Energy Strategy Reviews 25 (2019) 34–46

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Energy Strategy Reviews

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Impact of China-Pakistan economic corridor on Pakistan's future energy T

consumption and energy saving potential: Evidence from sectoral time series
analysis
Faisal Mehmood Mirzaa, Nishat Fatimab, Kafait Ullahc,∗
a
Department of Economics, University of Gujrat, Gujrat, Pakistan
b
Department of Economics, University of Gujrat, Pakistan
c
US-Pakistan Center for Advanced Studies in Energy (USPCAS-E), National University of Science and Technology (NUST), Islamabad, Pakistan

ARTICLE INFO ABSTRACT

JELclassification: China-Pakistan Economic Corridor is a strategic economic project to enhance economic connectivity between
C53 Pakistan and China. We estimate the impact of CPEC related economic activities on overall energy consumption
Q41 and its saving potential for Pakistan by 2030. Johansen cointegration is employed to evaluate the long run
Q47 relationship between energy consumption and its determinants at aggregate and sectoral levels and forecast
future energy demand using scenario analysis. Baseline scenario results indicate that aggregate energy con-
Keywords:
sumption will approximately be 41% higher in 2030 compared to 2013 levels. Energy consumption in industrial
CPEC
and commercial sectors in 2030 will increase by 136% and 414% under baseline scenario. The Monte Carlo
Energy consumption
Energy saving potential Simulations incorporating future uncertainty support the scenario analysis results. Energy saving potential
Scenario analysis suggests that energy conservation should be part of overall energy policies and sector specific energy intensity
Cointegration targets should be implemented to harness the energy saving potential.

1. Introduction economic activity and the energy consumption is expected to have

China-Pakistan Economic Corridor (CPEC) is a strategic economic
project aiming at increasing regional connectivity for the economic
development of Pakistan and China. Economic corridor will connect
Pakistan's Gwadar port with China's northwestern region between 2014
and 2030. It is not only expected to be beneficial for Pakistan and China
but is also expected to have positive spillover effects to other neigh-
boring countries by enhancing geographical connectivity of Pakistan
with landlocked central Asian states. More than US$46 billion will be
invested in Pakistan's power, infrastructure, industrial and agriculture
sectors under the CPEC. With the reduction in power outages due to
enhancement in electricity generation capacity and investment in other
production sectors of the economy, GDP growth rate of Pakistan is
targeted to increase to 7.5% by 2030 with the addition of about two
million jobs in the job market. Pakistan's vision 2025 also projects rapid
urbanization (50–60%) and high GDP growth rate (8%) by 2025 [1].
The boost in economic activity and rapid urbanization will derive the
demand for fuel and energy at an exponential rate [2,3]. As Pakistan's
economy is already facing severe energy crisis, robust increase in
lasting impacts on the energy supply security in the economy. Since
Pakistan's existing electricity production is still dependent on imported
fuel with improper pricing of indigenous fuels and their exploitative
consumption, the overall energy mix suggests that 64% of country's
electricity is thermal based.1 Most of the oil to produce electricity in the
country is imported. This highly skewed energy mix also puts Pakistan
on risk of being affected from any adverse supply shock in terms of
increase in international oil prices. Further increase in energy con-
sumption and reliance on imported coal to produce electricity under
CPEC projects is expected to put pressure on the balance of payment
account and can have negative consequences for different economic
sectors in terms of energy affordability and accessibility.
With the inception of CPEC projects, lack of comprehensive fore-
sight about future energy use may lead to undesirable economic and
social outcomes. Therefore, it is imperative to comprehensively review
the future energy demand and its determinants so as to come up with
suitable policy decisions in advance. Only a scant literature is available
regarding future energy forecasts related to CPEC in the case of Pakistan
at aggregate and the sectoral level [4,5].

∗
Corresponding author.
E-mail addresses: Faisal.mirza@uog.edu.pk (F.M. Mirza), nishatfsial@gmail.com (N. Fatima), kafaitullah@uspcase.nust.edu.pk (K. Ullah).
1
Furnace oil, natural gas, high speed diesel and coal had 48.5, 47.5 2.47 and 1.49% share respectively in this thermal energy mix of Pakistan in FY 2016–17.

