Solar energy: transforming the future

ISLAMABAD:

Solarisation is spreading at a stunning speed in Pakistan, catching global attention. Within just two to three years, Pakistan has transformed from being a negligible user of solar energy to one of the top solar markets globally.

According to the World Economic Forum, in the first six months of the current calendar year, Pakistan bought 13 gigawatts (GW) and thus has emerged as the third-largest importer of Chinese solar panels. Pakistan's imported solar capacity has already exceeded 30% of its total power capacity, which was 46GW in 2023.

This transition is largely a bottom-up process driven by households and businesses seeking relief from the unaffordable grid electricity. This change has been further accelerated by a dramatic 90% drop in solar panel prices over the last decade.

The government's role has been limited to facilitating this transition through modest interventions, such as removing the 17% sales tax on the import of solar panels in 2022 and implementing net metering policies that allow consumers to sell surplus energy back to the grid at significantly lower rates than the rates at which they purchase electricity.

In stark contrast, past energy policies, particularly those implemented since 1994, were top-down initiatives that left lasting damage. These policies prioritised short-term fixes over long-term sustainability and lacked transparency, leading to agreements that were poorly aligned with the country's needs.

When CPEC investments began in 2014, the mistakes of the 1994 Independent Power Policy (IPP) were repeated. Once again, excess capacity was created through costly agreements, including capacity payments that obligated the government and the consumers to pay for electricity, even if not produced.

According to the Institute for Energy Economics and Financial Analysis (IEEFA), Pakistan paid an estimated Rs6 trillion ($21.5 billion) in capacity payments between 2019-20 and 2023-24. Reliance on imported fuels added to the financial strain, while coal-fired plants raised environmental concerns.

While the ongoing solarisation process mitigates some of these issues, it has created new challenges for electricity generation and distribution companies.

With declining revenues as consumers move away from the grid, many within the government are advocating measures to slow down solarisation through the withdrawal of incentives for buy-back.

However, such proposals will face significant political and operational resistance. The government must recognise that solarisation is strengthening energy security, reducing reliance on expensive energy imports, and lowering long-term electricity costs for consumers.

It also supports environmental sustainability, aids in meeting climate goals, and expands energy access in remote, underdeveloped areas. Additionally, solarisation is driving economic growth by creating jobs, attracting foreign investment, and positioning Pakistan as a renewable energy leader.

Beyond domestic benefits, solarisation is critical for Pakistan's export competitiveness. Major markets like the European Union are implementing stricter environmental standards, such as the Carbon Border Adjustment Mechanism (CBAM).

Under this scheme, financial penalties will be imposed from 2027 onwards on imports based on the carbon emissions embedded in their production.

Transitioning from fossil fuels to solar energy could help Pakistan avoid these penalties, ensuring its exporters remain competitive in global markets while also meeting environmental obligations.

The government can build on the success of solarisation by adopting a similar bottom-up approach to the electrification of transport.

Pakistan's power and auto policies reveal striking parallels. Both were introduced in the 1990s, heavily top-down in nature, and have been subject to persistent government micromanagement.

While expensive energy has become the Achilles' heel for economic growth, the auto sector has struggled to achieve even nominal exports despite agreeing to various targets.

In contrast, competitors like Turkey, Indonesia, Morocco, and India have leveraged their automobile industries to diversify beyond textiles and secure a significant global market share.

To address this stagnation, allowing duty-free import of electric vehicles under the Pakistan-China Free Trade Agreement – mirroring the approach taken with solar panels – offers a game-changing solution.

This policy requires no subsidies and avoids the resource misallocation perpetuated by high tariffs protecting the auto industry. It could significantly reduce reliance on fossil fuels and combat the worsening smog crisis in urban centres.

By adopting this measure, Pakistan can accelerate its transition towards achieving the goal of 30% electric vehicles, including cars, motorcycles, buses, and trucks, by 2030 and 90% electrification of its transport fleet by 2040.

Rapid solarisation presents Pakistan with an unprecedented chance to address chronic energy challenges, boost economic competitiveness, and meet climate commitments. However, this momentum must be paired with complementary policies to tackle grid integration challenges and extend electrification to other sectors, particularly transport.

With a strategic, forward-thinking approach, Pakistan can transform its energy crisis into a powerful opportunity for economic growth and environmental leadership.

The writer is a senior fellow at the Pakistan Institute of Development Economics (PIDE). Previously, he has served as Pakistan's ambassador to the WTO and FAO's representative to the United Nations