Power sector—hope on the horizon

Over the past year, power tariffs in Pakistan have come down considerably and, contingent on key reforms being implemented over the next five years, are on their way to becoming “normal” by global standards.

As highlighted in a recent IEA report, power tariffs in Pakistan are almost twice as high as in most of the world. Behind this are a multitude of reasons, ranging from a high share of stranded capacity, high technical and commercial losses, cross subsidies and other economic distortions that have kept power tariffs prohibitively high and subdued demand, contributing to a utility death spiral, and most recently a solar boom that threatens the viability of the national grid.

While power tariffs have been brought down significantly over the past two years, it’s important to point out that they’re back around the pre-crisis levels of 2021-22 which were not very competitive to begin with. They spiralled from around 10-12 cents/kWh to 16-17 cents/kWh in the wake of the economic crisis of 2022-23; as the economy has adjusted some demand has recovered (though still below 2020-21), while international developments have also kept fuel prices at a low. Hence, the reduction in power tariffs has been brought about by a combination factors, including economic recovery, and a targeted subsidy with sunset clause.

The only “structural” or long-term sustainable change has been the termination and renegotiation of 1992/2002 policy IPP contracts, which brought about a relief of Rs 16 billion and Rs 17 billion in the third quarter of FY25. This translates into an annual reduction of around Rs 120 billion in total capacity charges of Rs 2.27 trillion (based on FY25 Power Purchase Price determination)—an impact of negative Rs 0.92/kWh in the average power purchase price.

Some relief is also planned to be financed through the Grid Transition Levy on captive power plants, though it’s unclear how the government expects to raise funds from the captive levy while simultaneously shifting them to the grid and “eliminating captive power usage from the gas sector” in IMF agreement lingo. Except little to no relief from this front, especially as captive gas consumption was down by ~90 percent YoY in April 2025.

The reduction brought about by negative QTAs over last few quarters, primarily through the IPP termination/renegotiation and CPP transition, will be embedded into the base tariff as part of cost and demand projections for next year. Considering these factors, and the CPPA Power Purchase Price projections, which range between Rs 24.75-26.70/kWh compared and Rs 27/kWh for FY25, it is safe to assume that power tariffs will be rebased to around where they are at present.

Considering all these dynamics, any further reduction in power tariffs beyond current levels is unlikely without systemic overhauls. The good news is that the IMF Staff Report outlines a few such corrections that are now in motion. However, the way some energy sector policies—particularly the captive-to-grid transition—have been implemented over the past year raises serious concerns about transparency, adherence to the rule of law, and a troubling reliance on the notion that the ends justify the means.

Two measures that are likely to have a substantial positive impact on power tariffs are restructuring of the power sector circular debt and rewiring of energy subsidies mechanism for low-income groups.

Circular debt has been a major issue not only because the debt servicing cost has been a significant contributor to prohibitive power tariffs, but also because it is a major hindrance to broader power and energy sector liberalization. Investors don’t want to buy debt ridden entities, and as consumers fall off the grid who will service the debt?

Conversion of up to 80% CD stock to CPPA debt at a favourable rate and plan to clear it by FY31 is hence a very positive development. While lifting of the cap on the debt servicing surcharge as a contingency measure has attracted some criticism, it should not need to be increased above the 10 percent of revenue requirement level if all goes well, and the Rs 3.23/kWh surcharge (at present) can be eliminated over the next 5 years.

Removal of cross subsidies from power tariffs by FY27 is another very significant correction. Power tariffs across different consumers are highly distorted through cross subsidies, where high-end consumers—i.e., those with a high propensity to consume and ability to pay—are made to subsidize the consumption of lower-income consumers. First, not only does this significantly inhibit the demand of “good” consumers—industrial, commercial and residential—and create a significant incentive for them to move off the grid, the poorly designed and administered system has led to widespread abuse of the protected and lifeline tariffs, and theft under the guise of subsidized consumption.

There are numerous instances of a single household having multiple power meters to avail protected tariffs, and with massive proliferation of off-the-grid solar, more and more middle-to-high-income consumers are becoming eligible for low-consumption-based protected tariffs, the cost of which is again borne by the good consumers, furthering the utility death spiral. In addition to the cross subsidy, it also costs the government over Rs 1 trillion annually through the tariff differential subsidy.

Under the Resilience and Sustainability Facility, the government has committed to reforming the energy subsidy system to “reduce incentives for overconsumption, wasted energy, and incentives for theft and losses.” In FY27, the country can expect a simplified power tariff structure without cross subsidies, and power subsidies for low-income consumers moved to the Benazir Income Support Programme, where they rightfully belong. Communication campaigns around this should be starting within a few weeks, consumers will be identified and verified by early 2026, a rebate mechanism will be defined by mid-2026, and the first rebates should start going out from early 2027.