https://doi.org/10.1016/j.esr.2019.04.015
Received 15 October 2018; Received in revised form 25 March 2019; Accepted 22 April 2019
Available online 15 May 2019
2211-467X/ © 2019 Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/BY-NC-ND/4.0/).
F.M. Mirza, et al.
In this scenario, our study provides an empirical investigation into
this issue by forecasting the potential impact of CPEC related economic
activities on future sectoral energy use and the energy saving potential
in Pakistan. Despite the fact that each sector of Pakistan is experiencing
energy inefficiencies, neither energy conservation measures nor legis-
lative frameworks for energy use are put in place (ENERCON).2 Thus,
our study will be helpful for the policy makers in deciding the level of
sector specific conservation measures to be adopted to harness the
available energy saving potential.
This study contributes in country specific empirical work by esti-
mating future energy consumption and its saving potential by 2030. To
the best of our knowledge, no empirical study is available on estimation
of future energy conservation potential for Pakistan; specifically in the
context of CPEC. Forecasting of Pakistan's energy consumption has been
done merely on the basis of income and price elasticities while ignoring
the structural factors [6–9]; Hussain el al., 2016). We have carried out
the future energy consumption forecasts on the basis of scenario ana-
lysis and Monte Carlo simulations. The specific research objectives are
as follows. First, we estimate the impact of macroeconomic variables on
aggregate and sector specific energy use for the case of Pakistan.
Second, we compute the impact of CPEC related economic activities on
sectoral and aggregate energy consumption of Pakistan using scenario
approach. Third, we apply Monte Carlo Simulation for checking the
reliability of the predictions and to forecast different possibilities of
sector specific energy consumption by 2030 under uncertainty. Fourth,
we estimate the aggregate and sectoral energy saving potential for fu-
ture on the basis of scenario analysis and propose sector specific energy
conservation measures to meet the growing energy demand for Paki-
stan.
Structure of the paper is as follows. Section 2 comprises of brief
introduction to China-Pakistan Economic Corridor (CPEC). Section 3
discusses the literature review and section 4 contains the details related
to data and methodology. Results are discussed in section 5 whereas
section 6 concludes the paper with suitable policy recommendations.
2. China-Pakistan economic corridor
“One Belt and One Road” (OBOR) is the developmental strategy of
China, announced in October 2013 for the connectivity and cooperation
among the countries. OBOR involves sixty-five countries and will con-
nect Europe, Asia and Africa through “Silk Road Economic Belt” and the
“Maritime Silk Road”. This will be win-win situation to all participants,
as it will increase the trade and boost up the economic growth of the
whole region [10].
CPEC is also a notion of regional economic cooperation and exten-
sion of “One Belt One Road” initiative. The original strategic framework
of CPEC was signed between China and Pakistan with the amount of
more than US$46 Billion. It will connect the Gwadar port with the
Chinese northwestern region i.e. Xinjiang with the “Silk Road Economic
Belt”. It does not only involve the building of efficient road infra-
structure but it is also aimed at laying foundations for the development
of regional cooperation, boost up the economic growth, diversify the
investment opportunities and trade, promote industrial, financial and
agricultural cooperation, achieving political stability and modernize the
energy sector.3 Moreover, this strategic project is aimed at improving
the people-to-people contact to exchange culture, transfer knowledge
for the urban-rural development and establishment of industrial zones.
The detailed description of major areas of cooperation and their status
under CPEC project by 2030 is as under.
2
For details see http://www.enercon.gov.pk/.
3 4
For Details see http://cpec.gov.pk/index.
35
Energy Strategy Reviews 25 (2019) 34–46
2.1. Energy
Major proportion of investment under CPEC (US$33.79 billion) is
directed towards the construction of power projects to produce
17045 MW of electricity in Pakistan in which 10,400 MW of electricity
generation capacity is to be installed on priority basis. This huge in-
vestment is planned to be undertaken with the view of utilizing existing
energy resources and tackle the energy crisis in Pakistan. Table 1 re-
presents different power projects under CPEC with their installed ca-
pacity. Fourteen power projects are on the priority to be completed by
2020 while the remaining eight projects have been actively promoted
but their completion time is yet to be decided. Most of these electricity
generation projects are based on Coal and Hydel technologies. All coal
prioritized power projects will run on imported coal except two power
projects, which will run on local coal with the capacity of 1980 MW.
Along with the power projects, CPEC involves the development of
transmission line on urgent basis from Matiari to Lahore with the length
of 878 km [12]. This transmission line will have the load capacity of
4000 MW and fifty percent of this transmission line has already been
completed. Matiari to Faisalabad transmission line project is also under
construction. Within the highly prioritized energy projects, 7 projects
have been completed and remaining projects are under construction. 19
billion USD have been invested in energy projects as FDI and at the end
of 2018, 3240 MW of electricity has been added to national grid [11].
With the establishment of all power projects by 2020 and energy
imports by energy tunnels will increase the energy supply security in
Pakistan. With this supply of energy, CPEC is expected to add 2.5% into
the current GDP and its growth to 7.5% [13]. Due to this CPEC related
investment, thirty thousand jobs have been created by energy projects
alone [11].
2.2. Gwadar port
Gwadar port is located in Gwadar, Balochistan on the Arabian Sea.
In connection with OBOR, Gwadar will play a pivotal role in the de-
velopment of the landlocked Central Asian region. Total of 792.62
million USD4 investment has been allocated to the development of
Gwadar with the following projects. (1) Development of Gwadar Uni-
versity in which special focus will be on marine disciplines along with
others. (2) Forty types of businesses would be in Gwadar industrial free
zone. Major prioritized industries include Stainless Steel and Petro-
chemical industries. (3) Special projects will be initiated for the pro-
motion of fisheries and establishment of boat making industry. (4) For
the enhancement of education, skills and betterment of health, the
vocational & technical institutes, hospitals, primary and fresh water
supply & its distribution will be established in Gwadar smart city. (5)
Construction of additional terminals, East-Bay expressway (to connect
Gwadar with Makran coastal highway) and Gwadar International Air-
port are the major infrastructure projects. The progress status of
Gwadar international airport and East-Bay expressway is forty and sixty
percent respectively. Thirty companies have already invested in free
economic zone with an investment of 474 million USD [11]. It is as-
sessed that after the completion of Gwadar port, Pakistan will be a trade
hub for the whole region because of duty free economic zone [14].
2.3. Transport infrastructure
CPEC related projects are also aimed at constructing new routes and
overhauling existing road infrastructure to facilitate the trade and in-
creasing accessibility to markets. Transport infrastructure will involve
the road network, railways, highways and energy tunnels.
2500–3000 km roads will connect Gwadar port with Kashgar with the
cost of 9784 million USD. In the eight projects related to road and
For Details see http://www.cpecinfo.com.
F.M. Mirza, et al.
Table 1
Power projects under CPEC's development agenda.
Power Prioritized Actively promoted Installed Capacity
projects projects projects (MW)
Coal 7 5 13140
Wind 4 1 350
Solar 1 – 900
Hydel 2 1 2693
Gas – 1 525
Source: National Electric Power Regulatory Authority (NEPRA) and [11].
railway infrastructure, one railway project has been completed and
operational and 70% work on Karachi-Lahore motorway has been
completed [11].
CPEC investment in transport infrastructure will boost the trade
within Pakistan and increase trade and economic cooperation with
China. Pakistan will shift the trade routes with China and other coun-
tries from sea and air to cheapest land transportation. This will increase
the export of agricultural products in the global market, which was
previously discouraged due to high transportation costs [15]. Hence,
efficient transport infrastructure in CPEC will reduce the internal
transportation cost and time consequently achieving comparative ad-
vantage in international market [16].
2.4. Industrial cooperation
Establishment of free industrial zones is one of the key areas of
economic cooperation under CPEC and are considered as a trustworthy
strategy to foster the economic growth and employability into an
economy [17,18]. Nine special economic zones characterized by spe-
cific products or services, will be established in all of the provinces in
Pakistan along the corridor. Local production accompanied by local raw
material and labor under the economic zones will speed up the urba-
nization process and the employability (expected 2 million jobs) with
expected increase into high standard of living, reduced imports and
price stability [19]. Due to the establishment of stainless steel and
petrochemical industries, energy consumption in the economy is ex-
pected to growth at a higher pace (World steel association, 2016).
Owing with the CPEC development, the growth rate of FDI during FY-
17 stood at 12.75% (Economic survey of Pakistan 2016–17). It is ex-
pected that with the completion of CPEC the FDI will be much higher in
Pakistan due to increased industrial activity, energy supply security and
strengthened infrastructure to support the markets.
This discussion suggest that due to heavy investment in energy,
transportation, Gwadar port and special industrial zones, strong and
robust economic activity will be generated in Pakistan's economy. This
could result in industrial development led high economic growth, in-
tensive use of energy, increased trade and high level of FDI till 2030.
Literature supports a very significant relationship among above-men-
tioned variables with the energy consumption [20,21]. Therefore, it is
imperative to estimate their impact on future energy consumption of
Pakistan under the CPEC scenario.
3. Literature review
Our literature review comprises of two segments. One segment deals
with the studies conducted from the perspective of the impact of CPEC
on different segments of Pakistan's economy while the other segment
deals with the literature encompassing competing methodologies.
[22] analyzed the impacts of renewable energy investments in Pa-
kistan under CPEC. 2840 MW of renewable energy will be produced
through the early harvested CPEC projects. Investment in hydro, wind
and solar projects indicates the promotion of low carbon development
scenarios in Pakistan. The Cholistan solar park with the installed ca-
pacity of 1000 MW will be the single largest addition to renewable
36
Energy Strategy Reviews 25 (2019) 34–46
energy production in the country.
[23] qualitatively analyzed the impact of China Pakistan Economic
Corridor (CPEC) on employment generation in Pakistan using sec-
ondary data. This study assessed that the economy will experience
boost in private investment under CPEC project due to establishment of
free economic zones, efficient infrastructure, energy supply security
and stable economy. All these developments will lead in an increase of
