The price of cool air: why electricity costs so much in Pakistan

Nothing beats the heat in the summer months, especially June and July. With record temperatures across Pakistan this year, air conditioning has become more of a necessity than a luxury. The state, however, is trying its best to keep it a luxury. Take a look at the electricity bill to find out for yourself.

A family of four residing in Lahore and using an air conditioner sparingly through June can still consume around 1,000 units. At an effective rate approaching Rs60 per unit, its monthly electricity bill can reach Rs60,000. The same consumption, priced under the residential slabs that Bangladesh notified in June 2026, costs about Rs32,000 including VAT. India sets tariffs state by state rather than nationally, but Delhi, the closest large comparator to Lahore in climate and cooling load, prices 1,000 units at roughly Rs20,000 with fixed charges and duty. Rates run higher elsewhere in India. In Mumbai, where top-slab households pay INR8 to INR11 per unit before a 16% state duty and a separate wheeling charge, a comparable bill exceeds Rs32,000. What explains this brutal discrepancy?

If consumers were paying only for energy and the variable cost of generation, the national average would be around Rs8.13 per unit. Instead, the National Electric Power Regulatory Authority’s (NEPRA) power-purchase price for 2026 stands at Rs25.32. The difference, approximately Rs17.19 per unit, reflects capacity and use-of-system obligations. NEPRA itself estimates that these costs together account for around 68% of the projected power-purchase price. This is the cost of not generating; the price ordinary consumers pay for power plants simply existing, whether dispatched or not. Much of this burden originates in the capacity-payment model introduced under the 1994 power policy. The legacy did not end there. Later capacity additions, particularly under the China-Pakistan Economic Corridor (CPEC), deepened the obligations; by February 2026, liabilities associated with CPEC power projects had reached Rs543 billion.

The power-purchase price, however, does not capture the full cost of delivering electricity to the consumer. Once approved distribution costs, system losses, margins and prior-year adjustments are incorporated, NEPRA’s national average base tariff rises to approximately Rs33.38 per unit, before the Debt Service Surcharge, taxes and subsequent monthly or quarterly adjustments enter the bill.

Many Pakistanis may not realise that another hidden layer pushes up the per unit cost of electricity. On virtually every unit consumed nationwide, a flat Rs3.23 is charged as a Debt Service Surcharge. It services a Rs1.225 trillion financing arrangement raised from 18 commercial banks to retire part of the power sector’s circular debt. Consumers are effectively repaying liabilities created elsewhere in the system.

Why does circular debt exist in the first place? Partly because of negligence, partly because of inefficiency, and partly because of operational impediments such as poor recoveries, system losses and delayed payments across the power chain. Yet when consumers are repeatedly made to absorb these costs, the surcharge does little to correct the behaviour that created the debt. Instead, it risks encouraging it. The system learns that losses can be refinanced, converted into a bank facility and quietly recovered through the meter.

For a household consuming 1,000 units, the surcharge alone adds Rs3,230 to the monthly bill. The family did not take this loan, no bank assessed its credit-worthiness, and it had no say in how the liabilities accumulated. Yet it repays the financing through an instrument it cannot refuse: the electricity meter. More importantly, the International Monetary Fund (IMF) required the removal of the surcharge’s previous cap of 10% of the base tariff, leaving consumers exposed to future increases if the underlying debt continues to grow.

What strengthens this argument is how little the debt surcharge has done to solve the underlying problem. If anything, by allowing the system’s liabilities to be passed on to consumers, it has weakened the incentive for genuine reform. Circular debt continued to rise, reaching Rs1.924 trillion by the end of May. The Power Division’s own accounting places Rs873 billion of that stock as payable to banks under circular-debt financing arrangements. Even after year-end adjustments brought the figure down, it still stood at around Rs1.835 trillion by June 30, against a committed target of Rs1.614 trillion. The surcharge has merely changed who pays for the problem, without changing the conditions that produce it.

