A quiet yet significant shift is underway in Pakistan’s energy landscape. The Off-the-Grid (Captive Power Plants) Levy Bill, 2025, though seemingly technical in nature, signifies a deeper repositioning. One that redefines fairness, efficiency and sustainability across the country’s power sector.
ENERGY SECTOR
A quiet yet significant shift is underway in Pakistan’s energy landscape. The Off-the-Grid (Captive Power Plants) Levy Bill, 2025, though seemingly technical in nature, signifies a deeper repositioning. One that redefines fairness, efficiency and sustainability across the country’s power sector.
The ordinance authorises the federal government to impose a levy on natural gas-based captive power plants. The revenue generated from this levy will be used to reduce electricity tariffs for other consumers. Under the ordinance, all captive power plants are required to pay a levy to the federal government on their consumption of natural gas or RLNG, in addition to the notified sale price.
Grid-connected industries pay significant energy-related taxes and levies, including general sales tax, fuel adjustment charges, income tax, and various surcharges. In contrast, many captive users have avoided this full burden. The result is a bifurcated energy landscape where one segment subsidizes the other. The newly introduced Captive Power Levy begins to level this field.
Structured to phase in gradually, starting at 5.0 per cent and rising to 20 per cent by August 2026, the levy is a calculated policy move. It neither bans captive generation nor imposes sudden shocks. Instead, it sends a clear signal that decentralized inefficiency will no longer be state-subsidised. Industries are encouraged, not coerced, to shift back to the grid, where a cleaner, cheaper and more efficient generation exists.
Earlier in May, Sindh CM Murad Ali Shah hosted a high-level forum to discuss the mandatory shift of industries from captive power plants to DISCOs, as per federal policy. He emphasised that gas reallocated from captive power plants should stay within the province after industries shift to the national grid. The meeting provided a forum for federal officials and industrialists to discuss and plan a transition timeline from captive power to DISCOs.
Captive Power Plants (CPPs) were developed as a necessary response to a crisis. During the severe load-shedding episodes of the 1990s and early 2000s, industries found themselves unable to function reliably on grid electricity. The only viable option was to self-generate power, mostly through natural gas-fired plants, in order to protect productivity and ensure continuity. The policy and regulatory environment tacitly supported this workaround because it filled a critical gap at a time when the national grid could not cope.
That context, however, has changed. Pakistan’s total installed generation capacity has now crossed 46,000MW, while actual peak demand lingers around 30,000 megawatts. Despite having more than sufficient supply on paper, the country continues to grapple with inefficiencies and ballooning energy costs, largely because this excess capacity remains underutilised.
Grid-connected plants continue to operate at optimal levels while hundreds of captive plants continue to generate their own power in isolation.
This fragmented system has a cost. When demand is scattered across off-grid and captive setups, economies of scale are eroded. Per-unit costs of electricity increase because the fixed capacity charges of idle grid plants are recovered from a shrinking consumer base. As a result, users, who must still rely on the national grid, are saddled with disproportionately high tariffs. They are paying the price, quite literally, for inefficiencies they did not create. Today, Pakistan’s circular debt has crossed Rs2.5 trillion, driven in part by these systemic imbalances.
The Captive Power Levy may not resolve all the structural challenges Pakistan faces in energy governance. But it is a vital first step in aligning incentives with national priorities
The energy inefficiency of many captive power plants further compounds Pakistan's challenges. While modern, grid-connected combined-cycle plants achieve fuel efficiencies of 50–60 per cent, most captive units operate at just 25–30 per cent when measured solely for electricity production. This disregard for annual fuel utilisation efficiency is a significant problem. This inefficiency persists partly due to the failure of relevant departments to conduct mandatory energy audits of these captive power plants and designated industrial consumers.
In a country facing a sharp decline in domestic gas production, which is falling at an estimated 3-4 per cent annually, this is an untenable luxury. To plug the shortfall, Pakistan spent over $5 billion on imported LNG in 2023, a figure that exerts enormous pressure on foreign exchange reserves.
This misallocation of gas has raised red flags internationally. The IMF, in its latest programme review with Pakistan, explicitly recommended rationalizing gas allocation to eliminate inefficiencies and improve fiscal discipline. The new levy on CPPs is, in many ways, also a response to this call.
In line with another condition set by the IMF, Pakistan has introduced a levy of Rs238 per Million British Thermal Units (MMBTU) on gas supplied to captive power plants. Facilitating the required shift from CPPs to grid power for larger industrial consumers needs to be planned timely and efficiently, alongside this increasing phase-wise levy on the supply of natural gas/RLNG.
Power Minister Awais Leghari has shared that a 30 per cent industrial tariff reduction has already been implemented, and DISCO operations are being improved. A 7,000MW feasibility plan is ready. He has also noted that 583 captive power plants have already shifted to the national grid, and more industrial units will eventually need to transition from captive generation to distribution networks.
KE too is proactively supporting Karachi’s manufacturing sector in transitioning to the national electricity grid, at a time when the government’s policy to phase out industrial reliance on captive power generation is gaining momentum as part of broader energy sector reforms aimed at reducing inefficiencies and optimising surplus capacity. Over the past year around 23 industries running on captive power have been energised by the power utility, while some others have increased their consumption of on-grid power. Another 45 industrial units are also in the process of conversion. Consequently, KE is also enhancing its infrastructure to support the anticipated increase in power demand by the industrial sector.
For distribution companies, this marks a turning point. The current disaggregated demand structure makes planning, cost recovery and load management extremely difficult. Bringing industrial users back to the grid creates scale, predictability and the opportunity to spread costs more evenly. With appropriate support, this could even lower tariffs for end consumers.
Understandably, segments of the industrial community view the levy with skepticism. Concerns around competitiveness, cost pass-through and international pricing pressures are legitimate. But it is equally important to recognise that no sustainable industrial strategy can rely on gas subsidies or isolation from national obligations. The levy is also tax-deductible, cushioning its fiscal effect, and the legislation includes discretionary powers for the president to respond to exceptional cases. Parliament has also built in safeguards by mandating annual reports on the levy’s use, ensuring accountability.
The Captive Power Levy may not resolve all the structural challenges Pakistan faces in energy governance. But it is a vital first step in aligning incentives with national priorities. It seeks to foster a shared understanding that energy equity means more than just access. It means fair participation in the system’s costs and benefits. It signals that while captive generation was once a lifeline, it is now an obstacle to rational pricing and sustainability.
By gradually phasing in this change, the government has provided a fair runway for adaptation. What is required now is a willingness across the board from all stakeholders to view energy not as a private good, but as a shared resource. Only then can the country truly reorient its energy landscape toward affordability, inclusiveness and long-term stability.
The writer has served at the Energy Conservation Fund-NEECA. He can be reached at: energyexpert.pk@gmail.com
