Pakistan’s Energy Crisis with Compounding Challenges

By Ghulam Haider

Pakistan’s energy crisis, though longstanding, has intensified dramatically in recent years, posing significant challenges to the nation’s economy and its people. The most glaring manifestations of this crisis include soaring electricity tariffs, frequent power outages, and the daily struggle of citizens to afford and manage basic utilities. These issues not only disrupt lives but also impede industrial productivity and economic growth.

At the heart of Pakistan’s energy dilemma lies a complex web of structural, financial, and governance challenges that have accumulated over decades. Among the primary culprits are poorly negotiated agreements with Independent Power Producers (IPPs), which lock the country into exorbitant capacity payments regardless of actual electricity consumption. These contracts have created a financial burden on the national exchequer and have contributed to an ever-growing circular debt that stifles the energy sector.

Compounding the crisis is an outdated and inefficient power distribution system, plagued by technical losses and frequent breakdowns. Rampant electricity theft and widespread non-payment of bills further exacerbate the problem, straining an already fragile system and creating revenue shortfalls for energy providers. Meanwhile, governance lapses and a lack of long-term strategic planning have left the sector ill-equipped to meet the growing demand for electricity, leaving both urban and rural areas in the dark.

The ramifications of this crisis extend far beyond individual households, undermining industrial performance, deterring foreign investment, and eroding public trust in institutions. Addressing these challenges is not merely an economic necessity but a social imperative to ensure equitable access to energy and improve the quality of life for Pakistan’s citizens.

To resolve the crisis, Pakistan must pursue comprehensive reforms, including renegotiating IPP agreements, upgrading infrastructure, curbing electricity theft, and fostering renewable energy investment. Only through decisive action and effective governance can the country emerge from its energy quagmire and lay the foundation for a sustainable and prosperous future.

The Burden of Agreements with Independent Power Producers

One of the most significant factors driving Pakistan’s electricity costs is the legacy of unfavorable agreements with IPPs. These contracts, signed primarily in the 1990s and subsequent years to address power shortages, guaranteed high returns to private investors while placing disproportionate financial risk on the government. The agreements included take-or-pay clauses, obliging the government to pay for a fixed amount of electricity regardless of whether it was utilized. In many cases, this meant paying IPPs for unused capacity, a phenomenon referred to as “capacity payments.”

Capacity payments have ballooned over time as Pakistan’s energy demand failed to keep pace with the over-expansion of its generation capacity. The country is now saddled with an energy surplus it cannot afford, with the cost of idle electricity contributing significantly to inflated consumer bills. Re-negotiating these agreements is politically sensitive and legally challenging, yet it remains one of the key steps toward a more sustainable energy system.

The Transmission and Distribution Nightmare

While generation capacity has increased, Pakistan’s transmission and distribution (T&D) infrastructure has lagged far behind. The system is plagued by inefficiencies, with outdated equipment and an inability to handle peak loads. Frequent tripping and prolonged outages are common, particularly during the summer months when demand surges.

T&D losses—electricity lost during transmission from power plants to end-users—are alarmingly high, often exceeding 20% in many areas. These losses are caused by technical inefficiencies and theft. Compounding the problem is Pakistan’s failure to invest in modernizing its grid infrastructure. Without urgent upgrades, the country will continue to waste a significant portion of the electricity it generates.

Power Theft: A National Crisis

Power theft is a deeply entrenched issue in Pakistan, particularly in areas where governance is weak. Illegal connections, commonly referred to as kundas, are widespread and contribute significantly to line losses. The economic impact of theft is devastating, with billions of rupees lost annually. This burden is inevitably passed on to paying consumers, who face inflated electricity bills to compensate for the system’s inefficiencies.

Efforts to curb theft, such as crackdowns and public awareness campaigns, have yielded limited success. The issue is often tied to broader governance challenges, including corruption and lack of accountability in utility companies.

Non-Payment of Electricity Bills

Non-payment of electricity bills is another major contributor to Pakistan’s energy woes. Large public-sector entities and even government departments frequently default on payments. Circular debt, which represents the accumulation of unpaid obligations in the energy sector, has spiraled out of control, crossing PKR 2.5 trillion in 2024. This debt creates a vicious cycle where power producers are unable to pay fuel suppliers, leading to further inefficiencies and interruptions in electricity supply.

Private consumers also contribute to the non-payment problem, often driven by high electricity tariffs that make bills unaffordable for many households. This creates a paradox: the need to recover costs results in higher tariffs, which in turn exacerbate non-payment and theft.

Structural Inefficiencies in the Energy Mix

Pakistan’s reliance on imported fuel, particularly for thermal power generation, exposes the country to global price volatility. The devaluation of the Pakistani rupee and fluctuating international oil and gas prices have made electricity even more expensive. Despite the country’s abundant renewable energy potential—such as wind, solar, and hydropower—progress in diversifying the energy mix has been slow. Renewable projects have faced bureaucratic hurdles, financing challenges, and policy inconsistencies, further delaying their development.

Hydropower, often considered Pakistan’s most viable renewable energy source, has been underutilized due to long gestation periods for large projects and environmental concerns. Solar and wind power, while more scalable in the short term, have yet to gain traction at the required scale to significantly reduce the country’s dependence on imported fuels.

Impact on the Population

The human cost of Pakistan’s energy crisis is staggering. Businesses face productivity losses due to frequent power outages, dampening economic growth and discouraging investment. For households, rising electricity costs have become a significant financial strain, particularly for low-income families. With inflation already high, utility bills now consume a substantial portion of disposable income, leaving little for essentials like food, healthcare, and education.

Energy insecurity has also exacerbated social inequalities. Wealthier communities and businesses can afford backup power solutions such as generators, while poorer communities are left to endure prolonged outages. This disparity reinforces the perception of injustice and fuels resentment toward the government and utility providers.

Pathways to Reform

Addressing Pakistan’s energy crisis requires a multi-faceted approach that tackles both immediate and long-term challenges:

Revisiting IPP Agreements: The government must engage with IPPs to renegotiate terms that reduce the financial burden on the state. Transparent negotiations and support from international stakeholders could help in achieving equitable outcomes.

Modernizing the Grid: Upgrading the T&D infrastructure is critical to reducing technical losses and improving reliability. Investments in smart grid technologies and regular maintenance can minimize outages and inefficiencies.

Combating Power Theft: Tackling theft requires a combination of stricter enforcement, community engagement, and incentives for compliance. Addressing corruption within utility companies is equally important.

Promoting Renewable Energy: Expanding the share of renewables in the energy mix can reduce dependency on costly imported fuels. Streamlined approval processes and financial incentives for renewable projects can accelerate their adoption.

Improving Payment Discipline: Introducing pre-paid metering systems and stricter penalties for non-payment can enhance bill collection rates. Public-sector entities must lead by example in clearing arrears.

Policy Stability and Transparency: A consistent and transparent policy framework is essential to attract investment in the energy sector. Reforms should be guided by long-term objectives rather than short-term political considerations.

Pakistan’s energy crisis is a symptom of deep-rooted structural and governance problems. While there are no quick fixes, a combination of bold policy reforms, infrastructural investments, and enhanced governance can set the country on a more sustainable path. The cost of inaction is simply too high: continued economic stagnation, worsening social inequalities, and an increasingly disillusioned populace. It is time for Pakistan to prioritize energy as a cornerstone of its national development agenda, recognizing that the power to illuminate homes and industries is also the power to transform lives.