Pakistan is so rapidly shifting towards renewable energy that it has become the world’s sixth-largest solar energy market, drawing international attention. Some are calling it a revolutionary change, others a miracle, with the World Economic Forum (WEF) calling the development “an important lesson for developing countries”.Pakistan has imported nearly USD 4bn worth of solar panels over the past four years. A Bloomberg report last November said that in 2024 alone, the country imported nearly USD 2 billion worth of solar products from China.

“In the first nine months of this fiscal year, China bought a staggering USD 1.7 billion worth of solar equipment, equivalent to 17 gigawatts of production and more than a third of the country’s total production capacity.”

Some experts attribute this unprecedented shift to the US sanctions on Chinese products, global efforts to protect the environment and the Pakistan government policies. However, the reality is that solarization in Pakistan did not take off for any single reason, but rather a combination of factors, including expensive electricity in the country, played a role in shaping the new scenario.

Skyrocketing bills and the trap of capacity payments

The country was plunged into darkness in the last decade due to a severe power crisis. To deal with this problem, thermal plants running on imported fuels (coal, LNG, diesel, etc.) were hastily introduced, which later became a problem in itself.

Most of the new power plants, built with foreign investment, were given sovereign guarantees by the state. All payments under these contracts were linked to dollars and a ‘take or pay’ clause was also a part of the contracts. It means that regardless of electricity consumption, these plants will continue to be paid capacity payments equal to their production capacity in any case. Since the state of Pakistan is the guarantor in these agreements, if these payments are not made according to the terms, Pakistan will be considered bankrupt in the world, which will cause irreparable damage to the country's economy and reputation.

According to the Renewables First and Herald Analytics report ‘The Great Solar Rush in Pakistan’, the problem of capacity payments became more serious when the country’s electricity production capacity reached about 45,000 megawatts while the demand did not increase beyond 30,000 megawatts. It is as if we had to pay the price of 45,000 after consuming 30,000 megawatts of electricity. This additional burden was obviously borne by the consumers.

After 2021, the rupee depreciated significantly against the dollar. Since capacity payments are made in dollars, electricity in rupees has become more expensive and its rates have increased by more than 155pc in three years.

Net-metering policy and incentive schemes

During the power crisis, in 2015, the government decided to start net-metering whose goal was to attract citizens to invest in solar energy. It had two objectives. One was to save foreign exchange by reducing dependence on expensive thermal electricity and the other was to control increasing environmental pollution.

The net-metering policy was implemented in 2017, under which the consumers were allowed to install small-scale renewable energy systems. Later, systems below 25kW were exempted from the generation license requirement. As a result, consumers also became power producers.

According to the Renewables First, a think tank for energy and environment, the net-metering regulations allow solar systems up to one-and-a-half times the approved load to be installed, further improving the financial benefits. Thanks to this, the cost to the consumer is recovered in just two to four years.

Besides the net-metering policy, but government incentive schemes have also played an important role in the promotion of solar energy.

The State Bank of Pakistan launched a financing scheme for renewable energy in 2016, in which loans of up to Rs6bn were given to the projects at a six percent markup for 12 years. This amount has provided capital for more than 2,600 projects.

“By September 2024, Pakistan’s total solar energy capacity under on-grid net metering had reached about 3.2 gigawatts. This is an estimate but the actual figure could be much higher.”

China-US conflict: Fishing in troubled waters 

China is the largest center for solar manufacturing or polysilicon production. It supplies more than 80pc of the world’s panels or their parts. The US and European countries have been dependent on China for solar imports.

According to a report by the South Asia Peace Action Network (SAPAN News), China failed to meet the growing demand for solar in the US during Covid-19, while the world was emphasizing a reduction in the use of fossil fuels (petroleum, coal, etc.).

During this time, solar rates there tripled between 2022 and 2024. There were two reasons for this. The first was the closure of a large Chinese factory for repairs and the second was US sanctions on products coming from Xinjiang.

After some time, the closed factory in China reopened and a new solar factory also started production while US sanctions remained in place. Due to the Chinese production as well as the sanctions, solar rates declined to extremely low levels which benefited Asian countries, especially India and Pakistan.

“Pakistan has benefited the most from this situation. It had a solar adoption rate that was on par with other countries until 2022, but by 2024 it had become the world’s sixth largest solar market. The main reason for this was an unexpected oversupply of Chinese panels.”

The number of net-metering customers in Pakistan has now exceeded 283,000, with an installed solar capacity of 4,124 MW. There are millions of off-grid solar customers in addition to them. That is, those who are directly getting electricity from solar panels without net metering, such as agricultural consumers running tube wells using solar.

New policy—the catalyst in solar power sector

The biggest problem of the power sector was the low consumption compared to the installed capacity. Now, because consumers have started generating electricity themselves through solar systems, on the one hand, electricity production has increased while on the other hand, the income of power companies has also decreased, but the monster of capacity payments not only remains the same, but is becoming more and more terrifying day by day.

In this situation, the government announced a new solar policy a few days ago, under which solar power will now be purchased from new net metering customers at Rs 10 per unit. Earlier, distribution companies were purchasing electricity from net-metering customers at Rs27 per unit.

Federal Minister for Energy Awais Leghari says that the government is not discouraging solar energy, but is expecting 1,200 MW of electricity from solar every year. He claims that despite the new net-metering policy, those who install solar will recover their money in three-and-a-half to four years.

Rao Amir Ali, deputy research head at the Arif Habib Limited, believes that the payback period with the new policy will be 10 to 15 years.

However, experts at Renewables First believe that the cost of solar energy and grid electricity rates are so different that whether net metering is replaced by a net billing policy or the buyback regime is completely abolished, solar will still remain economically attractive and the payback period is likely to be less than five years. They say that the demand for grid electricity in the country has declined significantly, so supply and demand projections need to be revised. Changes to strategy for adopting renewable energy sources and modernizing the grid have become inevitable.