1.5% in annual GDP growth.
[24] discussed the impacts of efficient infrastructure under CPEC on
Pakistan and China by using Global economic model. This connectivity
project will not only improve the transportation infrastructure of Pa-
kistan but will also reduce the journey of 10000 km for China to access
Middle East, Africa and European markets. Efficient infrastructure will
improve the accessibility to markets, reduce cost of fuel, enhance
transfer of knowledge, increase the investment level and job opportu-
nities. The model suggested that efficient infrastructure will result in
lower export prices especially for perishable goods due to land trans-
portation.
[25] analyzed the impact of CPEC energy projects on socio-eco-
nomic development of Pakistan. With the addition of 17000 MW in
national grid under CPEC, energy crises in Pakistan (i.e. 8000 MW) will
be finished by the end of 2019. Moreover, surplus energy will be pro-
duces (2732 MW) from 2019 onwards.
This suggests that most of the studies on the impacts of CPEC have
been qualitative in nature and have looked at forecasting its impacts on
various sectors of Pakistan's economy in quantifiable terms.
Furthermore, estimation of energy saving potential has been a vast area
of research since 1980s. It can be studied under economic and technical
perspectives. We only focus on economic perspective for forecasting
energy saving potential in this review. Early work on energy saving
potential comprised of estimation of supply curve for conserved energy.
This method is used to assess the relationship between energy costs and
saving potential of different conservation technologies [59]. was among
the pioneering efforts to put forward this analytical tool to assess the
cost and technical energy conservation potential for different con-
servation technologies adopted in California's residential sector. This
technique was further developed by Ref. [26] and Worrell et al. (2000).
In comparison with the conservation supply curve method, the Data
Envelopment Analysis (DEA) has an advantage of incorporating inputs
for assessing the productivity of industry instead of using the technol-
ogies and cost of saving potential [27]. Seminal work on energy saving
potential using this methodology has been done by Refs. [28,29]; and
[30]. On the contrary, index decomposition method is not considered as
an appropriate method as it ignores the price effects [31,32]. However,
this technique has been used to calculate the emission reduction po-
tential for economies around the globe [33].
Scenario analysis has attracted a lot of attention in analyzing energy
consumption and its saving potential in recent years [34–37]; Ouyang
and lin, 2015). A number of scenario studies aimed to advise policy
makers on future energy system in line with the public policy goals
have been conducted (European Commission, 2011; [38,39]. Scenario
design is thus also commonly used approach to undertake the fore-
casting. It minimizes the future surprises by providing various future
possibilities and it broadens the policy makers’ thinking in the un-
certain environment [40,41]. Scenario approach is a useful tool to
provide the alternative outcomes linked with different decisions and
strategies adopted into the economy [42]. Scenario analysis based on
econometric models is considered as suitable technique in energy de-
mand modeling both in short and the long run and makes it possible to
explain the past behaviors, future prediction and the effects of different
policies in a single study [43].
[35] empirically investigated the demand for oil and it's saving
potential in China's transport sector by using time series data from 1980
to 2010. Johansen-Juselius cointegration analysis was applied to esti-
mate the long run effects of GDP, road conditions, labor productivity
condition are the main contributors in increasing and lowering the
F.M. Mirza, et al.
demand for oil respectively. Monte Carlo risk analysis suggested that
efficiency can be improved by pursuing aggressive oil saving policies.
[44] used Johansen-Juselius method to evaluate the long run re-
lationship between carbon emissions and its determinants for China's
transport industry. The study also adopted scenario approach to esti-
mate the potential for emission reduction in transport sector for 2015
and 2020. Cointegration results demonstrated that carbon intensity,
energy intensity, urbanization and GDP increase carbon emissions in
the economy. Results of scenario approach showed that there is a huge
emission reduction potential in China's transportation sector.
[46] selected non-metallic mineral product industry of China for
assessing the determinants of electricity demand, future electricity de-
mand and its saving potential. Cointegration analysis showed that GDP
is a key factor in increasing electricity demand however, R & D in-
tensity, labor productivity and energy prices reduce electricity demand.
It is estimated that under low growth scenario, energy consumption and
saving potential will be lower as compared to high growth scenario in
2020. In all sub scenarios, energy prices and technological progress play
influential role in reducing energy demand.
Employed ARDL bound testing approach to investigate the impact of
FDI, clean energy, trade openness, carbon emissions and growth in
income on energy demand of UAE during 1975–2011. Results indicated
that foreign direct investment and trade openness lead to energy saving
in UAE. Increase in trade openness will increase people's access to more
energy efficient products which will increase energy efficiency and
reduce energy intensity. Carbon emissions are inversely related to en-
ergy demand whereas, economic growth and clean energy cause energy
demand to increase.
[47] used data for 30 Chinese provinces between 1995 and 2011 to
investigate the relationship between energy consumption, urbanization
and carbon emissions. Along with the panel analysis, the study also
developed scenario analysis to predict carbon emissions for the future.
Results revealed that there is bi-directional causality between urbani-
zation, carbon emissions and energy consumption whereas one-way
causality runs from urbanization to energy use. Further, all scenarios
predict that carbon emission will be high during 2012–2020 period.
[48] investigated the determinants of China's commercial energy
demand from 1981 to 2012. Study also forecasted the future commer-
cial energy demand and energy saving potential from 2012 to 2024.
Cointegration results proved the theoretical understanding that GDP
and urbanization increase commercial energy consumption however
labor productivity and energy prices reduce energy consumption. Sce-
nario analysis reflected that energy consumption will be lower in 2015
and 2020 for moderate and advance scenario as compared to baseline
scenario. It was predicted that high energy conservation potential exists
in Chinese commercial sector.
[49] forecasted electricity consumption and generation from 2012
to 2020 for Pakistan using ARIMA and Holt-Winter forecasting models.
The study utilized the secondary data from 1980 to 2010 for estimation
of future electricity consumption for all the sectors. The results de-
monstrated that household sector will have highest energy consumption
in the future. Furthermore, overall energy consumption will be high in
the future due to increase in FDI, population and share of each sector in
GDP. However, energy generation will be lower as compare to energy
demand; therefore energy shortfall will persist in the projected period.
[21] employed panel co-integration and fully modified OLS
methods for modeling sectoral and aggregate electricity demand for
Pakistan during 1978–2012. Results concluded that GDP and electricity
prices are significantly associated with electricity consumption in all
models. Study predicted that both at aggregate and disaggregate level,
GDP plays more important role than electricity prices in effecting
electricity consumption.
By reviewing an extensive literature, we found that each method has
some advantages and disadvantages to estimate future energy con-
sumption and energy saving potential. While dealing with the modeling
and forecasting of energy demand, no single discipline offers a flawless
37
Energy Strategy Reviews 25 (2019) 34–46
approach (Greening at al., 2007). However, co-integration analysis has
been commonly used to estimate the energy demand function in the
recent literature [50]. This review of literature also suggests that sce-
nario analysis and Monte Carlo simulations have been frequently em-
ployed in literature to forecast energy demand. Specifically in the
context of Pakistan, although some studies have forecasted future en-
ergy demand (i.e. [6–9]; Hussain el al., 2016) but no study has speci-
fically estimated the impact of CPEC related economic activities on
energy consumption. As CPEC is expected to generate robust economic
activity in Pakistan, there is a strong need to assess its impact on future
energy consumption and its saving potential. Therefore, this study fills
the gap in literature by assessing future energy use and saving potential
under CPEC related economic scenarios.
4. Theoretical framework
We have employed the modified version of IPAT model to study the
underlying determinants of overall and sector specific energy con-
sumption in Pakistan. IPAT model was originally developed in 1970 by
biologists, environmentalists and ecologists [51]. IPAT represents the
impact (I) of population (P), affluence (A) and technology (T) on the
environment in a multiplicative form; where affluence represents the
per capita economic activity and technology is the impact per unit of
economic activity reflected in eq (01). Technology can be inferred from
the values of I, P and A; [52–54]. As, affluence is per capita GDP
therefore P × A = GDP. Thus, technology is measured as I/PA or I/
GDP.
I=P × A*T (1)
[51] presented the modified version of IPAT model by adding sto-
chastic terms in it and can be presented as in eq (02).
I = a × Pb* Ac × Td *e (2)
Where, e represents the residuals. a, b, c and d are the parameters to be
estimated using standard econometric techniques. By logarithmic
transformation, STIRPAT model presented in Eq (02) can be re-
presented as in Eq (03):
lnI = a + b (lnP)+ c (lnA)+d (lnT)+e (3)
In the basic STIRPAT model, technology is considered to be a part of
the error term. It is not measured separately for making this model
consistent with IPAT model. Therefore in STIRPAT model, technology
represents all factors other than population and affluence that can in-
fluence the impacts.
[55] argued the IPAT equation must involve the socio-economic
systems of different economies and the effects of globalization to study
their impacts on different outcome variables. IPAT model is a mathe-
matical identity which represents the driving forces of environmental
impacts and can be modified. The modified IPAT model in our case for
overall and sectoral energy consumption is presented in eq (04) and eq
(05) respectively:
lnEt = B0 + B1 lnPt + B2 lnGDPt + B3 lnEIt + B5 lnTOt + B6 lnFDIt + ut
(4)
lnEt = B0 + B1 lnPt + B2 lnGDPt + B3 lnEIt + B6 lnFDIt + ut (5)
Where in Eq (04), Et represents energy consumption, GDPt is the gross
domestic product, Pt shows aggregate energy prices and EIt is the energy
intensity which is the measure of technological improvements and en-
ergy efficiency into the economy. TOt reflects the trade openness
whereas FDIt presents the net inflows of foreign direct investment. In
Eq. (05), we take Et , Pt, EIt and FDIt specifically for the commercial and
industrial sectors respectively.
For the estimation of IPAT model, few of the previous studies have
estimated economic activity as GDP per capita [56–58,60,61]. How-
ever, we intend to estimate the impact of economic activity and other
F.M. Mirza, et al. Energy Strategy Reviews 25 (2019) 34–46

