Pakistan’s Power Sector Emergency: Why Time is Running Out

Soaring electricity prices and a steep drop in demand have pushed the power sector of Pakistan into a full-blown crisis, exacerbated by a rapid shift by residential and commercial consumers to alternative energy sources like solar. If this trend continues the demand for electricity will further decrease which will lead to a sharp rise in per unit price for all consumers who are still dependent on the grid. Even with falling demand, the government will be trapped in “take-or-pay” contracts, forcing it to pay for unused power, pushing the sector into an even deeper crisis. It is important to understand that solar installations in Pakistan are not the enemy; they are, in fact, a natural response to an economic environment that has pushed consumers to seek alternative solutions. Blaming solar energy for the sector’s decline misses the point when it is a lifeline for many, not the cause of the crisis. The core issues stem from policy misalignments of all previous governments which often lacked foresight and delayed corrective measures that have led to decrease in electricity demand. The priority of the government for constitutional amendments targeting the basic structure may only serve political agendas but the looming energy crisis demands far greater attention and action to safeguard Pakistan’s economic and security interests.

 The power sector is the backbone of our economic infrastructure. As the army of a country defends its borders, a stable and competitive power sector ensures economic growth. Without a reliable electricity supply, no economy can thrive, and its security is directly threatened. There is no doubt this is a national emergency demanding immediate government intervention, requiring stakeholders and political parties to collaborate quickly as time is running out. If the power sector collapses, not only will the much-needed industrial growth halt, but the entire nation will face a worse of the economic crisis that may even jeopardize Pakistan’s security.

How have we reached here?

Before proposing any solutions, we need to understand how we got here?

Unbundling of WAPDA – A Questionable Necessity.

One of the key historical missteps that contributed to today’s crisis is the unbundling of WAPDA, a move intended to improve efficiency but which, in practice, has created significant challenges. What was once an organized and centralized entity was divided into generation, transmission, and distribution companies in one fell swoop. There could be a debate on whether the decision of unbundling of WAPDA was inevitable or not, however, it surely was a hasty and impractical move which created a fragmented system, where each entity operates in isolation. In Pakistan, any disintegrated system with multiple chains of command does not seem to work. Instead of streamlining operations, the reform has led to inefficiency, mismanagement, and a lack of coordination between critical components of the power sector. Instead of rushing into unbundling, we should have taken a phased approach, allowing each part of the sector to mature before moving to the next stage of reform. By rushing towards the unbundling process, we have ended up with a disorganized system that struggles to function competently leaving the country vulnerable to the power sector crisis that we are facing now. It is concerning that this has resulted in a scenario where decision to privatize these state-owned enterprises may not attract investors or achieve a favorable sale price.

State-Owned Enterprises: Bureaucracy, Inefficiency, and Mismanagement

Another major problem is the lack of effective policies, management, and governance across SOEs, regulatory bodies, and ministries. The reason behind this is not that the officers in charge lack qualifications but many have realized that suggesting the solutions that are otherwise correct for the sector but not according to the wishes of the government are rarely appreciated. Nearly all SOEs face serious governance and management issues. The creation of independent companies which have separate Board of Directors for oversight and management teams for execution was meant to foster their autonomy. However, the frequent changes in formation of their Boards and management cultures which have grown complacent due to a lack of accountability have undermined these efforts. Instead of playing their part in creating a competitive power sector market by enhancing efficiency and reducing electricity prices for consumers, most of these officers are merely focused on securing their jobs. Rather than providing effective services, the management of these companies has become mired in bureaucratic structures, hindering progress and neglecting the necessary reforms that could benefit the sector. In short, there is an environment where merit is often overlooked the inaction becomes the safest choice. These officers know that pushing for reforms might risk their positions while staying passive will just result in a transfer. This risk-averse attitude stalls progress and this has left the sector in the condition we face today.

It is pertinent to mention here that these officers must remember they have a dual responsibility; not only to run their offices efficiently but also to serve the public interest. They should understand that their inaction does not just mean collecting a paycheck at the end of the month but this inaction has resulted in a failure to serve the public and caused a direct loss to the national exchequer. By choosing to work in public service these privileged individuals accepted a duty which goes beyond personal gain. This is only achievable if there is a shift toward merit-based leadership, performance-driven incentives, and strict accountability measures, not just within SOEs but across the power sector to ensure transparency and restore trust.

