Pakistan generates electricity through both thermal and hydel power, although until 1980s, share of hydropower in the energy mix was more than 50%. This changed after the introduction of IPP Policy as it encouraged private sector to invest in furnace oil and gas based plants in Pakistan.
The policy was driven by the lower oil prices (an average of $18 per barrel), at the time, which escalated to more than $90/bbl over the years driving up the cost of generation. Since, electricity was subsidized for domestic consumers, the differential between the tariff charged and the cost of electricity had to be picked up the government, leading the country to the vicious cycle of circular debt.
Moreover, uncoordinated policy of allocating natural gas among its various uses, without long term planning, resulted in depletion of local gas reserves necessitating import of LNG.
Presently, the installed capacity of the country is 26,000 MW while gross generation is 117,000 GWh with hydel providing 30%, gas 30 % and furnace oil 36% of total generation. Renewable energy share (excluding large hydro) is below 2%.
Source: Power System Statistics 2015-16
However, if the government doesn’t change its energy policy along the way, and the planned investments for the next 15 years materialize, by the year 2035 the energy mix would get 50% from thermal (coal, LNG, gas and oil) and 47% from renewables (solar, wind and hydro), with a total installed capacity of around 74,000 MW. Since 50% of the incoming coal plants will be using imported coal while RLNG plants will utilize LNG imported from Qatar, our energy costs will continue to be vulnerable to external factors.
Source: Planning Commission
The increased deployment of renewable energy, including large hydroelectric projects, can provide energy security, foreign exchange savings, and environmental benefits. More importantly, a higher share of renewables can reduce fuel costs (a major component of the total generation costs), and as a result reduce subsidies afforded to the power sector. Liquefied natural gas, coal, and oil prices tend to be highly volatile as these depend on external factors, and can thus have substantial impact on the energy costs. On the other hand, wind, solar and hydro power costs are much less volatile.