Reliable, accessible and affordable energy is crucial for economic growth. However, Pakistan’s power sector faces significant challenges, including high transmission and distribution (T&D) losses, poor recovery rates, cross-subsidisation, elevated tariffs and increasing circular debt.
Reliable, accessible and affordable energy is crucial for economic growth. However, Pakistan’s power sector faces significant challenges, including high transmission and distribution (T&D) losses, poor recovery rates, cross-subsidisation, elevated tariffs and increasing circular debt.
Ineffective policies, lack of strategic planning, institutional weaknesses, mismanagement, corruption, underinvestment in transmission, neglect of an optimal energy mix, inefficient generation and a dysfunctional distribution network exacerbate issues in generation, transmission and distribution.
In response to rising electricity demand in the 1980s, the government undertook reforms by unbundling Wapda and KESC into ten distribution companies (DISCOS) and four generation companies (GENCOS). The introduction of private sector independent power producers (IPPs) in 1994 added capacity to the national grid but also resulted in higher electricity costs. IPP contracts linked to sovereign guarantees and currency fluctuations contributed to rising energy prices and escalating circular debt by 2006.
Due to these longstanding structural issues, the government has had to increase electricity prices, significantly impacting industrial consumers. These consumers warn that volatile power tariffs could result in de-industrialisation, relocation of businesses, and reduced operations, jeopardising a competitive manufacturing sector's sustainability. Recent data indicates that industrial electricity tariffs have increased by 183 per cent over the past five years, as of September 30, 2024.
The rise in power tariffs has significant repercussions for domestic manufacturing, exports, employment, investment and overall economic stability in Pakistan. This issue is not just economic for industrial consumers but also strategic, as a weakened industrial base negatively affects national productivity.
Policymakers and energy experts must explore long-term strategies to create a reliable and economically sustainable power supply for industries. Key questions include the reasons behind the volatility and continual rise of electricity tariffs, as well as how these increases impact industrial productivity and competitiveness. A thorough analysis of these issues will provide a deeper, evidence-based understanding.
Pakistan's energy sector began with a mere 60MW of power generation at independence in 1947. The development of hydro-based energy sources, notably from the Mangla and Tarbela dams, increased installed capacity to 9,094MW by 1984. However, the failure of public utilities (Wapda and KESCO) to meet the annual energy demand of 9-10 per cent led to the introduction of independent power producer (IPP) agreements in 1994. While this increased power availability, it also raised costs and created chronic issues like circular debt, jeopardising the sector's financial stability.
As part of the restructuring of public sector utilities in 1998, the Pakistan Electric Power Company (PEPCO) was established to encourage private sector involvement, resulting in ten distribution companies, four generation companies, and the National Electric Power Regulatory Authority (Nepra). KESC was privatised in 2005, rebranded as K-Electric.
Electricity is essential for economic development and directly impacts industrial production, investment, and business operations. Affordable energy helps control manufacturing costs, boosts production, sustains supply chains, promotes industrial growth and creates jobs, ultimately driving economic growth. The energy-intensive industrial sector requires a stable power supply, but unreliable and expensive tariffs deter investments and economic activities, ultimately harming all societal segments, particularly industries. Rising energy prices have stifled industrial growth and competitiveness, resulting in de-industrialisation, especially in sectors like textiles and metal. Industrialists are urging the government to provide energy at competitive rates of around $0.09 per kWh to mitigate socioeconomic repercussions.
The evaluation of the industrial sector shows a contraction in large-scale manufacturing, with a recorded decline of 0.1 per cent and a notable decrease in output across several sectors. Electricity tariffs for the industrial sector rose to Rs43.81 per unit in 2023-2024 from Rs15.5 in 2019-2020, marking a 183 per cent increase. Industrialists are calling for reduced power tariffs, the termination of costly IPP agreements, the elimination of cross-subsidies, and the removal of capacity charges to enhance competitiveness. Currently, industrial power tariffs in Pakistan, at approximately 17 cents/kWh, are nearly double those in India, Bangladesh and Vietnam.
