Preface: Readings in Pakistan’s Energy Challenges
PREFACE
Energy is the driving force behind economic growth, but Pakistan has grappled with energy-related issues since its inception. Pakistan, an economy worth US$ 376 billion with a population of around 230 million, relies on imports for 49 percent of its primary energy supplies. It strains its already limited foreign exchange reserves of US$7.7 million (as of October 20, 2023). In FY2023, Pakistan spent US$17 billion on energy imports (excluding coal imports). From a geo-economic perspective, heavy energy imports and global market volatility constantly threaten Pakistan’s economic and energy security.
Energy demand in Pakistan is increasing rapidly. Since 1980, it has grown by 5 percent per annum. However, per capita energy consumption is still one of the lowest in the world. Furthermore, around 50 million people in Pakistan do not have access to grid electricity. A significant portion of Pakistan’s population still needs access to commercial energy for cooking purposes, which forces them to rely on biomass energy, mainly in rural areas. The rural population is estimated to meet 94 percent of their domestic energy needs by burning biofuels, posing health and environmental risks.
Most of Pakistan’s primary energy supply comes from fossil fuels, specifically oil and gas. The use of coal, liquefied petroleum gas, and imported liquefied natural gas has grown to accommodate the surging demands in the country’s energy sector. Indigenous gas production is decreasing, leading to increased imports of liquefied natural gas rather than a shift towards alternative and renewable energy sources.
Dependence on fossil fuels for electricity production has increased. In a world of plentiful energy supplies, evolving technologies are making it cheaper to generate electricity using renewable resources. In Pakistan, electricity generation energy costs are growing, and so are its prices. Despite having massive potential for hydro and other renewable resources, unfortunately, these indigenous resources have not remained our priority in the energy strategies. Due to greater import dependency and the limited contribution of low-cost energy production from hydroelectricity and other renewable resources like wind and solar, in addition to costly electricity production, supply shortages often occur.
Due to long-term dollar-based contracts with power generation companies, the capacity payments have surged significantly. Over the years, the focus remained on increasing capacity instead of using the existing capacity more efficiently. With the addition of ill-thought-out projects, Pakistan has transitioned from an energy deficit to an energy surplus but has yet to establish a stable energy mix.
he electricity sector in Pakistan has been facing a financial deficit (circular debt) since 2006, which was initially PKR 111 billion but has now grown to a massive PKR 2.3 trillion. The sector’s total cumulative loss has now surpassed PKR 6 trillion. Additionally, the burden of electricity sector subsidies since FY2007 has exceeded PKR 5 trillion. This has significantly burdened the government. Despite a subsidised electricity tariff for the majority, the average consumer end tariff has increased by more than 550 percent over these years.
While Pakistan struggled with electricity sector circular debt, gas sector circular debt emerged in 2016 due to cost price difference. Politically motivated gas allocation and pricing policies in the presence of increasing reliance on imported LNG have led to the rise in this sector debt equivalent to about PKR 1.5 trillion (excluding interest payments).
Pakistan has been facing petroleum-related issues for several years. Although reliance on furnace oil for electricity production has decreased significantly, the country still depends on imports for 80 percent of its petroleum needs, mainly in the transport sector. Our refineries are protected through concessions/ subsidies but produce below-capacity and low-quality products; primarily, they are hydro-skimming technology capable of producing furnace oil, for which local demand is decreasing.
Since FY1991, net energy losses have increased by more than 400 percent. A lot of energy is wasted while supplying electricity and gas in the country. The idea of energy conservation and efficiency has never remained a priority.
Despite private participation, the state presence in the energy sector is about 78 percent (as estimated in the PIDE study What is the Size of the Government Footprint on Pakistan’s Economy? published in 2021). It wouldn’t be incorrect to say that the government controls all energy sub-sectors or makes major decisions. Furthermore, the decision-making is not by the sector professionals but under the influence of one or the other interest group.
Over the years, there have been no serious efforts towards achieving long- term energy sustainability in the country. The lack of investment in exploring indigenous energy reserves, construction of hydropower projects, and focus on alternative and renewable energy resources have resulted in numerous challenges. Due to the government’s insufficient professional expertise, ad hoc measures have been relied upon to address energy challenges. Policy decisions are often based on donor guidance, mostly disconnected from the ground realities.
Achieving economic self-reliance is not feasible when a country’s fundamental energy needs are unmet. This inadequacy in energy supply acts as a disincentive for investors/businesses. Better decision-making and implementation processes are essential for a sustainable energy sector. A well-functioning governance system, tailoring objectives to local needs and ensuring accountabilities for all stakeholders, is necessary to achieve this. Unfortunately, Pakistan’s energy system currently falls short in these areas and requires reforms.
