Pakistan’s power sector held captive, now there are signs of breaking loose

In Pakistan’s complicated energy sector maze, a quiet battle has had the government and industries engaged, one that pits the struggling national grid against captive power plants (CPP). The arrangement came under scrutiny by the International Monetary Fund (IMF), and some progress has been made.

Captive power plants, set up by industries that took advantage of natural gas at cheaper rates, have now been penalized, so to speak, with a levy that make them more expensive than the grid in some cases.

Industries operating on CPPs have resisted integration with the national grid – already operating in surplus capacity – and this results in soaring fixed costs per unit, tightening the noose on an already strained system.

These off-grid power generation units have long operated under the radar of national power planning. But as Pakistan’s grid struggles with underutilization, subsequently rising capacity payments, and decreasing demand – falling by over 5% in FY-2024 – CPPs have rightfully drawn increased scrutiny from policymakers.

The struggle between captive power and the national grid isn’t just technical – it’s rooted in distrust, economics, and survival. In the past, where power outages could shut down entire production lines, industries did what they had to: they took matters into their own hands.

Out of Pakistan’s 1,180 captive plants, majority are dedicated with very few serving as co-generation plants which export surplus energy to the grid. This grid, which is capable of supplying over 45,000 MW, faces a demand shortfall of over 3,000 MW because of these CPPs alone, an estimate by NEPRA, making these plants one of the largest informal sources of electricity in the country.

While CPPs serve industrial needs, their unregulated growth creates problems for the broader power sector. The government and NEPRA have grown increasingly critical of captive generation, particularly in the context of excess capacity and rising capacity payments – payments to independent power producers (IPPs) for unused electricity.

Moreover, inefficiency and high gas consumption stagnate the power sector. By supplying gas to these inefficient plants, more efficient grid plants are deprived of their fair share – thereby relying on expensive RLNG – which further impacts the tariff. Most CPPs in Pakistan operate at around 30% efficiency, much lower than modern grid-connected power plants, which can exceed 50% efficiency. This means CPPs consume more gas per unit of electricity generated, resulting in wasteful use of a scarce resource.

Two-fold issues let this situation run amok. Initially, the policymakers turned a blind eye on captive power as they lowered industrial complaints and kept industries energized to maintain Pakistan’s sluggish economic growth. On the other hand, policymakers kept growing capacity – assuming demand would grow, but a large chunk of industrial demand never showed up because those users were still running their own power plants. This has resulted in a vicious cycle hampering the grid – exacerbated by the policymakers repeating their mistakes with net-metering and solarization.

Recognizing this cycle, the government has begun taking steps to discourage captive generation and incentivize industries to return to the grid. The biggest step was the withdrawal of gas for captives.

Starting in 2021, only those with efficiency above 50% were allowed to continue operations with subsidized gas. By March this year, the government sharply increased gas prices for CPPs – by up to 23% – and imposed a new grid levy, raising costs to bring their generation costs on par with grid generation costs.

The government also mandated industries to maintain dual connectivity with the grid and demonstrate they can switch to grid supply during peak hours with proposals to impose surcharges or wheeling charges on self-generation, especially if they are connected to the grid only as backup.

Pakistan’s total installed capacity stands at over 45,000 MW, but peak demand rarely crossed 30,000 MW in 2024. That is almost 15,000 MW of excess capacity being charged to consumers – a monstrous Rs2 trillion being excessively charged to consumers in 2024, over 60% of total electricity

sector costs.

Additionally, these industries – those that had the clout to install big CPPs – rendered other local players uncompetitive, inserting a layer of incentives to dump goods in the local market rather than exporting them.

Still, captives are wary of switching to the grid. Their consumption patterns require dedicated sub-stations – as per NEPRA’s regulations – which incur a significant cost to develop. Concerns on voltage fluctuations remain while inconsistent policies also hinder CPPs from folding into the grid. Moreover, most firms have already invested millions in CPPs. For them, switching to the grid offers only additional financial outflows – the cost of developing the necessary grid connections requiring a substantial investment of Rs 2-4 billion.

But it seems like Pakistan is getting ready to shift industries to the national grid. Coordination and collaboration will be key. Assurances of grid stability, uninterrupted power supply, and facilitation during the transition are going to be key.