Improved Outlook for Power Sector: Brighter Days Ahead

Improved Outlook for Power Sector: Brighter Days Ahead

New and Improved Power Landscape in Pakistan

In the past year, power tariffs in Pakistan have seen a significant decrease and, provided that key reforms are implemented over the next five years, they're on track to become "normal" by international standards.

A recent report by the International Energy Agency (IEA) reveals that power tariffs in Pakistan are almost double those found in most parts of the world. Reasons for this include a high share of stranded capacity, elevated technical and commercial losses, cross-subsidies, and other economic distortions. All these factors have kept power tariffs high and stifled demand, leading to a utility death spiral. Recently, however, a solar boom has also posed a threat to the national grid's viability.

While power tariffs have come down substantially in the past two years, it's crucial to note that they've returned to pre-crisis levels of 2021-22, which were not particularly competitive to begin with. They rose from around 10-12 cents/kWh to 16-17 cents/kWh during the economic crisis of 2022-23; the economy's adjustments, some demand recovery although still below 2020-21 levels, and lower fuel prices as a result of international developments have contributed to the decrease in power tariffs. This change has been brought about by a combination of factors, including economic recovery, and a targeted subsidy with a sunset clause.

The only "structural" or long-term sustainable change has been the termination and renegotiation of 1992/2002 policy Independent Power Producer (IPP) contracts, which led to 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).

Some relief is also planned to be financed through the Grid Transition Levy on captive power plants; however, it remains unclear how the government intends to raise funds from this levy while simultaneously shifting them to the grid and "eliminating captive power usage from the gas sector" as per IMF agreement language. There appears to be little to no relief from this front, especially considering that captive gas consumption was down by ~90 percent YoY in April 2025.

Considering these dynamics, any further reduction in power tariffs beyond current levels is highly unlikely without systemic overhauls. Fortunately, some positive measures are being implemented to improve power tariffs. Among these are the restructuring of the power sector circular debt and the rewiring of energy subsidies for low-income groups.

Circular debt has been a major issue as the debt servicing cost has been a significant contributor to prohibitively high power tariffs, and it has also hindered broader power and energy sector liberalization. As such, converting up to 80% of CD stock into CPPA debt at a favorable rate and plans to clear it by FY31 is very promising.

Another significant correction is the removal of cross subsidies from power tariffs by FY27. Currently, power tariffs across different consumer groups are highly distorted through cross subsidies, with high-end consumers unfairly subsidizing lower-income consumers. This significantly inhibits demands from industrial, commercial, and residential sectors while creating a significant incentive for them to move off the grid.

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

The Competitive Trading Bilateral Contracts Market (CTBCM) is also under development, with a proposal for a Rs 28.45/kWh (10.2 cents) wheeling charge now being rationalized to Rs 12.55/kWh (4.5 cents) + bid price. Revenue generated through bidding above the base price will be contributed to the grid to cover stranded costs. The indicative plan is to operationalize the competitive market with a cap of 800MW allocated over five years.

While these reforms bring positive change, concerns remain about transparency, adherence to the rule of law, and reliance on the idea that the ends justify the means. Additionally, the government should reconsider its approach to incentivizing additional consumption, opting for a better method like expanding the Time-of-Use tariff regime and introducing more slabs priced at marginal cost.

Finally, the outdated consumer databases of DISCOs must be updated. This would enable proper recalibration of security amounts, inject much-needed liquidity into the sector, and resolve many underlying mismatches and disputes between consumers and utilities.

In conclusion, while the path to a sustainable, competitive, and equitable power sector finally begins to show signs of light, the success of these efforts depends on transparent implementation, lawful policymaking, and a clear commitment to reform that prioritizes long-term efficiency over short-term optics. Let's look forward to a brighter and more progressive future for Pakistan's power sector!

1. The power tariffs in Pakistan, despite a recent decrease, are still almost double those found in many parts of the world, necessitating key reforms to meet international standards.
2. The decrease in power tariffs can be attributed to economic recovery, targeted subsidies, and the termination of 1992/2002 policy IPP contracts, which resulted in a relief of Rs 33 billion in the third quarter of FY25.
3. To further improve power tariffs, the government is implementing measures such as restructuring the power sector circular debt, rewiring energy subsidies for low-income groups, and privatizing inefficient GENCOs and DISCOs.
4. The Competitive Trading Bilateral Contracts Market (CTBCM) is being developed, aiming to operationalize the competitive market with a cap of 800MW allocated over five years.
5. Concerns remain about transparency, adherence to the rule of law, and the approach to incentivizing additional consumption in the power sector.
6. The outdated consumer databases of DISCOs should be updated to resolve disputes between consumers and utilities, inject liquidity into the sector, and ensure proper recalibration of security amounts.
7. The government should consider adopting a better method to incentivize consumption, such as expanding the Time-of-Use tariff regime and introducing more priced slabs at marginal cost.
8. For the power sector to achieve sustainable, competitive, and equitable growth, it is crucial to have transparent implementation, lawful policymaking, and a commitment to long-term efficiency over short-term optics.

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