INSTITUTE OF STRATEGIC STUDIES ISLAMABAD

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PAKISTAN’S ENERGY CRISIS:

CHALLENGES AND PATH FORWARD
By
Mian Ahmad Naeem Salik
Research Fellow

Centre for Strategic Perspectives (CSP), ISSI

Edited by
Dr Neelum Nigar

October 9, 2024

(Views expressed in the brief are those of the author, and do not
represent those of ISSI)

Introduction: Understanding the Current Energy Landscape

Pakistan is grappling with a multifaceted energy crisis, compounded by political

instability and economic stagnation. The country’s power sector, a significant
contributor to the ongoing crisis, faces inefficiencies that have escalated electricity
costs well beyond what many citizens can afford. Public protests over the surging
electricity prices reflect the discontent felt by the masses, with economic imbalances
deepening due to a growing reliance on external debt. 1 Amid these challenges,
Independent Power Producers (IPPs) play a key role in determining the future of
Pakistan's energy sector. With circular debt in the power sector rising to Rs 2,310
billion in May 2024, and payments to IPPs nearing Rs 1,800 billion,2 the inefficiencies,
mismanagement, and lack of transparency in the sector need urgent redressal and
reform.

1
Tehmina Asad, Afia Malik, “Pakistan’s energy mess,” Dawn, July 15, 2024,
https://www.dawn.com/news/1845916/pakistans-energy-mess
2
APP, “‘IPPs have destroyed country’s economy’,” Tribune, July 5, 2024,
https://tribune.com.pk/story/2476761/ipps-have-destroyed-countrys-economy

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 IB Pakistan’s Energy Crisis: Challenges and Path Forward October 9, 2024

Role of IPPs: Escalating Costs and Public Discontent

IPPs, especially those established under the energy policies of 1994 and 2002, have come under
scrutiny for their contribution to rising electricity costs. As of FY2025, capacity payments alone are
projected at Rs 2.1 trillion, a figure that translates to a charge of Rs 17.31 per kilowatt-hour (kWh).3
This has sparked public outrage, leading to calls for the renegotiation of Power Purchase Agreements
(PPAs). Protests have erupted across the country, as the steep rise in electricity tariffs is seen as
unsustainable, particularly for residential consumers who pay between Rs 6.76 to Rs 48.84 per unit.4

Figure: Capacity Payments5

A significant source of discontent lies in the capacity payments made to IPPs, which represent the
third-largest debt obligation after defence and foreign debt.6 Capacity payments to IPPs are made
regardless of actual power generation, which results in a financial strain on the government and
consumers alike. Despite ongoing payments, Pakistan’s circular debt continues to climb, driven by
poor recoveries, operational inefficiencies, and misaligned policies.7

Contractual Concerns and Transparency Issues

The increasing burden of IPP payments has raised concerns about the contractual agreements with
IPPs. Many contracts obligate the government to make payments to IPPs regardless of whether power
is generated or not, further intensifying the crisis.8 In some instances, the government has continued

3
Afia Malik, Ayesha Rehman, “The power struggle: navigating Pakistan’s energy crisis,” Business Recorder,
September 3, 2024, https://www.brecorder.com/news/40320524
4
ibid
5
Kamran Arshad, “The burgeoning burden of capacity payments,” Business Recorder, June 6, 2024,
https://www.brecorder.com/news/40307052
6
APP, “‘IPPs have destroyed country’s economy’,” Tribune, July 5, 2024,
https://tribune.com.pk/story/2476761/ipps-have-destroyed-countrys-economy
7
Dr Abedullah Anjum, Usama Abdul Rauf, “The IPP deals that keep draining,” News, August 2024,
https://www.thenews.com.pk/magazine/money-matters/1223667-the-ipp-deals-that-keep-draining
8
Afia Malik, “Corporate Window: IPPs and Capacity Payments,” Dawn, July 29, 2024,
https://www.dawn.com/news/1848654

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 IB Pakistan’s Energy Crisis: Challenges and Path Forward October 9, 2024

to make capacity payments to non-operational plants, while also subsidizing maintenance and
insurance costs, despite the terms of the contracts. This has led to widespread allegations of over-
invoicing and inefficiencies. For instance, some wind power plants in Pakistan were commissioned
evidently at costs up to four times higher than similar projects in Bangladesh and Vietnam, raising
concerns about transparency and corruption.9

Moreover, IPPs relying on imported fuels, despite Pakistan’s domestic coal reserves, further inflate
electricity costs. Some IPPs have failed to deliver the expected power output despite benefiting from
government subsidies, while take-or-pay contracts have compelled the government to pay for unused
power.10 This mismanagement has exacerbated the financial strain on the government and consumers
alike, prompting demands for forensic audits and greater accountability within the IPP sector.