exogenous variables on aggregate energy consumption therefore; all the 5.2.2. Johansen-Juselius Cointegration test
regressors have been not been used in per capita terms. We have employed Johansen-Juselius cointegration test under the
Vector Autoregressive (VAR) system [64]. introduced the VAR models
by criticizing the simultaneous equations models. Contrary to the si-
5. Data and methodology multaneous equations models, VAR models do not need any priori
distinction between endogenous and exogenous variables. By con-
5.1. Data and data sources sidering two variables Yt and Xt , first order VAR is presented in Eq (7)
and (8).
The key objective of this paper is to forecast Pakistan's future energy
consumption and its saving potential under the scenario of CPEC at
Yt = 1 + 11 Yt 1 + 12 Xt 1 + yt (7)
aggregate and the sectoral level. We have considered industrial and Xt = + (8)
2 21 Yt 1 + 22 Xt 1 + xt
commercial sectors for the analysis due to availability of data and that
these two sectors are to be directly linked with projects to be under- Where, yt and xt represent white noise error terms that might be cor-
taken under CPEC. We have used time series data from 1976 to 2013 for related. These equations in the context of matrices can be written as;
carrying out the analysis. Y¯t = + A1 Y¯t 1 + ¯t (9)
Data on sector specific and aggregate energy consumption is mea-
sured in tons of oil equivalent (TOE) and has been collected from var- Where, Ȳt reflects Yt & Xt , and ¯t represents yt & xt . Eq (09) represents
ious issues of Pakistan energy yearbooks. We have used nominal elec- VAR (1) model while the VAR of pth order can be written as in Eq (10);
tricity prices as a proxy for energy prices and sector specific and Y¯t = + A1 Y¯t 1 + …………+ Ap Y¯t p + ¯t (10)
aggregate electricity prices have been obtained from Ref. [62]. Elec-
tricity prices are measured as weighted average of WAPDA & KESC in Where, Ȳt is the (k x 1) vector of all times series. Each A represents
Paisa/kWh. Data on GDP, sectoral value added and aggregate trade (k x k) matrix of coefficients and ¯t is the (k x 1) vector of white noise
openness has been obtained from WDI in constant LCU. Data on net error terms with two properties i.e. zero mean and constant variance.
inflows of foreign direct investment in US$ has also been collected from The Johansen-Juselius co-integration test under VAR is used to test for
WDI and is converted to local currency unit. The summary statistics of the presence of long run relationship between our variables of interest
the variables are presented in Table 2. (Eq (11)).
Y¯t = + 1 Y¯t 1 + …………+ p 1 Y¯t p+1 + Y¯t 1 + ¯t (11)
5.2. Methodology Where, = . is the matrix of cointegrating vectors while is the
weight assigned to the cointegrating matrix. The first step of Johansen
5.2.1. Unit root test cointegration approach is to test for the hypothesis relating to the rank
Before carrying out the empirical analysis, we have studied the unit of matrix (r). Rank of matrix is the representation of cointegrating
root properties of the variables employed in the analysis using vectors. Number of cointegrating vectors can be examined by trace test
Augmented Dickey Fuller test [63]. The estimable equation of the and Maximum eigenvalue test. Trace test checks the null hypothesis of
Dickey Fuller test is presented in Eq (06). r = 0 against the alternative hypothesis of r 1 whereas and Max test
checks the alternative hypothesis if r = 1. Closer the characteristic roots
m
yt = + to one, the larger will be the values of Trace and max statistics, con-
0 1yt 1 + i yt i + t
i=1 (6) sequently, the higher will be the chances for the presence of coin-
tegrating vectors [65]. Trace and Eigenvalue tests are represented in Eq
Where, y represents the series of interest. yt 1 represents the lagged (12) and (13)
value of y series, shows the difference operator and m reflects the n
trace (r ) = T ln (1 ˆr )
maximum number of lags to be introduced. t is the white noise error i =r+1 (12)
term with zero mean and constant variance. Null hypothesis of presence
max (r , r + 1) = Tln (1 ˆr + 1) (13)
of unit root will be rejected, if 1 < 0 statistically.

