In today’s Finshots, we try to understand the electricity woes facing our neighbouring country and also examine the viability of its clean energy transition.

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The Story

China is the leader in producing and exporting solar equipment.

While that might be unsurprising, here’s something you might not expect: Pakistan, our neighbour, is the third-largest buyer of Chinese solar panels. It’s also the sixth-largest solar market in the world!

And this solar boom isn’t just an elitist trend. Factories are covering their rooftops with solar panels. Farmers are using solar power for irrigation pumps. And middle-class households are joining the fray, too, thanks to affordable imports from China.

To put it in perspective, in the first nine months of 2024, Pakistan imported a whopping 17 gigawatts (GW) of solar modules from China. This capacity could generate over a third of Pakistan’s total power capacity if fully utilised.

That’s impressive, right?

This rapid solarisation is reducing the government’s fuel import bills. It’s also nudging the country closer to its ambitious goal of doubling renewables to make up to 60% of the total energy mix by the end of this decade.

All this sudden transition to solar energy happened without government advocacy or subsidies. Sounds like a dream scenario worth replicating, doesn’t it?

Except, this solar power boom is not as sunny as it seems.

Let’s take it from the top. And we’ll start with Pakistan’s shaky power grid, which is in shambles.

Many areas face up to 12 hours of daily load shedding, and for many regions, electricity access is either nonexistent or limited to a few hours a day. And this isn’t a recent phenomenon either; Pakistani citizens have been grappling with erratic power supply for decades. Grid electricity supplied by the government is prohibitively costly, which again pushes households and industries alike to make the solar switch.

However, this solar frenzy is also causing new challenges for Pakistan's economy.

Look, people switching to solar power are either using very little of the state-supplied electricity or abandoning it altogether. This cuts into the revenues of national power grid suppliers, which are already about $8 billion in debt. The government hikes electricity tariffs to stay afloat, which again drives more people away from the grid and towards solar.

Then, we have the independent power producers (IPPs). These are private companies selling power to Pakistan’s grid, and the government must pay them for their pre-decided capacity, even if they generate less electricity due to low demand. So, as more people go off-grid, demand for grid electricity drops. However, the government still has to pay IPPs their dues, further raising electricity costs for the remaining grid users. And the problem compounds. Rising tariffs push more people to solar, leaving the grid teetering on financial collapse.

So, it all seems like a vicious cycle!

Adding to the complexity is China’s dual role.

You see, under the China-Pakistan Economic Corridor (CPEC), China invested heavily in Pakistan’s power infrastructure—mainly in coal-based IPPs that operate on the same fixed-payment models we just spoke about. And Pakistan is drowning in dues here, too. It owes these China-controlled plants over $2 billion in unpaid operational costs.

At the same time, China profits as the world’s largest supplier of solar tech, cashing in on Pakistan’s transition to renewables. It’s a double-edged sword for Pakistan.

Also, amid all this is the government’s net-metering scheme introduced in 2017, which allows solar users to sell excess electricity back to the grid. While this incentivised solar adoption, it also reduced grid revenues, exacerbating the financial strain.

So, currently, amidst all this unfolding, the government is in a muddle. A few experts argue that Pakistan must continue to invest heavily in solar parks, thanks to its abundantly available sunshine, to prepare for future energy needs. But again, incentivising or supporting solar energy usage would undermine its grid electricity consumption and, more so, the ability to repay its debts.

So, what’s the way out for Pakistan?

The World Economic Forum (WEF) offers a blueprint: modernise the grid to be more flexible and sustainable.

This means adopting advanced AI-driven monitoring to predict energy demand more accurately and optimise power flow. Additionally, upgrading the grid with digital metering can help track energy use in real time and reduce inefficiencies as well as wastage.

Sure, it sounds great and the perfect solution on paper.

But modernising the grid requires massive investments and political consensus, both of which seem challenging for Pakistan, given its economic struggles.

So yeah, dealing with rising debts is a lurching question facing the Pakistani government. And it seems the government is stepping up. It recently revised contracts with the IPPs and also announced that it will stop buying electricity from some of them to bring reforms to its debt-laden power sector. Nevertheless, there’s still a long way to go before the nation could see significant results.

And there’s a lesson here for emerging economies, including ours. Transitioning to clean energy requires balancing innovation with practicality. Deregulating energy markets, encouraging competition, and creating alternative revenue streams could make energy more affordable while keeping grids sustainable.

What do you think?

Until then…

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Note: An earlier version of this article had a cover image with an incorrect map of Pakistan. We've now replaced it with an updated version. Please accept our sincere apologies, as we regret the oversight.

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