The recent upsurge in circular debt (CD) accumulation coincided with the signing of “take-or-pay” contracts for imported coal and RLNG-based plants. These contracts, intended to address energy shortages, came with volatility and a hefty price tag.

This escalation in electricity generation costs has severely impacted Pakistan’s transition to renewable energy by diverting financial resources away from potential investments in renewables and locking the country into long-term dependencies on fossil fuels.

The persistent rise in circular debt (CD) within the power sector, currently amounting to PKR 2.6 trillion, is fueled by a multitude of factors, including high transmission and distribution (T&D) losses, inefficiencies within power distribution companies (Discos), and unbudgeted energy subsidies.

Frequent hikes in electricity tariffs aggravate Pakistan’s CD by increasing non-payment rates and T&D losses, as these losses are calculated as a percentage of the tariff. Instead of temporary fixes, policies must address the root causes of this debt.

For instance, transmission and distribution losses stood at 16.45% in FY 2022-23, while the inefficiencies and low collection rates of DISCOs have led to significant commercial losses, with outstanding debt from defaulters exceeding PKR 900 billion.

According to World Bank, Pakistan’s high energy subsidies to the domestic sector, currently estimated at PKR 976 billion (0.9 percent of GDP) for FY 2024, further strain the financial system. This explains the increasing financial burden on the power sector, highlighting the urgent need for a shift towards lower cost energy sources.

By reducing dependence on imported fossil fuels, where long-term forex-based prices are currently rising and unpredictable, Pakistan can alleviate some of these financial pressures, stabilize power prices, and pave the way for a more sustainable and economically viable energy future through indigenization and the induction of a local supply chain and renewables.

However, the current fossil fuel-based power plants should be retired, potentially through public debt financing, to address overcapacity issues and reduce the CD crisis. Advancing the planned retirement of outdated and inefficient power plants while ensuring that new additions focus exclusively on renewable energy is need of the hour.

Investing in renewable energy not only offers a sustainable solution to the circular debt crisis but also brings numerous economic and environmental benefits. Renewable technologies, such as solar and wind, have near-zero marginal costs of production, which can significantly lower overall electricity generation costs. This makes renewables highly competitive in the long term.

For example, the International Energy Agency (IEA) reports that new solar projects are now the cheapest source of power on a levelized cost of energy (LCOE) basis, with solar energy costing around $60 per MWh, while gas is $20 more expensive at $80 per MWh. Redirecting funds from LNG and coal infrastructure to renewable energy projects aligns with global trends favoring climate-friendly investments and will ensure a resilient energy future for Pakistan.

But where do we stand in terms of renewable energy in the country? Pakistan’s energy production and consumption landscape is predominantly fueled by fossil fuels. As of recent........

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