KARACHI: Pakistan’s power sector sustainability hinges on sustained tariff discipline under International Monetary Fund (IMF) oversight, measurable reductions in transmission and distribution (T&D) losses, clarity on independent power producer (IPP) renegotiations, upgrades to transmission infrastructure and a recovery in demand aligned with broader macroeconomic stabilisation.
The sector remains central to economic stability and industrial revival, but structural imbalances continue to weigh on its long-term viability, according to the latest report by the Pakistan Credit Rating Agency (Pacra).
The report noted that circular debt, high consumer-end tariffs, weak demand growth and inefficiencies across generation, transmission and distribution persist despite reform momentum. Circular debt not only constrains liquidity for fuel suppliers and power companies but also raises electricity costs for end-consumers.
Under the programme supported by the IMF, upward tariff adjustments and fiscal discipline have helped contain the accumulation of circular debt. A Rs1.2 trillion commercial bank restructuring for the Central Power Purchasing Agency has also provided short-term liquidity relief. However, structural reforms remain a work in progress.
The government is continuing negotiations with IPPs to revise power purchase agreements (PPAs), seeking to shift from rigid ‘take-or-pay’ structures to more flexible ‘take-and-pay’ arrangements to rationalise capacity payments.
In the latest round, six IPPs were terminated, while 14 have signed revised PPAs. Authorities expect fiscal savings and lower per-unit costs over the remaining contract tenors. However, negotiations — particularly with Chinese IPPs established under the China-Pakistan Economic Corridor — are ongoing, and clarity on the final outcome is still awaited.
Pacra said capacity payments remain the sector’s core structural stress. Despite installed capacity exceeding 41,000MW, system utilisation is close to one-third, pushing up per-unit costs.
Transmission bottlenecks, operational inefficiencies at certain public-sector plants and a suboptimal merit order continue to limit cost optimisation. At the same time, the generation mix is gradually improving, with higher penetration of renewables, particularly solar power.
The report noted that the government is promoting distributed generation and solarisation, including the conversion of agricultural tube wells, to reduce fuel import dependence and ease pressure on distribution companies. However, grid readiness, integration capacity and the financial sustainability of net-metering frameworks remain key concerns.
In FY25, energy and capacity payments accounted for 97 per cent of total sector revenue, broadly unchanged from FY24. Raw materials represented 55.3 per cent of total costs, while energy costs rose to 10.2 per cent from 7.8 per cent a year earlier. Raw materials typically include coal, furnace oil, high-speed diesel and re-liquefied natural gas, depending on the fuel mix.