The government is also moving forward with other key reforms, including addressing distributional efficiencies through privatization of DISCOs, improving the transmission system through restructuring of NTDC, and privatization of inefficient GENCOs.

Some progress has also been made on the Competitive Trading Bilateral Contracts Market (CTBCM). The proposal for a Rs 28.45/kWh (10.2 cents) wheeling charge has been rationalized to Rs 12.55/kWh (4.5 cents) + bid price, comprised of Rs 3.23 debt servicing surcharge, Rs 3.47 cross subsidy, Rs 2.34 distribution margin, Rs 1.45 use of system charge, and Rs 2.06 in losses. Revenue generated through bidding above the base price will be contributed to the grid in lieu of stranded costs. The indicative plan is to operationalize the competitive market with a cap of 800MW to be allocated over 5 years. If the government succeeds in reforming the power subsidy and clearing the CD stock, the wheeling charge will come down to Rs 9.08/kWh (3.3 cents) by FY27, and Rs 5.85/kWh (2.1 cents) by FY31.

However, it is important to note that the 4.5 cents/kWh base price is still two to three times the 1.5-2 cents/kWh wheeling charge that is financially viable for industrial operations. Considering the generation tariffs of IPPs and GPPs, a wheeling charge of 4.5 cents/kWh takes the final price above the grid tariff of ~11 cents/kWh, leaving little to no incentive for industries to shift to the competitive market.

While a key objective of the CTBCM has been to transition industrial bulk power consumers to a competitive market where they can avail power at regionally and internationally competitive prices, operationalizing CTBCM at Rs 12.55/kWh + bid price risks low to no participation from industrial consumers and the bulk of the capacity going to BPCs like housing societies whose load is non-productive in nature and does not create an economic multiplier like industry. Hence, the government must reconsider whether it wants to go this route.

Looking at these rosy reforms, one must also not forget the grim reality of the grid transition levy on captive power consumers. While the objective of shifting inefficient gas generators to the grid is appreciable, the blanket application of a purposefully miscalculated and “contrary to the law” levy is counterproductive and significantly undermines confidence in the broader reform agenda.

Gas price for captive was raised to Rs 3,500/MMBtu, RLNG equivalent, in February 2025, which brought the cost of captive generation at par with the grid. Imposition of an additional levy, based on the peak industrial tariff applicable for 4/24 hours a day, under-assumption of captive generation costs, and inclusion of unrelated frivolous charges, contrary to the methodology specified by law, has led to undue penalization of efficient facilities like combined heat and power cogeneration plants.

Captive cogeneration plants are an international standard for industries requiring a stable and high quality of power supply and contribute to lower emissions to meet shifting buyer preferences. The 2021 CCoE decision that has been used as a basis for transitioning CPPs to the grid specifically exempted cogeneration facilities, and the spirit of this decision should be maintained by reclassifying cogeneration captive to the industrial power tariff category.

Beyond cogeneration, many captive consumers who have shifted to the grid are facing major challenges related to quality of supply. Industrial units across the country, but especially in Southern DISCOs, are regularly experiencing repeated tripping and severe voltage fluctuations, and feeders are burning out, causing damage to expensive equipment and operational disruptions. The forced transition to grid was premature in this regard. While the power division has advocated signing of Service Level Agreements, these provisions should be embedded into the Consumer Service Manual, and top-quality supply must be ensured for all power consumers across the board.

There are additional measures worth serious consideration. First, the government should reconsider its approach to incentivizing additional consumption. Another incremental package priced at Rs. 20–25/kWh is reportedly in the works, but the last such initiative—with its convoluted conditions and limited uptake—fell short of expectations, particularly for industry. A better approach would be to expand the Time-of-Use tariff regime, introducing more slabs priced at marginal cost. A deeply discounted night-time tariff for 3-shift-industries, for instance, would offer clarity and real value to consumers while driving up utilization of idle capacity far more effectively than the stopgap incentives tried so far.

Second, the Discos’ outdated consumer databases—which are often not reflective of sanctioned or actual loads, or the corresponding security deposits—must be updated. Doing so would enable proper recalibration of security amounts, injecting much-needed liquidity into the sector, and also help resolve many underlying mismatches and disputes between consumers and utilities.

In conclusion, while the horizon is finally beginning to show signs of light, the path to a sustainable, competitive, and equitable power sector hinges on transparent implementation, lawful policymaking, and a clear commitment to reform that prioritizes long-term efficiency over short-term optics. The proactive role of the Power Minister and his team in pushing fundamental corrections is highly appreciated—but the challenge now is not just to promise change, but to make sure that it sticks.

Copyright Business Recorder, 2025