Table 2 5.2.3. Scenario analysis and energy saving potential

Descriptive statistics.
As, delineated in section 2, CPEC will boost economic activity, trade
Series Measurement Mean Std. Dev. Min Max and FDI inflows which are closely linked with energy consumption. We
have developed scenario design approach to forecast the future energy
Aggregate
consumption under CPEC for 2030 on the basis of cointegration. We
E Million TOE 23.725 9.819 9.993 40.185
P Paisa/kWh 490.27 97.868 273.652 612.246 develop three scenarios for the estimation of future energy consump-
GDP Rs. Trillion 5.401 2.501 1.813 10.162 tion, namely; Baseline (Business as usual), Moderate and Advance
EI E*/GDP 1.03E-05 7.27E-07 8.47E-06 1.18E-05 scenario. Each scenario involves differentiated growth rates of exo-
FDI Rs. Million 59065.12 96169.78 150.71 382879
genous variables for the future, which is briefly discussed in section 6.
TO Rs. Billion 1689.987 724.666 661.997 2931.668
Industrial Sector
Further we have forecasted energy saving potential on the basis of
E Million TOE 8.874 4.117 3.249 16.804 scenario analysis.
P Paisa/kWh 527.661 89.873 316.293 670.190
GDP Rs. Trillion 5.401 2.501 1.813 10.162 5.2.4. Monte Carlo simulation
EI E/VA 9.14E-06 8.39E-07 7.18E-06 1.05E-05
FDI Rs. Million 24768.78 43354.08 176.7 168076
Monte Carlo simulation is a mathematical technique, which accu-
Commercial Sector mulates the risk or uncertainty in our daily decision making and helps
E Thousand TOE 771.562 468.803 191.752 1655.436 in carrying out quantitative analysis for the future. It has been widely
P Paisa/kWh 822.888 161.951 415.311 1039.552 adopted to account for uncertainty in the electricity generation plan-
GDP Rs. Trillion 5.401 2.501 1.813 10.162
ning and to model the uncertainties in the energy prices [66,67]. But
EI E/VA 0.000263 2.83E-05 0.000219 0.000319
FDI Rs. Million 31271.62 65479.34 10.6 320784 uncertainty in the issues relating to electricity consumption has been
ignored [68]. Following [27,35]; we apply the Monte Carlo simulations
Note: E* represents primary energy consumption. to verify the predictions based on cointegration results and quantify

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F.M. Mirza, et al. Energy Strategy Reviews 25 (2019) 34–46

Table 3 Table 5
Unit root tests. Long run results.
Series Augmented Dickey-Fuller Test (ADF) Series Aggregate Industrial Sector Commercial Sector

Aggregate Model Industrial Sector Commercial Sector LnE Coefficients S.E Coefficients S.E Coefficients S.E

Level First Level First Level First 1 1 1

Difference Difference Difference LnP 0.564 0.14427 0.232 0.03714 0.194 0.02521
LnGDP −0.676 0.17083 −1.537 0.07681 −0.762 0.09645
LnE −1.307 −6.465*** −2.03 −4.71*** −1.79 −4.83*** LnEI −2.15 0.41419 −1.239 0.09149 −0.799 0.04744
LnP −1.346 −4.221*** −2.76 −5.14*** −2.87 −4.39*** LnFDI 0.073 0.03305 0.020 0.00903 −0.019 0.00405
LnGDP −2.456 −3.81*** −2.46 −3.81*** −2.46 −3.81*** LnTO −0.918 0.16722
LnEI 0.239 −6.583*** −1.57 −8.12*** −1.63 −5.99*** Trend 0.008 0.00385 −0.014 0.00307
LnFDI −1.791 −5.195*** −0.47 −8.90*** −0.74 −5.24***
LnTO −1.418 −5.598***
indicates the existence of three or more co-integrating vectors among
Note: *** and ** represents significant level of 1% and 5% respectively.
the variables. Furthermore, four or more co-integrating vectors are
found for industrial sector model and two or more for commercial
different possibilities for future energy consumption by 2030 in Paki-
sector model. These results confirm that there is a long run relationship
stan from the perspective of probability theory.
among the variables in all models over the period of 1977–2013. The
normalized long run equations of the models are presented in Table 5.
6. Discussion of results Estimated parameters represent the elasticities of energy consumption
with respect to energy prices (LnP), gross domestic product (LnGDP),
6.1. Results of unit root tests energy intensity (LnEI), net inflows of foreign direct investment (LnFDI)
and trade openness (LnTO). Interpretation of long run coefficients is as
Before conducting the cointegration analysis, we have tested for the follows.
order of integration of the series by employing ADF test. The results of In all the models, energy prices form a negative relationship with
ADF and PP test are presented in Table 3. Table 3 clearly demonstrates the energy consumption. The coefficients of energy prices are highly
that the results of ADF and PP tests are consistent with each other ex- significant for overall and each sector studied. This relationship is
cept for GDP with no trend. Moreover, all the series have stochastic consistent with the existing literature [21,46,48,69–71]. Price can be
trend and they are first difference stationary. These results satisfy the used as an influential tool for achieving aggregate and sectoral energy
pre-requisite of applying Johansen co-integration method. SIBC cri- efficiency in Pakistan.
terion has been used for the choice of optimal lag length for each series. In literature, we find both negative and positive spillover effects of
FDI on energy consumption. Results in our study are also mixed as
6.2. Johansen-Juselius for co-integration test coefficients of net inflows of FDI are negative for aggregate and in-
dustrial sectors while positive for the commercial sector. However, the
In order to test for the presence of cointegration among the vari- coefficients of net inflow in each of the model are very small. Our re-
ables, we first constructed unrestricted VAR model. We selected 1 lag in sults are in line with the evidence put forward by Ref. [72]. In the
the unrestricted VAR on the basis of SBIC criterion. table A1 in ap- commercial sector, positive spillover effects of FDI on energy con-
pendix contains statistics for lag selection. Results for the Johansen sumption are supported by Refs. [71,73].
Trace and Max-eigenvalue test are presented in Table 4 for all the The GDP coefficients are positive and statistically significant for the
models. overall and the sectoral models. Our findings are supported by the ex-
Max-eigenvalue test rejects the null hypothesis of one or zero co- isting literature [20,21,46,72,74]. Our GDP coefficients are consistent
integrating vectors against the alternative hypothesis of r = 2, for ag- with the Environmental Kuznets curve (EKC) theory based on [75].
gregate and industrial sector model. However, for commercial sector Estimated elasticity of energy intensity in aggregate and industrial
model, the null hypothesis of no co-integration has to be rejected sector models is large and statistically significant. This result finds
against the alternative hypothesis of r = 1. Johansen Trace test ac- support from the fact that Pakistan is highly energy intensive economy
cepted the alternative hypothesis (r ≥ 3) for aggregate model and both at aggregate and sectoral levels as Pakistan is the second largest

Table 4
Johansen Trace and Max-Eigen test for co-integration.
H0 H1 Aggregate Industrial sector Commercial sector

Trace 5% Critical Value Trace 5% Critical Value Trace 5% Critical Value

r=0 r≥1 144.4792 95.75366 138.3582 88.8038 128.974 88.8038

r≤1 r≥2 92.85067 69.81889 90.20971 63.8761 73.09799 63.8761
r≤2 r≥3 48.04816 47.85613 51.51869 42.91525 41.53662 42.91525
r≤3 r≥4 24.5926 29.79707 30.40747 25.87211 25.20439 25.87211
r≤4 r≥5 10.15485 15.49471 10.72818 12.51798 10.26969 12.51798
r≤5 r≥6 0.362473 3.841466

H0 H1 Max-Eigen 5% Critical Value Max-Eigen 5% Critical Value Max-Eigen 5% Critical Value

r=0 r=1 51.6285 40.07757 48.14848 38.33101 55.87602 38.33101

r≤1 r=2 44.80251 33.87687 38.69102 32.11832 31.56137 32.11832
r≤2 r=3 23.45556 27.58434 21.11122 25.82321 16.33223 25.82321
r≤3 r=4 14.43775 21.13162 19.6793 19.38704 14.9347 19.38704
r≤4 r=5 9.792375 14.2646 10.72818 12.51798 10.26969 12.51798
r≤5 r=6 0.362473 3.841466