Figure: Residential Electricity Price (PKR/Unit)11

9
Ahmad Ahmadani, “IPPs allegedly pocketed billions without power generation, over-invoicing,” Pakistan
Today, September 22, 2024, https://profit.pakistantoday.com.pk/2024/09/22/ipps-allegedly-pocketed-
billions-without-power-generation-over-invoicing/
10
Bilal Hussain, “Pakistan’s economic crisis is largely due to its power sector: experts propose bypassing
govt,” Business Recorder, July 10, 2024, https://www.brecorder.com/news/40312262
11
“Cost of Electricity in Pakistan has risen by 116% in 8 years,” Climate Finance Pakistan, Accessed on
September 24, 2024, https://www.linkedin.com/posts/climatefinancepk_electricity-prices-in-pakistan-
have-surged-activity-7228709482304802816-Wx-E

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 IB Pakistan’s Energy Crisis: Challenges and Path Forward October 9, 2024

Government Response and the Need for Reform

The government has recognized the need for significant reforms within the IPP framework, adopting
a cautious approach toward renegotiating IPP contracts. Rather than taking unilateral action, the
government is engaging with IPPs to find mutually agreeable solutions. Power Minister Awais Leghari
has emphasized the importance of maintaining investor confidence while ensuring accountability. The
government aims to reduce electricity tariffs, a critical factor in stimulating economic growth, while
addressing the long-term sustainability of the IPP model.12

A Task Force has been set up to review IPP agreements, focusing on transitioning from "take-or-pay"
to "take-and-pay" models. This shift would allow the government to pay for actual electricity
generated rather than being locked into paying for unutilized capacity. The Task Force is also exploring
the option of net present value for projects nearing completion and establishing fixed operational
costs for short-term contracts.13 In addition, negotiations with private IPPs are ongoing, with some
agreeing to lower tariffs in the national interest. Over 100 powerhouses are under review, with phased
shutdowns and tariff reductions being considered as possible measures to alleviate the energy crisis.14

Regulatory Bodies and Future Investments

A significant criticism of Pakistan’s energy sector is the inefficiency of regulatory bodies, particularly
the National Electric Power Regulatory Authority (NEPRA). Observers point out that despite receiving
a roadmap in 2012 to reduce transmission and distribution losses, NEPRA has implemented ineffective
measures, allowing the situation to worsen. Rising system losses, high tariffs, and poor oversight have
shifted the financial burden onto consumers while leaving critical inefficiencies unaddressed.15

The 2020 Power Sector Inquiry Report revealed deep-rooted problems in the energy sector, including
outdated state-owned generation companies (GENCOs) and inefficiencies in IPP operations. One of
the primary issues identified was inflated invoicing, with capacity payments being made without

12
Khaleeq Kiani, “Major cut in electricity prices unlikely soon: power minister,” Dawn, September 21, 2024,
https://www.dawn.com/news/1860117/major-cut-in-electricity-prices-unlikely-soon-power-minister
13
“Power minister says ‘govt cautiously navigates complex IPPs issue’,” Pakistan Today, August 31, 2024,
https://profit.pakistantoday.com.pk/2024/08/31/power-minister-says-govt-cautiously-navigates-complex-
ipps-issue/
14
“Govt expects tariff relief following review of independent power producers,” AAJ News, September 21,
2024, https://english.aaj.tv/news/330380495/govt-expects-tariff-relief-following-review-of-independent-
power-producers
15
Arshad H Abbasi, “The growing circular debt burden,” Tribune, March 19, 2024,
https://tribune.com.pk/story/2459784/the-growing-circular-debt-burden

