Green Finance in Pakistan

Abstract

Pakistan has been mired in a crippling energy crisis for several years, but is experiencing a rapid turnaround in the energy sector with several new projects coming online. However, government interventions rely heavily on imported fuel such as oil, coal, and LNG. An import-driven energy policy is not sustainable for Pakistan. Besides being a drain on its foreign exchange reserves, it exposes the economy to international energy price shocks, putting the entire economy at risk. A green energy-based energy policy can help Pakistan meet its energy requirements while reducing its dependence on imports and hence reduce the cost of energy to the country. This paper describes how the regulations and the structure of the power market support the financial viability of renewable energy in Pakistan and enable easy access to financing. The one-buyer, take-or-pay model of power purchase ensures that any new project that may produce expensive power but provides other benefits like clean energy or an improvement in the balance of payments (use of local fuel instead of imported fuel) can be financially viable provided the government approves it. However, the increased financial viability comes at the cost of higher energy prices to consumers due to low operational efficiencies and a higher subsidy burden on the government. The paper also discusses the challenges faced by distributed renewable energy projects (like home rooftop solar energy solutions) since they do not benefit from the same one-buyer, take-or-pay support. However, subsidized financing can help increase the penetration of this source of energy.