Pakistan’s power sector is mired in a complex web of challenges, characterized by chronic underinvestment, inefficient power generation, and a dysfunctional distribution network. The sector’s history is marked by ill-conceived policies, corruption, and a lack of long-term planning. These factors have culminated in a crisis that has far-reaching implications for the economy, society, and environment.
The government’s attempts to address the crisis through a mix of policies, including increased power generation and subsidy-driven solar adoption, have yielded mixed results. While these measures have provided some relief, they have also exacerbated underlying issues such as circular debt and inefficiencies. The burden of these challenges has disproportionately fallen on consumers, with rising electricity costs eroding purchasing power and fueling social discontent.
Forecasts for GDP growth in Pakistan suggest only modest increases over the next few years. This implies that the anticipated rise in electricity demand will be gradual, rather than dramatic.
The average cost of electricity in Pakistan stands at $0.23 per unit, a rate that has prompted many consumers, including industries and farmers, to shift toward solar energy. A significant number of farmers have adopted off-grid solar systems to power their water pumps, reducing their reliance on the national grid. This shift underscores the impact of high electricity rates on consumer behavior, as many seek more cost-effective and reliable alternatives.
Since 2021, electricity prices have surged by an astonishing 155 percent. This increase is largely attributed to the government’s strategy to raise industrial and retail electricity rates as part of securing loans from the International Monetary Fund (IMF). The IMF’s conditions included substantial tariff hikes and other economic reforms. With inflation hovering around 12 percent, the rising costs of electricity, fuel, and essential goods have placed additional strain on the purchasing power of the populace. In July, the government further increased residential electricity prices by 18 percent to meet IMF conditions, which also involved raising taxes and the costs of basic commodities.
A recent Bloomberg report revealed that electricity bills in Pakistan now surpass the cost of household rent for some Pakistanis. The financial strain on consumers is exacerbated by the loss of approximately 16 percent of electricity due to theft and transmission inefficiencies. These losses contribute to the circular debt crisis, a longstanding issue in the energy sector that continues to burden both consumers and the government.
The origins of Pakistan’s power sector crisis can be traced back to 1994, when the country, then with a population of 130 million (today, it’s approximately 250 million), sought to attract foreign investment to establish new power plants. This initiative was intended to address severe load-shedding, which was significantly impacting industrial productivity.
The government at the time aimed to reduce public sector involvement in the economy through a policy known as “de-publicizing the economy.” This strategy involved transferring economic responsibilities from the public to the private sector, with the goal of stimulating private investment, improving efficiency, and creating jobs. In the electricity sector, this culminated in the introduction of Independent Power Producers (IPPs).
Before the introduction of the IPP policy in 1994, electricity production in Pakistan was managed entirely by public sector power plants. Many of these plants were outdated, inefficient, and prone to frequent breakdowns, leading to high fuel consumption and unreliable electricity supply. The policy shift toward private sector involvement was intended to address these issues by encouraging investment in new, more efficient power plants and reducing the burden on the public sector.
Political instability, coupled with sluggish economic growth, hampered investment in critical transmission infrastructure. Moreover, the escalating cost of imported fuels for fossil fuel-based power plants exacerbated the issue, leading to underutilized power plant capacity and increased costs for consumers.
Consumers were compelled to subsidize idle power plants through capacity charges, despite not receiving the equivalent electricity. This anomalous situation underscores the systemic inefficiencies rooted in outdated contracts and mismanagement, placing an undue financial burden on consumers.
The burgeoning adoption of solar energy, while commendable, presents a new challenge to the power sector. As more consumers opt for solar power, the demand for grid-supplied electricity decreases, while the fixed costs associated with power generation and infrastructure remain relatively constant. This imbalance can lead to increased tariffs for remaining grid-connected consumers as the costs are spread over a smaller user base.
Pakistan’s power crisis is a complex issue with far-reaching consequences. Beyond economic implications like industrial decline, unemployment, and inflation, it has profound social impacts, including increased poverty and social unrest. Despite these pressing challenges, the government is making efforts to address energy demands and reduce greenhouse gas emissions.
On August 16, Nawaz Sharif, presiding of the ruling Pakistan Muslim League-Nawaz (PMLN), announced a notable reduction in electricity costs for residents of Punjab. Specifically, a $0.05 per unit decrease was introduced for households consuming up to 200 units (equating to a 22 percent discount, based on the average per unit price for electricity).
Additionally, a substantial $2.5 billion package was unveiled, aimed at providing free solar panels to eligible families in the province. This initiative reflects the government’s effort to mitigate the financial burden on consumers while promoting the use of renewable energy sources.
According to Pakistan’s Economic Survey 2023-24, significant investments are being made in renewable energy to meet the goal of a 50 percent reduction in emissions by 2030. As of March 2024, Pakistan’s installed electricity capacity was 42,131 MW, with contributions from hydropower (25.4 percent), nuclear (8.4 percent), renewable (6.8 percent), and thermal (59.4 percent) sources.
Although thermal power remains the largest source of electricity, its share has decreased, reflecting a positive trend toward cleaner energy sources. According to Pakistani government data, hydropower, nuclear, and renewable sources accounted for 54.1 percent of the total electricity actually generated in the fiscal year ending in March 2024, indicating progress in transitioning to more sustainable energy.
The government’s commitment to renewable energy is evident in its target of a 50 percent emissions reduction by 2030, as outlined in the Economic Survey 2023-24. However, significant investments and policy reforms are still required to fully harness the potential of clean energy and address the persistent issues plaguing the power sector
The power crisis in Pakistan has intensified broader societal and political issues, creating a persistent cycle of instability. Addressing this crisis requires a multifaceted strategy that tackles both supply and demand challenges. While the emphasis on increasing renewable energy is a positive development, achieving a sustainable energy future necessitates a comprehensive approach.
To effectively address these challenges and foster economic growth, Pakistan must adopt a holistic strategy that integrates energy efficiency, grid enhancements, and a strong renewable energy sector. Additionally, resolving circular debt issues and strengthening governance within the power sector are crucial.
A stable and efficient energy sector is essential for sustainability and for stimulating GDP growth, which, in turn, ensures the nation’s capacity to afford and manage higher electricity costs. High GDP growth will provide the financial means to meet the challenges posed by capacity charges and support the overall stability of the energy sector.