A Legacy of Short-Sighted Policies

One of the major failures of the power sector is the years of inconsistent and poorly thought-out policies which are a result of different governments prioritizing their personal agendas over national interest. From the 1994 take-or-pay contracts with IPPs to the unbundling of WAPDA, and from imposing 2013 Power policy to destroy the opportunities offered by 2006 Renewable Power Policy to the policies of the current government to privatize without fixing problems of the sector, each decision seemed to be more about boosting political profiles or blindly fulfilling demands of IMF than addressing the country’s energy needs. Policies such as the 2006 Renewable Power Policy, which had the potential to transform the energy landscape, were poorly implemented, while the 2013 shift back to thermal power undid progress toward renewable energy solutions. Throughout these years, leadership at regulatory bodies and SOEs made decisions more focused on their career or political milestones than the sector’s long-term health, contributing to a fragmented and unstable energy system. Moreover, the lack of industrial expansion, despite the installation of numerous generation plants across Pakistan, has compounded the complexities of an already outdated national grid. Generation facilities, particularly in areas like Sindh and KPK where demand and industrial activity are minimal, were established without a strategic approach to local demand. As a result, NTDC is often forced to dispatch power from plants that don’t align with the Economic Merit Order (EMO). The grid’s design, coupled with the dispersed and uncoordinated placement of generation plants, makes it nearly impossible to consistently dispatch electricity from the cheapest sources, further undermining efficiency and economic dispatch objectives.  

Furthermore, inconsistent government policies have been a persistent problem throughout the previous decade. While there was a drive for privatization and market liberalization, the SOEs remained inefficient and lacked meaningful changes. This has resulted in current issues in 2024, like growing power costs and dependency on imported fuel, which have only exacerbated the situation. Residential and bulk consumers are increasingly converting to solar power, lowering demand for grid electricity, and this movement has highlighted the flaws in pricing models and regulations. Those that still rely on the grid are stuck paying higher rates because of poor planning and years of policy mistakes that emphasized short-term political advantages above long-term sector sustainability.

High Tariffs: A Threat to Demand and Industry

In addition, the uncontrollable rise in the cost of per unit of is the major concern that requires immediate response. This is why the consumers and companies are forced to seek out cheaper energy alternatives, such as solar electricity. As more users disengage from the national grid, power consumption continues to plummet. This has led to a vicious cycle, that target those who remain connected, ultimately affecting everyone engaged. More particularly the industrial enterprises, which are critical to economic growth, are especially affected, since rising power prices make it difficult for them to compete in global markets.

The industry is being crushed under the weight of ever-increasing circular debt, which is expected to hit a record Rs2.8 trillion by the end of this fiscal year. The take or pay contracts were originally intended to encourage international investment by ensuring income for IPPs regardless of power usage. However, as demand decreases and tariffs rise, they have become a financial burden, adding to the sector’s mounting debt. As demand for energy falls, owing mostly to the collapse of major industries over the previous two decades, the deteriorating economic status of Pakistani residents, and the overwhelming surge in solar power installations, the government’s financial burden becomes even more unsustainable.

Revitalizing Our Energy Sector: NEPRA’s Key Role in Change

It is high time for a national consensus to deal with this rapidly approaching crisis. However, in every proposal, the role of NEPRA may be critical to ensure a transparent solution. In this regard, it is particularly important to highlight its mandate under the Regulation of Generation Transmission and Distribution of Electric Power Act, 1997 (NEPRA Act) which provides a significant pathway for reform. Under Sections 7 and 31 of the NEPRA Act, NEPRA has adequate jurisdiction to review, adjust and revisit the tariffs allowed to the power sector companies under any extraordinary circumstances such as the current crisis. However, considering the legal complications involved due to back-to-back agreements including government guarantees it may not be prudent for NEPRA to invoke emergency economic conditions and reassess existing power purchase agreements (PPAs) without a formal request from the federal government, backed by approval from the Council of Common Interests (CCI) under Article 154 of the Constitution. This constitutional backing may ensure that all provinces, as stakeholders, are aligned with the solution, paving the way for national reconciliation.