An analysis of Pakistan's power sector highlights significant structural policy flaws and strategic oversights that have hindered the establishment of a sustainable energy system capable of efficient generation, distribution and transmission. Despite rising energy demand in the 1980s necessitating a comprehensive energy strategy, the sector was plagued by shortsighted policies that overlooked essential financial and operational factors. For instance, an undue focus on projects like the Kalabagh Dam detracted from more viable alternatives, such as the Diamer-Bhasha Dam.
Independent Power Producer (IPP) contracts established in 1994 favoured the IPPs, lacking competitive bidding and entailing sovereign guarantees and other protections that did not sufficiently address tariff considerations. Currency devaluation exacerbated the issue, with tariffs soaring alongside fluctuating exchange rates -- from Rs204.85 to Rs287.50 within two years. The take-or-pay model further burdened the system by ensuring IPPs received payments regardless of actual power generation, contributing to wasteful capacity payments. Reliance on thermal power, coupled with a neglect of renewable resources like Thar coal, escalated generation costs, while poor site selection for plants increased logistical inefficiencies. Finally, unrealistic demand forecasting resulted in distorted investment planning, leading to an oversupply of electricity amidst stagnant industrial growth.
An inefficient energy mix is another major factor behind the spike in power tariffs. Pakistan’s energy mix comprises 64 per cent fossil fuels (coal, furnace oil and gas), which are thermal and largely imported. Even coal is imported from Indonesia and South Africa due to its superior quality. This heavy reliance on imported fuels significantly increases the cost of energy production.
The sector-wise installed capacity reflects the following: In 2022-2023, Pakistan’s total installed power generation capacity stood at 45,885MW, reflecting the country’s heavy reliance on thermal sources. Thermal power plants, largely dependent on fossil fuels, contributed the lion’s share with 28,811MW, making up 62.79 per cent of the total capacity. Hydropower remained the second largest contributor, providing 10,635MW or 23.18 per cent. Nuclear energy added a further 3,620MW, accounting for 7.89 per cent, while renewable sources -- including wind, solar, bagasse and biomass -- collectively supplied 2,819 MW, or 6.14 per cent of the total capacity.
Mismanagement, inefficiency and corruption in public sector distribution and generation companies have severely compromised the reliability and affordability of electricity in Pakistan. These issues have led to operational inefficiencies, inadequate power generation and a financially unsustainable power sector. Key problems include ineffective management of DISCOs resulting in high transmission and distribution (T&D) losses, outdated infrastructure, and poor revenue recovery.
Financially strapped DISCOs cannot invest in necessary infrastructure, causing significant resource wastage and escalating electricity costs. The slab-based tariff design penalises peak-hour usage and burdens industrial consumers with high taxes and surcharges -- 37-40 per cent -- which undermines their competitiveness, particularly in export-oriented industries.
Despite having an installed capacity of 45,885MW, capable of serving an average peak demand of only 25,000MW, industrial users often experience power shortages due to inefficient distribution. Circular debt has escalated to Rs2.4 trillion as of June 30, 2024, with the government facing rising subsidy burdens -- from Rs236 billion in FY2020 to Rs1,190 billion in FY2025. Faulty IPP contracts further exacerbate these issues, leading to idle capacity payments and systemic inefficiencies. A comprehensive reform of the power sector is essential to promote sustainable economic growth, which includes integrated energy planning, prudent management of IPP agreements and restructuring to phase out inefficient practices.
Policy recommendations include developing a balanced energy mix focused on local resources like Thar coal, modernising T&D infrastructure and revising tariff structures to incentivise peak usage. Offering concessions and tax incentives for industrial consumption, supporting renewable energy solutions, and implementing smart grid technology are also crucial steps. Ultimately, a deregulated and integrated power sector with efficient operational functions is required to create a sustainable and cost-effective energy landscape.
The writer is a freelance contributor.
