The global energy transition is underway, aiming to decarbonize the energy sector and achieve net zero carbon emissions by 2050. Countries worldwide are investing trillions of dollars in green energy sources and technologies, such as wind, solar, green hydrogen, electrification of transportation and heating, sustainable aviation fuels, carbon capture and storage, and more. This paradigm shift is driven by cost competitiveness, technological advancements, policy incentives, and concerns about energy security. However, developing countries like Pakistan face significant challenges due to weak macroeconomic fundamentals and a distressed energy sector. Pakistan needs to undergo comprehensive reforms in its energy sector and governance framework to achieve its net zero emissions target and attract the necessary investment.
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Pakistan has set an ambitious target of increasing the share of renewable energy to 60% by 2030 as part of its commitment under the Paris Agreement. However, financial constraints and the country’s vulnerability to frequent floods and heatwaves pose significant obstacles. To overcome these challenges, Pakistan requires a tailored JETP program supported by policy incentives, a pipeline of bankable projects, and the active participation of credible local private business groups and public sector entities.
Fundamental reforms and overhauling Pakistan’s energy sector and governance framework are essential to attract local and foreign capital. A liberalized regime should be established where the state ensures a level playing field for all participants without intervening in the market, except during emergencies. Initiatives like buying distressed LNG or discounted crude cargoes may provide short-term relief but fail to address the root causes. Operationalizing the wholesale power commodity market (CBTCM) and facilitating bilateral corporate contracts between multiple sellers and bulk buyers can promote efficiency and eliminate the need for a single sovereign buyer model.
Imported LNG should be procured directly by export industries from the domestic and international market without subsidy support from the government. This approach, applied consistently, may impact state-owned power and gas companies with expensive legacy contracts, but it would have a net positive economic impact. Similarly, the government should allow differentiated pump pricing for petrol and diesel, enabling private oil marketing companies to compete with the state-owned PSO. In a deregulated marketplace, special subsidy schemes and guaranteed returns for oil refineries would no longer be necessary, fostering healthy competition and market-driven investment.
Given the stretched balance sheet, the state’s primary role in the energy sector should be enacting enabling policies and establishing an independent regulatory framework to facilitate the free flow of energy products between private sector buyers and sellers. While managing the pricing and allocation of indigenous natural gas, the government can retain its socio-economic policies and constitutional provisions. Sovereign guarantees and offtake contracts should be reserved for select nuclear and large dam projects with national security considerations. Indirect taxes on energy products and targeted subsidies for low-income segments can be implemented through social welfare programs.
Reprofiling the outstanding debt of recently commissioned and upcoming Independent Power Producers (IPPs) is crucial to provide breathing space to power consumers. Contrary to popular belief, the primary reasons for the circular debt and high tariffs are unaffordable fixed capacity charges and shrinking electricity demand, rather than transmission and distribution losses. Privatization of all state-owned Distribution Companies (DISCOs) should be expedited, along with fair financial sharing between the federation and provinces, aligning with the spirit of the 18th Amendment and NFC Award.