39
F.M. Mirza, et al.
energy intensive economy among the South Asian countries [76]. Ac-
cording to State bank of Pakistan, Pakistan economy is inefficient in the
use of Natural gas [77] and industrial and domestic sectors are major
consumers of gas [78]. In commercial sector, the energy appliances are
highly inefficient and have the capacity of achieving 20–25% energy
efficiency [79]; ENERCON5). Elasticity of energy consumption with
respect to trade openness is positive and statistically significant and is
in accordance to the existing literature [80,81].
6.2.1. Stability test
The VAR model can only be used for the prediction of future energy
consumption if it is stable. With the unstable coefficients, wrong con-
clusions can be drawn. For checking the stability of our estimated
parameters, we used roots of characteristic polynomial which can be
seen in Table 6. VAR model satisfies the stability condition in all models
and both the conditions are fulfilled. Firstly, in our models there are kp
roots where k reflects number of endogenous variables in the VAR
model and p reflects the maximum lags that we have selected in our
model. Secondly, all roots have the modulus less than one and lie within
the unit circle.
6.2.2. Fitting accuracy of co-integration models
Our co-integration analysis is best fit for predicting the future ag-
gregate and sectoral energy consumption for Pakistan. Our in sample
predicted and actual values of aggregate energy consumption over the
period of 1977–2013 are 23.1 and 23.7 million TOE.
On average, Root Mean Square Error between fitted and actual
values for overall model is only 2.5%, implying that our model will
predict future energy consumption with higher accuracy. On average,
error between fitted and actual energy consumption is only 1.67% and
0.10% in commercial and industrial sectors respectively. The graph of
actual and fitted values for both the sectors is reflected in Fig. 1.
6.3. Scenario analysis
We have specified annual growth rate of exogenous variables for the
future forecast in three scenarios i.e. baseline scenario, moderate sce-
nario and advance scenario, which have been presented in Table 7. Our
BAU baseline scenario is consistent with the Intergovernmental Panel
on Climate Change (IPCC) definition. Average annual growth rate of
each exogenous series during 1977–2013 is considered as the growth
rate in BAU baseline scenario. It implies that each variable by assuming
no change in policies, will keep this average annual growth rate in BAU
baseline scenario over the period of 2014–2030. Formation of baseline
scenario has the rationale that series must pass through this growth rate
in the future in the absence of uncertainties. Growth rates for each
series in advance scenario are rooted in the ground realities of Pakistan
economy. We design the advance scenario in the perspective of CPEC
related economic activities in line with Pakistan's vision 2025. Our
scenario analysis strictly follows the policy documentations. Moderate
scenario is the representation of mild situation and lies between the
advance and baseline scenario. Its growth rate for each series is de-
termined by taking the average of baseline and advance scenario
growth rates. The detailed description of growth rates of exogenous
variables under discussion is as follows.
6.3.1. Energy prices scenario
Growth rate of electricity prices for the period of 2011–2030 is
predicted by Ref. [82] [82]. projected that average electricity prices
will grow by 2.025% from 2011 to 2020 and with 1.25% from 2020 to
2030. These prices will grow with 0.6% and 2.2% from 2011 to 2020
for industrial and commercial sector respectively. However, this sec-
toral price growth will slow down to 0.3% and 1.1% during 2020–2030,
5
For details see http://www.enercon.gov.pk.
40
Energy Strategy Reviews 25 (2019) 34–46
respectively. Under advance scenario, the average price growth rates
for overall and industrial and commercial sectors will be 1.638%,
0.45% and 1.65% respectively during 2011–2030. These growth rates
will be lower than baseline growth rate for all models. Lower growth
rate in energy prices under advance scenario is in line with CPEC as
more renewable energy is expected to enter Pakistan's electricity
market.
6.3.2. . Gross domestic product scenario
Pakistan is expected to experience high GDP growth rate because of
its increasing size in working age group [83]. Pakistan's vision 2025 has
set 8% GDP growth rate target from 2018 to 2025. Pakistan's vision
2030 aims at achieving 7–8% of GDP percent till 2030. CPEC will add
2.5% into current GDP which will increase the GDP growth rate to
7.5%. Given the targets in Government documents and the CPEC, we
have set GDP growth rate of 7.5% under advance scenario and 6.144%
in moderate scenario.
6.3.3. Energy intensity scenario
Pakistan is highly energy intensive economy. No goals have been set
for achieving energy efficiency into the economy. Therefore, we have
assumed the same growth rate for energy intensity in the advance and
moderate scenarios as posited in the baseline scenario for aggregate
(−0.931%) and industrial sector (−0.895%) models. In commercial
sector, energy intensity has decreased from 2007 and onwards, there-
fore, we have assumed 15% less growth of commercial energy intensity
in advance scenario. Growth of commercial energy intensity will be
0.646% and 0.594% in moderate and advance scenario, respectively.
6.3.4. Foreign direct investment scenario
CPEC is a form of FDI inflows into Pakistan. We consider power and
transport infrastructure investment as commercial FDI related to CPEC.
We consider CPEC investment at Gwadar as industrial FDI inflow for
future. Future growth rate of FDI series under advance scenario is the
summation of growth in baseline scenario and per year growth rate of
FDI inflows related to CPEC. The rationale behind the approximation is
that the average growth in net FDI inflows during 1977–2013 will
sustain in the future. Therefore, we add it into the CPEC related FDI
inflows. Hence, we set 39.86%, 20.50% and 39.84% growth rates of FDI
series in the future under advance scenario for aggregate, industrial and
commercial series, respectively.
6.3.5. Trade openness scenario
With the improvement in infrastructure under CPEC investment,
internal and external trade will increase. After the completion of
Gwadar port, Pakistan will be a trade hub for the whole region [14].
Along with the CPEC's investment inflows, the Vision 2025 aims at
increasing exports to $150 billion and exports to GDP ratio to 16–19%.
Vision 2030 aims at increasing trade to GDP ratio from thirty percent to
sixty percent in 2030. This can only be possible after FDI inflows in the
form of CPEC into Pakistan. So, if the trade to GDP ratio is doubled in
2030 to its level in 2013, then the annual growth rate will be 5.88% and
4.94% under advance and moderate scenarios respectively.
6.4. Forecasting within scenario approach
Our scenario analysis is reasonable to forecast aggregate energy
consumption, having differentiated growth rates in each scenario. Our
analysis is similar to Refs. [35,84,85] and [86]. Figs. 2–4 represent the
forecasted energy consumption on the basis of scenarios and co-in-
tegration results discussed above.
Fig. 2 reflects that if the exogenous variables grow with the trends
shown in Table 7, the aggregate energy consumption will increase in all
future scenarios. Baseline scenario depicts that Pakistan will experience
approximately 41% more aggregate energy consumption in 2030 from
its level in 2013. Our results indicate that CPEC related economic
F.M. Mirza, et al. Energy Strategy Reviews 25 (2019) 34–46

Table 6
Results of roots of characteristic polynomial.
Aggregate Industrial Sector Commercial Sector

Root Modulus Root Modulus Root Modulus

0.972015 0.972015 0.985954 0.985954 0.994829 0.994829

0.865759–0.134875i 0.876202 0.648300–0.205663i 0.68014 0.88348 0.88348
0.865759 + 0.134875i 0.876202 0.648300 + 0.205663i 0.68014 0.50133 0.50133
0.676599 0.676599 0.3201 0.3201 0.428874–0.174593i 0.46305
0.43811 0.43811 0.247326 0.247326 0.428874 + 0.174593i 0.46305
0.002697 0.002697

Fig. 1. Fitted vs actual values of energy consumption for commercial and industrial sectors of Pakistan (Unit: Million TOE).