The tariff schedule itself is a case study in cross-subsidisation. Households in the upper consumption slabs may pay between Rs38 and Rs48 per unit, in part to support more than 20 million consumers who fall within the protected category, while the lifeline tariff begins at Rs3.95. Protecting poorer households is understandable, yet two questions present themselves. Why is the threshold set so low that the use of basic necessities, especially during a heatwave, can push a family beyond it? And why should a shrinking pool of higher-paying consumers bear the cost of the state’s failure to fund social protection transparently? Interestingly, much of that burden falls on households that own air conditioners.

The federal government then surveys this tower of capacity obligations, distribution losses, cross-subsidies and debt repayments, and taxes the entire amount at 18%. GST applies even to the Debt Service Surcharge, which means the consumer pays sales tax on a loan repayment. The scale is now on record: the FBR told the Senate in July that it collected Rs1.866 trillion in sales and income tax through electricity bills over four fiscal years, including Rs476.1 billion in 2025-26, while conceding that Rs400 to 500 billion in adjustable withholding goes unclaimed every year for want of filed returns. The state passes the cost of its failures through the electricity bill, earns tax revenue from the same amount, then keeps what its citizens never manage to claim back.

At this point, the arithmetic finally reconciles. The consumer-end cost of service sits near Rs33 per unit, while the Debt Service Surcharge adds another Rs3.23. Cross-subsidisation and the upper-slab tariff push the charge into the low forties. Fixed charges and pending adjustments add more; for April to June alone, distribution companies have sought Rs23 billion through the quarterly adjustment mechanism, driven by Rs49.7 billion in capacity charges, worth up to another rupee per unit. Once GST is imposed at 18% on this entire stack, along with any applicable duties and withholding tax, the effective cost approaches Rs60 per unit. What began as roughly Rs8 worth of energy and variable generation costs can approach Rs60 by the time it appears on a high-consumption household’s bill.

The bill’s history as a general-purpose collection mechanism is equally revealing. For two decades, until mid-2025, it carried a Rs35 fee for state television on every connection, whether or not the household owned a television. Provincial electricity duty was also routed through the same envelope. The meter has consistently proved easier to tax than the income, property and agricultural wealth that governments remain reluctant to assess.

The exits from this system are equally instructive. A household that keeps consumption below 200 units earns protected status. One hot month above the threshold can trigger six months of higher pricing, treating a heatwave as evidence of permanent affluence. A household with capital turns to rooftop solar. Existing net-metering consumers have been credited at Rs25.32 per exported unit, exactly the national average power-purchase price notified for the quarter. The grid therefore pays a solar household the wholesale price for the electricity it exports while charging the household that remains wholly dependent on the grid nearly Rs60 after surcharges, adjustments and taxes.

Every departure removes a paying consumer while capacity obligations and bank repayments remain fixed. Those costs must then be divided among those who remain. The grid is gradually becoming a gathering of households too poor to leave and too protected to pay, financed by a middle class steadily doing the arithmetic. Rising tariffs encourage people to exit, shrinking the paying base and leaving those who remain with a greater share of the system’s fixed obligations.

Relief, when ministers promise it, usually means a small tariff reduction, a deferred adjustment or a temporary subsidy that reappears later. Real relief requires renegotiating expensive capacity obligations where possible, improving recoveries, reducing distribution losses and financing social protection through the tax system rather than hiding it inside electricity tariffs. More importantly, the meter must stop being treated as a convenient substitute for reforms that successive governments have been unwilling to undertake.

Our family of four is clearly not enjoying a luxury at this price. It is, in effect, absorbing the accumulated cost of every contract the state entered into carelessly and every subsidy it promised without funding. The bill also reflects the cost of the negligence that produced circular debt, persistent line losses and gross mismanagement across the power sector. Every month, when the bill is presented to this family, somewhere within it a signature from 1994 and CPEC-era obligations are still being honoured.