South Asia hosts nearly a quarter of the world’s population and is experiencing rapid economic growth. This growth is driving a sharp rise in energy demand across the subregion. Countries such as Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka, show significant differences in their geographical features and energy sources. However, they face a common challenge: a continued reliance on fossil fuels, which accounts for nearly 80 per cent of the region’s primary energy production, and a heavy dependence on imported energy to meet almost two-thirds of total energy consumption. This dependence exposes countries to global price volatility, strains public finances, and raises concerns over energy security.

A fossil-heavy electricity mix

One of the most significant challenges facing the subregion is its heavy reliance on fossil fuels for electricity generation. In 2023, countries in South Asia were still dominated by fossil fuels, with coal accounting for about 67 per cent of total (Figure 1). This is mainly due to India’s reliance on coal-based power, as the country represents by far the largest share of electricity demand in the subregion. Hydropower provided around 9 per cent of total electricity generation and plays a vital role in Nepal and Bhutan. While renewable energy such as solar and wind are expanding across the subregion, their overall contribution remains relatively modest. 

South Asian countries follow diverse paths in generating electricity, yet solar and wind energy are still far away to replace traditional fossil fuels. At the same time, momentum is building to match with global requirements. Most South Asian countries have adopted ambitious renewable energy targets, signalling strong political commitment to cleaner and more sustainable energy systems.

However, on the other hand, fiscal constraints, high public debt and macroeconomic vulnerabilities limit the ability of many countries to scale up public investment for energy sectors. Meanwhile, other risks linked to policy uncertainty, utility finances and grid limitations continue to block investments from the private sector. The heavy dependence on imported fossil fuels further amplifies these pressures, as global energy price shocks quickly translate into higher domestic costs and fiscal stress.

Structural challenges beyond finance

Financing challenges are compounded by deeper structural issues. Electricity markets in several countries are shaped by policy distortions, weak institutional capacity and technical inefficiencies. Subsidy is essential for protecting vulnerable households, but it’s often poorly targeted and place heavy burdens on public budgets. Power utilities frequently struggle with high transmission and distribution losses, outdated infrastructure and low bill collection rates, limiting their ability and willingness to invest in clean energy and grid upgrades.

These challenges slow the integration of renewable energy and undermine investor confidence. Political uncertainty and limited cross-border cooperation further limited reform efforts, despite the region’s strong potential for shared solutions.

Unlocking finance through smarter approaches

A mix of financial instruments can help accelerate the energy transition. Public finance remains essential, particularly in countries with underdeveloped capital markets. At the same time, private investment is indispensable for scaling up renewable energy and improving efficiency. Blended finance with combining public and private resources can help reduce risks and crowd in private capital.

Carbon pricing and international carbon markets also offer emerging opportunities to mobilize finance while encouraging low-carbon investment. At the same time, regional and international organizations and financial institutions play a critical role by providing technical assistance, concessional finance, and risk mitigation tools that are not yet widely available in domestic markets.

A way forward

South Asia’s clean energy transition requires coordinated policy action and regional cooperation, together with the secure finance support.

Strengthening macroeconomic stability, improving utility governance and adopting transparent, predictable and trackable energy policies can significantly enhance investor confidence. Reducing dependence on imported fossil fuels through greater use of domestic renewable resources would improve energy security and ease fiscal pressures.

Addressing transmission and distribution losses through grid modernization and digital solutions is equally critical. These investments not only improve system efficiency but also strengthen the financial feasibility of utilities, an essential condition for sustained private-sector engagement.

Moreover, the subregion also stands to benefit greatly from expanded cross-border power trade. Seasonal and geographic differences in supply and demand create natural opportunities for electricity exchange, particularly between hydropower-rich countries and energy-importing neighborhoods. Regional cooperation can lower system costs, improve reliability and support the integration of renewable energy.

The engagement of community level must remain important. Transparent land acquisition, fair compensation, and strong social safeguards are not obstacles but foundations for successful and inclusive clean energy projects.

South Asia’s energy transition is both a national and regional endeavor. Platforms for policy dialogue, peer learning, and technical cooperation can help countries share experiences, align approaches, and build trust. As a regional coordinator, ESCAP can support these efforts by facilitating knowledge exchange, strengthening institutional capacity and promoting investment-ready energy frameworks.

With the trinity mix of policy reforms, financing strategies and regional collaboration, South Asia can move beyond fossil fuel dependence and build a cleaner, more resilient energy future, one that supports economic growth, energy security and climate goals together.