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 IB Pakistan’s Energy Crisis: Challenges and Path Forward October 9, 2024

verifying the actual power supplied.16 Moreover, observers contend that some projects under the
China-Pakistan Economic Corridor (CPEC), primarily coal-fired power plants, have added to the cost
burden, with imported fuel raising operational expenses and capacity payments.17

Looking ahead, major infrastructure projects like the Diamer-Bhasha Dam and Chashma Nuclear Plant
C-5 will require careful consideration to avoid further tariff increases.18 Hydroelectric power, while
crucial for Pakistan’s energy mix, may contribute to rising electricity costs if not managed efficiently.
The government must reconsider future energy contracts, particularly focusing on renewable energy
projects to diversify the energy mix and reduce reliance on imported fuels.

The Path Forward: Comprehensive Energy Reforms

Pakistan’s energy crisis is not solely the result of rising costs; it also stems from structural
inefficiencies, outdated infrastructure, and a lack of accountability. The country’s reliance on imported
fuels, coupled with the depreciation of the rupee, has exacerbated the problem. To address these
challenges, comprehensive reforms are needed across-the-board.19

The government must prioritize investment in renewable energy, which offers a sustainable and cost-
effective solution to the country’s energy needs. Solar, wind, and hydroelectric power projects can
reduce Pakistan’s dependence on expensive imported fuels while mitigating the impact of rising tariffs
on consumers.20 Forensic audits of IPP contracts are essential to identifying discrepancies and
providing a foundation for renegotiation.

Additionally, the transition to a Competitive Trading Bilateral Contracts Market (CTBCM) has stalled,
primarily due to unresolved disputes between stakeholders. Without progress on this front, the
inefficiencies in the power sector will continue to hinder the country’s economic growth.21 Structural

16
Shahid Kardar, “Renegotiating Agreements with IPPs to Reform the Energy Sector,” PIDE Discourse 2023,
Accessed on September 24, 2023, https://pide.org.pk/research/renegotiating-agreements-with-ipps-to-
reform-the-energy-sector/
17
Afia Malik, “Corporate Window: IPPs and Capacity Payments,” Dawn, July 29, 2024,
https://www.dawn.com/news/1848654
18
Israr Khan, “Amid energy overcapacity concerns: Govt reviews hydel, nuclear power projects,” News,
August 31, 2024, https://www.thenews.com.pk/print/1225652-amid-energy-overcapacity-concerns-govt-
reviews-hydel-nuclear-power-projects
19
Afia Malik, “Improving state-owned Discos,” Dawn, June 10, 2024,
https://www.dawn.com/news/1838812/improving-state-owned-discos
20
Dr Samuel Rizk, “Securing Pakistan’s energy needs,”
21
Afia Malik, “Corporate Window: IPPs and Capacity Payments,” Dawn, July 29, 2024,
https://www.dawn.com/news/1848654

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 IB Pakistan’s Energy Crisis: Challenges and Path Forward October 9, 2024

reforms are also required in the tax collection system, which remains inefficient and contributes to
the government’s fiscal challenges.

The heavy burden of capacity payments in electricity costs must be addressed through renegotiation
of IPP contracts. Failure to reform the current energy system will only intensify public dissatisfaction
and social unrest. A holistic approach, focused on governance, accountability, and efficiency, is crucial
to resolving the energy crisis.22 The government must also improve local production, develop a skilled
workforce, and enhance transparency in the energy sector to ensure long-term sustainability.

Conclusion: Toward a Sustainable Energy Future

Pakistan's energy crisis represents a significant challenge, but it also presents an opportunity for
transformational reform. The reliance on IPPs and imported fuels has led to unsustainable costs and
widespread public discontent. The solution lies in addressing inefficiencies, renegotiating flawed
contracts, and prioritizing renewable energy projects. By focusing on accountability, governance, and
a diversified energy mix, Pakistan can chart a path toward a more sustainable and affordable energy
future. These reforms will be critical not only for reducing electricity costs but also for stimulating
economic growth and addressing the concerns of the Pakistani people.

22
Shahid Kardar, “Renegotiating Agreements with IPPs to Reform the Energy Sector,” PIDE Discourse 2023,
Accessed on September 24, 2023, https://pide.org.pk/research/renegotiating-agreements-with-ipps-to-
reform-the-energy-sector/

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