Table 7
Growth Rates of explanatory variables under three scenarios (2014–2030).
Variables Baseline Scenario (%) Moderate Scenario (%) Advance Scenario (%)

Aggregate
P 2.179 1.908 1.638
GDP 4.787 6.144 7.5
EI −0.931 −0.931 −0.931
FDI 18.892 29.377 39.861
TO 4.004 4.943 5.882
Variables Industrial Sector Commercial sector
Baseline Scenario (%) Moderate Scenario (%) Advance Scenario (%) Baseline Scenario (%) Moderate Scenario (%) Advance Scenario (%)
P 1.689 1.069 0.45 2.007 1.828 1.65
GDP 4.787 6.143 7.5 4.787 6.144 7.5
EI −0.895 −0.895 −0.895 0.699 0.6463 0.5939
FDI 18.210 19.357 20.504 16.936 28.387 39.837

Fig. 2. Forecast on aggregate energy consumption of Pakistan under different scenarios.

activities will boost energy consumption by approximately 48% and consumption will increase by 136, 211, and 312% till 2030 from its
57% in 2030 from its level in 2013 under moderate and advance sce- 2013 level under baseline, moderate and advance scenario respectively
narios, respectively. The forecasts suggest that industrial energy (Fig. 3).

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F.M. Mirza, et al. Energy Strategy Reviews 25 (2019) 34–46

Fig. 3. Forecast on Industrial energy consumption of Pakistan under different scenarios.

Fig. 4. Forecast on commercial energy consumption of Pakistan under different scenarios.

Fig. 4 also reveals that commercial sector energy consumption will Table 8
increase by 414%, 154% and 26% in 2030 compared to its value in Future sectoral energy consumption in Pakistan (Unit: Million TOE).
2013 under baseline, moderate and advance scenarios respectively. Aggregate
This implies that in moderate and advance scenario, the commercial
energy consumption will be lower than baseline scenario. Our results years Baseline Scenario Moderate Scenario Advance Scenario
represent the second portion of Environmental Kuznets curve. It might
2020 41.79 42.42 43.07
have many reasons. First, we assume in the scenarios development that
2025 48.1 49.75 51.46
energy efficiency will improve in the commercial sector in the future. 2030 56.05 59.13 62.38
Second, increase in commercial GDP due to CPEC will reduce the en- Industrial Sector
ergy consumption. Third, CPEC related FDI will improve the road in- 2020 20.7 22.95 25.45
2025 26.37 31.92 38.64
frastructure and cause efficient utilization of fuel in transport, conse-
2030 33.59 44.39 58.67
quently reducing energy consumption. Commercial Sector
2020 2.82 2.67 2.54
6.5. Energy saving potential 2025 4.48 3.55 2.82
2030 8.51 4.21 2.08

Table 8 indicates that in the baseline scenario, aggregate energy

consumption will reach to 41.79, 48.10 and 56.05 million TOE in 2020,
2025 and 2030, respectively. Under the Moderate scenario, aggregate
energy consumption will be 1.5%, 3.4% and 5.5% more than the
baseline scenario in 2020, 2025, and 2030 respectively. While under
the Advance scenario, aggregate energy consumption will be 3.1%,
6.10% and 11.3% more than the baseline scenario in 2020, 2025, and
2030 respectively.
At sectoral level, industrial energy consumption will be on in-
creasing trend from 2020 to 2030 in all the scenarios. In the baseline
scenario, the industrial energy consumption will reach 20.695, 26.366
and 33.591 million TOE in 2020, 2025 and 2030, respectively. Under
the Moderate scenario, the industrial energy consumption will be
10.90%, 21.06% and 32.16% more than the baseline scenario in 2020,
2025, and 2030 respectively. Under the advance scenario, industrial
energy consumption will be 22.99%, 46.57% and 74.66% more than
the baseline scenario in 2020, 2025, and 2030 respectively.
Commercial energy consumption will increase during 2020–2030 in
both baseline and moderate scenarios. However, in advance scenario,
commercial energy consumption increases till 2025 with the amount of
2.82 million TOE but it will decline to 2.084 million TOE in 2030.
Under the Moderate scenario, commercial energy consumption will be
5.09%, 20.68% and 50.52% less than the baseline scenario in 2020,
2025, and 2030 respectively. Under the Advance scenario, commercial
energy consumption will be 9.91%, 37.08% and 74.51% less than the
baseline scenario in 2020, 2025, and 2030 respectively.
Energy saving potential for the future can be estimated by com-
parison of baseline scenario energy consumption with the moderate and
advance scenarios. On the basis of Table 8, we develop two scenarios
for assessing the future energy saving potential in comparison with the
baseline scenario. Scenario (A) represents aggregate energy saving
potential when aggregate energy consumption switches from the

