Dr. Shahnaz Khan
Pakistan’s Electricity Crisis and the Burden of IPPs
The soaring cost of electricity has become one of the most pressing issues facing the people of Pakistan. Every month, households struggle to pay electricity bills that consume an ever larger share of their incomes, while businesses and industries face rising production costs that undermine economic growth. Although many factors contribute to this crisis, its roots lie in the structure of Pakistan’s power sector itself — particularly in the Independent Power Producer (IPP) agreements introduced under the 1994 Power Policy.
The process began with HUBCO, Pakistan’s first major IPP project. The agreements signed at the time were designed primarily to protect private investors, offering generous guarantees and long-term protections with little consideration for the long-term burden on the state or the public. The HUBCO model later became the foundation of the 1994 Power Policy under which numerous other IPPs were established.
This policy did not emerge in isolation. It was shaped during the post-Cold War era, when neoliberal economic policies were aggressively promoted across the developing world by international financial institutions such as the World Bank and the International Monetary Fund. Following the collapse of the Soviet Union, privatization and deregulation became the dominant economic doctrine globally. Governments were encouraged to reduce their role in strategic sectors and open essential services to private capital. Pakistan’s energy sector became one of the major testing grounds for this model.
Several clauses embedded in the 1994 Power Policy have since become a major source of economic distress:
Capacity payments
Dollar-indexed returns
Sovereign guarantees
Long-term contracts
Take-or-Pay arrangements
Among these, capacity payments have emerged as perhaps the single largest contributor to rising electricity tariffs. Under this system, the government is obligated to pay power producers even when electricity is not consumed. Consumers therefore pay not only for the electricity they use, but also for idle generating capacity.
The burden of these agreements became especially severe after the sharp depreciation of the Pakistani rupee between 2018 and 2024. Since many IPP contracts are indexed to the US dollar, every devaluation increased the state’s liabilities. Capacity payments, debt servicing, fuel costs, and imported machinery expenses all rose dramatically, while the public was forced to absorb the impact through higher electricity bills.
According to recent estimates based on NEPRA’s performance evaluations, Pakistan’s total power purchase cost for FY2024-25 reached approximately PKR 2.94 trillion. Of this amount, nearly 61 percent — roughly PKR 1.8 trillion — consisted of capacity payments alone. To understand the scale of this burden, this figure is comparable to, and in some years exceeds, Pakistan’s federal spending on critical sectors such as health and defense. It has become one of the principal drivers of high electricity tariffs and the country’s persistent circular debt crisis.
A significant portion of these payments goes to government-owned power plants, which means the state has greater room to restructure and rationalize those costs. Many older and inefficient plants should be retired altogether. However, the most expensive and politically sensitive agreements involve several power plants established under the China-Pakistan Economic Corridor (CPEC), where the Chinese government and investors are directly involved. Renegotiating such contracts will require diplomatic skill as well as political courage.
The reality is that meaningful relief for the people of Pakistan cannot come without difficult decisions. The state must revisit the framework governing IPPs and renegotiate agreements where necessary. This includes reviewing dollar indexation mechanisms, replacing rigid Take-or-Pay structures with more flexible arrangements, encouraging the use of cheaper and indigenous fuel sources, and phasing out obsolete generation facilities.
At the same time, structural inefficiencies within the power sector must also be addressed. Transmission losses, electricity theft, weak governance, and poor distribution infrastructure continue to impose enormous costs on the system. Without reform in these areas, even renegotiated contracts alone will not fully solve the crisis.
Yet there is another dimension to this issue that is often ignored: Pakistan’s weak industrial base. Electricity systems become more sustainable when industrial demand expands because fixed costs are spread across larger productive consumption. Pakistan today suffers from the opposite problem — excess generating capacity alongside declining industrial activity. Expensive electricity discourages industrial growth, while low industrial consumption further increases the burden on ordinary consumers. This creates a vicious cycle.
Breaking this cycle requires a long-term national strategy centered on industrialization, infrastructure development, and economic planning. The state must play a leading role in guiding industrial growth, supporting strategic sectors, and ensuring that energy policy serves national development rather than short-term financial interests alone.
Pakistan’s electricity crisis is therefore not merely a technical issue. It is the outcome of decades of policy choices that prioritized guaranteed profits and external financial models over long-term economic sustainability and public welfare. The challenge now is not simply to produce more electricity, but to restructure the system in a way that balances investor confidence with national interest and public affordability.
Without serious reform, electricity will continue to become more expensive, industries will continue to decline, and ordinary citizens will continue to bear the cost of policies they never chose. The time has come for Pakistan to rethink the foundations of its energy sector and place the interests of its people at the center of economic policy.
Dr. Shahnaz Khan
Vice chairperson Barabri Party
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@shahnazsk
Email: Shahnazk@gmail.com
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