Why Pakistan keeps administering its energy crisis

Pakistan’s energy crisis has been analysed endlessly. Circular debt, capacity payments, distribution losses, gas depletion, expensive LNG, subsidies, theft and weak governance have all been identified and subjected to repeated reform programmes. Yet the crisis persists because Pakistan keeps treating the symptoms of an administrative energy economy while preserving the arrangements that produce them.

Perhaps Pakistan is asking the wrong question.

The issue is not that Pakistan lacks diagnoses. It is that the state has built a system in which diagnosis itself becomes part of the machinery of control: each problem is classified, priced, subsidised, levied or regulated in a way that generates the next administrative response.

French philosopher Michel Foucault never wrote about electricity tariffs or gas pipelines, but his concept of “governmentality” offers a useful way of understanding Pakistan’s predicament. Foucault argued that modern states exercise power not only through laws and prohibitions, but through institutions, classifications, prices, incentives and administrative rules that shape behaviour.

Over time, these mechanisms can acquire a life of their own. Institutions created to manage problems begin preserving the arrangements that produced them.

Pakistan’s energy sector increasingly resembles such a system. It is neither a functioning market nor conventional central planning. It is an administrative economy in which the state sets prices, assigns fuels, differentiates between consumers, redistributes costs and then adds new interventions to correct distortions created by earlier ones.

The cycle is familiar: intervention creates distortion; distortion produces another intervention; and every additional intervention makes genuine reform harder.

When administration replaces the market

Consider electricity. Pakistan has uniform tariff arrangements, protected consumer categories, cross-subsidies, tariff differential subsidies, fuel-cost adjustments, quarterly adjustments and multiple industrial tariff structures.

Each has a rationale. Collectively, however, they obscure one of the essential functions of prices: revealing economic reality.

If supplying electricity through one distribution company costs substantially more than through another but much of that difference is socialised, poor performance is concealed. Inefficiency survives because somebody else ultimately pays for it.

Government then attempts to manage the resulting deficit through tariffs, subsidies and circular-debt plans. Costs rise, tariffs increase, demand falls, affordability deteriorates, subsidies expand, fiscal pressures increase and new charges appear. As demand falls further, fixed costs are recovered from fewer consumers, pushing tariffs up again and reinforcing the very cycle policy was meant to break.

This is more than circular debt. It is circular policymaking.

Consumers respond rationally. Faced with expensive electricity, they conserve energy, install solar or generate electricity themselves. But the system does not necessarily respond by becoming more competitive. Instead, it increasingly attempts to recover fixed costs from remaining consumers or alter the economics of alternatives.

The gas levy: a revealing example

The Off-the-Grid Captive Power Plants Levy illustrates the problem because it does not simply price gas more transparently. It uses an additional charge to alter industrial fuel choices, steering firms away from self-generation and toward the grid.

Government wants industries generating electricity from gas or RLNG to migrate to the grid. Rather than relying on cheaper and more reliable grid electricity to attract them, policy progressively raises the cost of captive generation. The premium has been structured to reach 20 percent by August 2026, with levy proceeds intended to reduce electricity prices for grid consumers.

The policy therefore taxes one energy choice partly to improve the economics of another.

The mechanism is clear. The state does not prohibit captive generation; it changes the economic environment until the consumer makes the preferred choice. But this is not the same as a genuine market price signal, because the price is designed less to reveal scarcity than to produce administrative compliance.

If grid electricity is genuinely cheaper and more reliable, industry will migrate voluntarily. If efficient self-generation remains cheaper after paying the full economic cost of gas and network services, forcing migration does not create efficiency. It merely changes who bears the cost.

The problem is particularly evident with high-efficiency combined heat and power plants, which simultaneously produce electricity and useful thermal energy. Treating efficient cogeneration like inefficient standalone captive generation ignores total fuel efficiency and risks penalising the very investments that reduce the country’s energy burden.

Energy policy should reward efficiency, not penalise it because an efficient consumer happens to reduce demand on another system.

Gas policy reveals the same contradiction

For decades Pakistan treated natural gas as a cheap domestic resource rather than a scarce energy commodity. Households, fertiliser producers and industries consequently built their economics around administratively determined prices. Domestic production then declined, but the architecture remained.

Pakistan imported LNG to fill the gap while continuing to manage gas through structures developed around cheap indigenous supply. Expensive imported molecules entered a system designed for cheap domestic gas. Distortions were inevitable.

Now industrial gas consumption is being discouraged partly to move consumers onto electricity, even as Pakistan carries long-term LNG commitments and requires commercially viable gas demand to sustain the import and pipeline system.

