asserts. It stresses that it is imperative to engage a diverse range of stakeholders to achieve consensus and uniformity. Ensuring timely payments, providing mechanisms for liquidity damages, and upholding the integrity of contracts is also integral in this process, it argues.
Initiatives such as these should expedite investments in renewable energy infrastructure, supporting the transition to low carbon initiatives. To accelerate this transition, the country’s stakeholders must address these existing challenges and create an enabling environment for Chinese private sector investment, like the report suggests. As highlighted earlier, a transition to renewables and low carbon energy should ease off the significant pressure energy imports place on Pakistan’s economy, leaving it with a Sisyphean struggle with its debt obligations.