This process will also require the reopening of PPAs with Independent Power Producers (IPPs) as well; a matter which must be handled with utmost caution to avoid any legal disputes or investor backlash. Although this is a very complex and difficult journey, however, the government should approach these negotiations with a clear message: the current system is unsustainable, and without significant changes, it risks collapse within the next 5-6 years. Continuing with this system may only ensure that these IPPs are given temporary relief but this would ultimately result in default and non-payment; a scenario that is in no one’s interest. Moreover, since a majority stake in the power sector is held by SOEs, it may also be equitable to simultaneously renegotiate and revisit the PPAs with SOEs to show bona fide to the private sector. The government may propose renegotiations under the supervision of NEPRA to ensure transparency and fairness in the process. The role of the Special Investment Facilitation Council (SIFC) may also be critical to secure approvals from the federal cabinet and the CCI. SIFC may play its part in advocating the seriousness of the situation and ensuring that this process has political and legal legitimacy.

Furthermore, task team by the Prime Minister may also play an important role in reconciling regulatory directions with operational realities. It is important to integrate NEPRA’s regulatory oversight with the task force’s operational focus, enabling the government to restore stability in the power sector without bureaucratic delays. The recent news regarding settlement with 5 of the old IPPs is encouraging but in order to make a considerable impact and avoid legal risk, the suggestions proposed here may further strengthen task team’s objects.  

Once the government ensures the political and legal backing from key institutions, NEPRA’s role can be reinforced as part of a broader national effort. This approach would show the seriousness of the crisis and promote a united national front in tackling Pakistan’s energy crisis.

The necessity to address issue regarding high electricity tariff and diminishing demand cannot be understated. It is critical that Pakistan rethink its pricing strategy. The government and NEPRA must reconsider whether existing policies, such as time-of-use tariffs and tiered pricing, discourage power usage. Although apparently the lower rates for families using less power may seem equitable, however, they can inadvertently hurt those needing more energy. There is a lot to learn from other countries like Turkey, which adjusted pricing to encourage electricity use and stimulate industrial growth. This would result in enabling Pakistan to foster a more supportive environment for industries. By making electricity more affordable, particularly for industries, we can help revive the economy and ensure that the power sector supports national progress.

To enhance the performance of state-owned enterprises (SOEs), it is essential to implement merit-based leadership and accountability-driven governance structures. This requires setting clear performance benchmarks tied to management incentives, where key executives are rewarded based on measurable outcomes such as cost reduction, operational efficiency, and consumer satisfaction. SOEs should adopt modern management practices that empower decision-making at the operational level, reducing bureaucratic delays. Independent audits and performance reviews must be mandatory, with penalties for underperformance and rewards for innovative, efficient leadership. By instilling a culture of meritocracy, transparency, and accountability, the focus of management can shift from job preservation to long-term improvement in services.

Policies must be crafted to address the sector’s unique challenges rather than being mere reactions to political trends or international pressures. A holistic approach that balances the need for renewable energy expansion, modernization of the grid, and competitive electricity pricing is critical. Policies should prioritize sector-wide stability, incentivizing industrial expansion in areas where generation is abundant and minimizing reliance on imported fuels by encouraging local generation. Regular consultation with industry experts, long-term planning, and stakeholder engagement will ensure policies are tailored to actual sector needs, reducing the risk of reactive decision-making. This approach will lay the groundwork for future privatization or further de-bundling efforts to succeed under a stable, well-functioning framework.

Needless to state that implementing the aforementioned proposals may not be easy and it will take sheer political courage and cooperation from all stakeholders. But the outcome of failure to act now is clear; and it is not something we can afford to accept. Undoubtedly this is a national emergency and prompt decisions are required to prioritize targeted reforms in tariff adjustment, SOE management, and transparent renegotiations with IPPs. Only a united effort across political and provincial lines can restore stability and save the economic future of Pakistan.

We stand at a crossroads, but with the right choices now, we can transform this challenge into an opportunity for lasting growth and stability.