Renewable energy investments in Pakistan cross $4 billion in 14 years but more remain stalled

Investments in renewable energy in Pakistan have reached $4.6 billion since 2010 — peaking at $1.4 billion in 2015 — but policy changes regarding imported fuel and regulatory uncertainty have stalled or canceled projects worth $911 million.

Most of these investments — around 80% — were backed by debt, and over 50% came from foreign sources, a report from the Islamabad-based think tank Renewables First stated.

Fluctuating financing flows have hampered progress in renewable energy in Pakistan. The cost of capital has increased due to a liquidity crisis and record-high interest rates of 22% in fiscal year 2023-24.

Previously attractive returns on equity and debt premium no longer reflect market risks due to the economic decline. Challenges such as circular debt and delayed payments have also deterred foreign financing, halting financial closures for new large-scale renewable projects.

High capital costs and limited financing options are driven by increased risk perception, macroeconomic instability, and underdeveloped capital markets.

The State Bank of Pakistan's Financing Scheme for Renewable Energy, launched in 2016, aimed to boost private investment in clean energy projects up to 50 megawatts.

The scheme offered loans of up to PKR 6 billion per project at 6% interest over 12 years, providing around $350 million in financing from 2017-2020.

By June 2023, it had financed over 2,600 projects, adding 1,726 MW of renewable capacity with PKR 92 billion in outstanding loans. However, the scheme became inaccessible in FY24 due to Pakistan's economic crisis and ended on June 30 this year.

To address high capital costs, solutions include tapping into capital markets through securitization and using blended finance structures with patient capital to reduce investment risks.

Additional measures needed are currency hedging mechanisms, fiscal incentives, and supportive monetary policies to encourage bank lending.

A multi-stakeholder effort to implement targeted strategies and instruments can significantly improve the business case for renewables in Pakistan.

Developing a comprehensive policy framework, establishing clear national and provincial climate priorities, creating detailed action plans, and setting defined timelines are essential steps.

This also involves developing a green taxonomy, creating environmental standards to prevent greenwashing, standardizing green finance definitions across sectors, and building institutional capacity for sustainable activities.

Developing a green bond market by building capital market infrastructure, establishing a favorable investment climate, creating awareness programs, implementing tax incentives, and setting clear guidelines is also crucial.

Global clean energy investments

Global clean energy investments reached $1.8 trillion in 2023, with renewables taking a 35% share. Emerging markets, excluding China, remain stagnant at $260 billion annually.

While advanced economies rely primarily on private funding, emerging markets depend heavily on constrained public financing. High interest rates and risk premiums in emerging markets double their capital costs compared to advanced economies.

The International Energy Agency estimates that a 1% reduction in financing costs in these markets could save $150 billion annually between 2024 and 2050.