The contradiction is obvious. The power sector wants more grid demand. Gas utilities need throughput. LNG contracts require demand. The Finance Ministry wants lower circular debt. Industry needs competitive energy. And the country desperately needs higher exports.

Each objective may make sense within its bureaucratic silo. Collectively, they can be mutually destructive.

Pakistan does not have separate electricity, gas, LNG and industrial economies. It has one energy economy. Policy still behaves as though they were unrelated.

The export question

This matters particularly for exports because Pakistan’s ultimate economic constraint is foreign exchange, not simply energy availability. A policy that lowers one sector’s apparent cost while weakening export competitiveness can deepen the very balance-of-payments pressure that energy reform is supposed to relieve.

Periods of higher growth repeatedly generate higher imports, falling reserves, exchange-rate pressure and eventual monetary and fiscal tightening. Sustainable growth therefore requires a much larger export base.

Energy consumed by an efficient exporter is not economically equivalent to ordinary consumption. It is an input into the production of foreign exchange.

This does not justify subsidised energy. Exporters should pay the genuine economic cost of the energy they consume. But removing a subsidy is fundamentally different from imposing an administrative penalty designed to make one energy choice less attractive than another.

Once industry pays the legitimate delivered cost of gas or RLNG, including import, transmission and distribution costs, additional charges imposed mainly to change its fuel choice become industrial policy conducted through energy taxation.

The correct question is therefore not simply how much revenue is collected from each unit of gas. It is how much export value, employment and foreign exchange Pakistan generates from each unit of scarce energy.

That change in question can change the policy answer.

Who defines the problem?

Institutions do not merely solve problems. They also define them.

Pakistan’s energy debate revolves around familiar categories: “surplus capacity,” “captive power,” “protected consumers,” “circular debt,” “UFG,” “capacity charges” and “grid demand.” These categories are useful, but they also frame the solutions.

Define the problem as insufficient grid demand, and captive generation becomes undesirable because it appears to deprive the grid of consumers. Define the problem as the lowest-cost way of supplying electricity and thermal energy to industry while maximising economic output from scarce energy resources, and the answer may be completely different.

Similarly, define circular debt primarily as inadequate tariff recovery and higher tariffs appear inevitable. But define it partly as the financial manifestation of inefficient institutions, excessive losses, poor incentives and badly allocated risks, and continually increasing tariffs begins to look less like reform and more like passing institutional failure to consumers.

How we define the problem determines what solutions we can imagine.

Stop governing fuels

Pakistan needs a different philosophy of energy governance.

Government should progressively stop deciding which commercially viable fuel consumers ought to use. Gas and RLNG should be transparently priced. Pipeline charges should reflect genuine costs. Third-party access should become meaningful. Efficient cogeneration should be objectively recognised rather than administratively penalised.

Electricity should compete for industrial demand through price, reliability and service.

Distribution companies should face genuine commercial accountability. Differences in efficiency should become visible rather than continually obscured through averaging and cross-subsidisation. Transmission investment must allow cheaper generation to reach consumers rather than leaving them paying for generation that cannot be efficiently dispatched.

Subsidies for vulnerable households should be explicit and targeted rather than buried in industrial energy prices.

Most importantly, gas and electricity policy must be integrated. Suppressing industrial gas demand affects LNG commitments, pipeline economics, grid demand, industrial competitiveness, exports, government revenue and foreign exchange. These consequences cannot sensibly be evaluated in separate ministries and regulatory compartments.

Government should design markets, not outcomes

The practical question is whether government is making decisions that clearer prices, stronger competition and better regulation could handle more effectively.

The state still has an essential role: regulating natural monopolies, protecting vulnerable consumers, enforcing contracts, ensuring competition and preventing market abuse. That role is strongest when it sets rules and accountability rather than repeatedly choosing prices, fuels, allocations and technologies.

Industry should move to the grid when the grid offers a lower-cost, reliable service—not because competing options have been made administratively expensive.

Scarce gas should flow to uses that generate the highest economic value after accounting for full import, transmission and distribution costs.

Policy should avoid making one energy source artificially expensive simply to make another appear competitive.

Pakistan has too often responded to the costs of one intervention with another. The result is a layered system of tariffs, levies, subsidies and exceptions that weakens price signals and blurs accountability.

A better approach would make costs visible, target support directly, allow efficient producers and consumers to respond to real prices, and require energy companies to improve performance rather than pass inefficiencies through the system.

That is the reform Pakistan needs: fewer administrative fixes, clearer prices, accountable utilities and energy policy judged by efficiency, competitiveness and export value.

Copyright Business Recorder, 2026