42
F.M. Mirza, et al.
Table 9
Sectoral energy saving potential in the future (Unit: Million TOE).
Years Aggregatea
Scenario(A) Scenario (B)
2020 −0.63 −1.28
2025 −1.65 −3.37
2030 −3.08 −6.33
Note: “a” and “b” represent the losses and gains in energy saving potential in industrial and commercial sectors in comparison with the baseline scenario respectively.
baseline to moderate scenario. Scenario (B) is the aggregate energy
saving potential when aggregate energy consumption switches from the
baseline to advance scenario. Sectoral and aggregate energy saving
potential in both scenarios is listed below in Table 9.
It can be observed in Table 9 that loss in aggregate and industrial
energy saving potential will increase by 2030. Loss in aggregate energy
saving potential will be 0.63, 1.65 and 3.08 million TOE in the Scenario
(A) and 1.27, 3.37 and 6.3 million TOE in Scenario (B) for 2020, 2025
and 2030 respectively. Losses in saving potential for industrial sector
are 2.26, 5.55 and 10.80 million TOE in the Scenario (A) and 4.76,
12.28 and 25.08 million TOE in Scenario (B) for 2020, 2025 and 2030
respectively. Comparatively, huge loss in aggregate and industrial en-
ergy saving potential will be experienced in Scenario (B), which strictly
comprises of CPEC related economic activities.
However, in commercial sector, gains in energy saving potential will
experienced in both scenarios till 2030. These have been estimated at
0.143, 0.927 and 4.301 million TOE in the Scenario (A) and 0.280,
1.662 and 6.43 million TOE in Scenario (B) for 2020, 2025 and 2030
respectively. Comparatively, more gains in commercial energy saving
potential may be experienced in Scenario (B) which strictly comprises
of CPEC related economic activities.
By summarizing the results, we find that as conjectured in the
earlier sections of the paper, CPEC related economic activities will
boost energy consumption at the aggregate and the sectoral level in
Pakistan's economy. Moreover, substantial energy savings potential
exists that can be harnessed to bridge the widening energy supply and
demand gaps. Although the energy related projects under CPEC will
help reduce the existing energy shortages, their environmental impacts
can not be ignored as most of the electricity to be produced in these
projects is based on the coal related technologies.
6.6. Risk analysis
The BAU scenario prediction for future energy consumption is
drawn from certain annual growth rate of each exogenous variable.
However, in the reality these growth rates are uncertain. Each annual
growth rate of exogenous series can have many probabilities in the
future. The most accurate prediction for future energy consumption can
be obtained under different probability distribution of exogenous
variables by 2030. Therefore, for risk analysis we apply Monte Carlo
simulation to predict future aggregate and sectoral energy consump-
tion. It not only predicts Pakistan's future energy consumption for 2030
but also reconfirms the accuracy of BAU scenario.
Usual standard deviation and mean have been used for the devel-
opment of normal distribution of annual growth rate of all exogenous
variables. On the basis of their normal distributions, Monte Carlo si-
mulation generates random numbers to predict the future aggregate
and sectoral energy consumption by 2030. This procedure was repeated
5000 times to generate 5000 random numbers. Consequently, 5000
probable values for future aggregate and sectoral energy consumption
were obtained for 2030. These values have been used to form the dis-
tribution histogram and cumulative probability curve.
Figs. (5-7) represent a continuous random variable for 2030 i.e.
energy consumption which can take any value. Its probability density
function is represented by normal distribution/Gaussian distribution.
Energy Strategy Reviews 25 (2019) 34–46
Industrial sectora Commercial sectorb
Scenario (A) Scenario (B) Scenario (A) Scenario (B)
−2.26 −4.76 0.14 0.28
−5.55 −12.28 0.93 1.66
−10.80 −25.08 4.30 6.43
Where, horizontal axis measures energy consumption in million TOE
and vertical axis represents relative frequency. Probability density
function (pdf) of energy consumption summarizes the information re-
lating to the possible outcomes of energy consumption in 2030 and its
corresponding probabilities. Along with the pdf, cumulative distribu-
tion function (cdf) is also plotted which represents the area under the
probability density function.
In Fig. 5, the distribution histogram represents that maximum
probability interval of aggregate energy consumption will be about
53.69–55.38 million TOE by 2030, with the probability of more than
6%. Our baseline scenario under co-integration predicts 56.05 million
TOE, which is consistent with Monte Carlo simulation results to confirm
the accuracy of results. The cumulative distribution curve represents
that if the exogenous variables follow the historical growth patterns in
the future, our prediction lies between a reasonable ranges. The in-
dustrial and commercial distribution histogram represent that max-
imum probability interval of energy consumption will be about
31.34–32.33 million TOE and 7.6–7.8 million TOE by 2030 respec-
tively, with the probability of more than 6%. Our baseline scenario
under co-integration predicts 33.59 and 8.5 million TOE industrial and
commercial sector energy consumption respectively, which is very close
to Monte Carlo simulation results (Figs. 6 and 7).
7. Conclusion and recommendations
China-Pakistan Economic Corridor is a strategic economic project
aiming at regional connectivity for the economic development of
Pakistan and China respectively. In this context, objective of this study
is to forecast the impact of CPEC related economic activities on overall
and sectoral energy consumption and their saving potential in Pakistan
by 2030. We employed Johansen-Juselius Co-integration analysis to
estimate the long-run relationship between energy consumption and its
underlying factors both at aggregate and sectoral level and investigated
the impact of CPEC on future energy consumption by 2030 using sce-
nario analysis. Co-integration results demonstrate that both at ag-
gregate and sectoral levels, elasticity of energy consumption with re-
spect to price is negative while it is positive for GDP and energy
intensity. Mixed results have been found for elasticity of energy con-
sumption with respect to foreign direct investment. In aggregate ana-
lysis, the trade openness plays an influential role in increasing energy
consumption.
Baseline scenario depicts that Pakistan will experience approxi-
mately 41% more aggregate energy consumption in 2030 from its 2013
level. Our results indicate that CPEC related economic activities will
boost energy consumption by approximately 48% and 57% in 2030
from its 2013 level under moderate and advance scenario, respectively.
In comparison with baseline scenario, loss in energy saving potential
under moderate and advance scenarios will be 3.08 million TOE and
6.32 million TOE respectively in 2030.
Sectoral analysis revealed that under baseline scenario, energy
consumption in industrial and commercial sectors in 2030 will increase
by more than 136% and 414% to their values in 2013 respectively. In
advance scenario the energy consumption will increase by approxi-
mately 312% in industrial sector by 2030 from its level in 2013.
Therefore, losses in energy saving potential can be at increasing trend in
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F.M. Mirza, et al. Energy Strategy Reviews 25 (2019) 34–46

Fig. 5. Distribution histogram and cumulative probability curve of aggregate energy consumption in 2030.

Fig. 6. Distribution histogram and cumulative probability curve of industrial energy consumption in 2030.

2030 i.e. 25.08 million TOE in comparison with the baseline scenario.
In the commercial sector, energy consumption will be only 26% higher
than its 2013 level due to CPEC related economic activities under ad-
vance scenario. Commercial gains in energy saving potentials can be at
increasing trend with the passage of time till 2030. It is estimated at
6.43 million TOE in advance scenario in comparison with the baseline
scenario. For risk analysis we apply Monte Carlo simulation. Monte
Carlo simulation results are very close to scenario design results based
on co-integration. This verified not only our scenario BAU results but
also give the different possibilities of future energy consumption by
2030. The CPEC related investment into installed generation capacity is
expected to meet the increase in electricity demand and reduce the

Fig. 7. Distribution histogram and cumulative probability curve of commercial energy consumption in 2030.

44
F.M. Mirza, et al. Energy Strategy Reviews 25 (2019) 34–46

existing energy shortages, their environmental impacts cannot be ig-
nored as most of the electricity to be produced in these projects is based
on the coal related technologies. Targeted interventions to reduce en-
vironmental implications from these projects with appropriate abate-
ment activities are required.
In this context, loss in overall energy saving potential calls for tar-
geted energy conservation policies. Energy conservation should be
made part of the overall energy polices in the country and energy in-
tensity targets should be implemented for different sectors of the
economy to realize its overall energy saving potential and energy policy
should aim at achieving energy resource conservation with investment
strategies to promote energy efficient technologies. Government should
also make careful accounting and related planning to account for po-
tential increase in energy demand due to CPEC related economic ac-
tivities for each sector of the economy. Furthermore, as the increased
economic activity under CPEC is expected to carry environmental im-
plications, it is important to analyze and forecast the future GHGs
emissions to plan appropriate abatement activities.
Acknowledgements
Authors acknowledge all the people and organizations who have
supported this work. Authors also cordially acknowledge the reviewers'
time and effort for reviewing this work.

Appendix 1

Table A1
Lag order selection criteria in VAR

Aggregate

Lag LogL LR FPE AIC SBIC HQ

0 150.3917 – 8.25E-12 −8.49363 −8.22427 −8.40177

1 346.0045 310.6791 7.15E-16 −17.8826 −14.99711* −17.2396
2 389.902 53.22635* 4.54E-16 −18.3472 −13.8455 −17.153
3 441.9672 44.93988 3.01e-16* −19.29219* −13.1744 −17.54687*
Industrial Sector
0 98.37458 – 3.31E-09 −4.33569 −4.1135 −4.25899
1 288.4333 313.9544* 2.70e-13* −13.76762* −13.43446* −13.30741*
2 313.1235 33.8609 3.02E-13 −13.7499 −12.3058 −13.9062
Commercial Sector
0 119.0098 – 1.02E-09 −6.51485 −6.29265 −6.43815
1 312.5422 320.7109 6.81E-14 −16.1453 −13.81211* −14.68506*
2 343.2288 43.45586* 4.10e-14* −16.52736* −13.0832 −14.6837

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