Introduction
By Vaqar Ahmed and Muhammad Zeshan
Pakistan is currently faced with energy shortages and environmental challenges. The transition to renewable energy sources offers a promising solution to address these pressing issues. This blog post explores the potential benefits of green energy transition in Pakistan, the investment requirements, and the crucial role of local and foreign investment, including that by Multilateral Development Banks (MDBs). Replacing 70% of imported coal with renewables necessitates over USD 8 billion in public investment which could be a daunting task for the government given the current lack of fiscal space. This blog is based on a detailed research study conducted under the Center for Global Development (CGD)-Partnership for Economic Policy (PEP)collaboration.
The need for green energy transition
Pakistan's energy landscape has been dominated by fossil fuels, leading to various environmental and economic problems. The country faces significant air pollution, water scarcity, and climate change impacts. Moreover, its dependence on imported fossil fuels creates a vulnerability to global price fluctuations.
A shift towards renewable energy sources such as solar, wind, and hydro-power can provide several advantages. Firstly, it can reduce Pakistan's reliance on imported fuels, leading to improved energy security. Secondly, renewable energy sources emit significantly lower greenhouse gas emissions, contributing to mitigating climate change. Thirdly, renewable energy projects can create jobs and stimulate economic growth in rural areas.
The government has particularly focused on solar sector in recent years. Large-scale solar parks have been established, contributing to the country's renewable energy capacity. Additionally, rooftop solar installations have become increasingly popular, with net metering policies encouraging households and businesses to generate their own electricity. Solar-powered pumps are also being used for agriculture and drinking water supply in rural areas. To further diversify its renewable energy portfolio, Pakistan has also explored solar hybrid power plants that combine solar power with other renewable sources.
Investment requirements and financing sources
The transition to green energy requires substantial investments in infrastructure and technology. According to our analysis, the estimated investment outlay for Pakistan's green energy transition is significant. However, there are various financing sources available to support these investments.
- Domestic Financing: The government can play a pivotal role in financing green energy projects through public-private partnerships (PPPs), tax incentives, and direct public investments. Additionally, domestic financial institutions can provide loans and equity to support renewable energy initiatives.
- Foreign Investment: MDB scan provide concessional loans, grants, and technical assistance to support Pakistan's green energy ambitions.[1] Foreign direct investment (FDI) from private sector investors can also contribute to the development of renewable energy projects if there is regulatory easing.
Policy recommendations
Based on our computable general equilibrium (CGE)model-based simulation experiments offering different funding options and consultations with stakeholders, we propose the following policy recommendations to facilitate Pakistan's green energy transition:
- Phase Out Fossil Fuels and Phase in Renewable Energy: The government should gradually phase out fossil fuel subsidies and introduce targeted renewable energy subsidies. This will create a level playing field for renewable energy technologies and incentivize their adoption.
- Financing and Investment: MDBs can provide financial support through concessional loans, grants, and equity investments. Public-private partnerships can attract private sector investment, while government investments can encourage large-scale renewable energy projects in economically lagging areas.
- Policy Support and Reforms: MDBs can collaborate with the government to develop and implement policies that support renewable energy development, such as promoting competition and innovation in the renewable energy market.
- Environmental and Social Safeguards: MDBs could ensure strict environmental and social safeguards to demonstrate that renewable energy projects are sustainable and do not harm the environment or communities. This includes assessing environmental impacts, ensuring community involvement, and supporting local capacity building.
The Role of Southern-Led Research and Outreach
This project highlights the importance of Southern-led research and outreach in driving green energy transition. By engaging with local researchers, MDBs can gain valuable insights into the specific context and challenges faced by developing countries. This collaboration can lead to more relevant, localized, and effective policy implementation.
Conclusion
The transition to green energy is a critical step for Pakistan to address its energy challenges and contribute to global efforts to combat climate change. An area not covered in the current research program but worth exploring is the potential for the green transition to promote regional value chains in the energy sector. This subject has frequently emerged during SAARC heads of state meetings, suggesting a growing interest in collaborative energy initiatives within South Asia.
Acknowledgements:
The above blog benefits from research on “How can Multilateral Development Bank Support for Green Energy Transitions in Pakistan,” a project funded by the Center for Global Development (CGD) and coordinated by PEP.
