Daily Times

The government is currently renegotiating with several Independent Power Producers (IPPs), amidst widespread public distress and protests over rising energy costs. These escalating costs have also significantly impacted industrial and economic activity, while capacity payment charges are indeed a major contributor to the problem, they are not the sole cause. The issue is part of a larger and more complex challenge that the power sector in Pakistan faces, and it’s crucial to dissect each contributing factor to find viable solutions for much-needed power sector reforms, especially as the country approaches the brink of bankruptcy.

The present crisis is driven less by capacity payments and more by the sharp devaluation of the rupee, which has drastically increased local currency payments for the same amount of energy. In dollar terms, however, there has been little change. The ongoing negotiations with local IPPs regarding a ‘take-and-pay’ model are unlikely to provide significant relief to consumers already burdened by debt. Additionally, the role of provincial governments, which has been curtailed by IMF directives, cannot be overlooked as part of the overall solution. A holistic approach is needed to address these challenges effectively.

The current energy crisis in Pakistan can largely be attributed to the short-term planning of successive governments not just one or two, but all administrations since 1994, with only a few exceptions. The crisis we face today is rooted in the flawed policies of the 1980s, which led to reactionary short-term planning by the government in 1994. Unfortunately, the poor precedent set then was further exacerbated during the 2002-08 regime. Since then, Pakistan has been grappling with an ongoing energy crisis in various forms. At times, there has been a shortage of energy; at others, the government has been unable to transmit the available energy, disrupting the energy mix. There have also been occasions where Pakistan simply could not afford the energy it had.

While capacity payment charges have been widely discussed, current interventions are insufficient and will not resolve the core issue. The higher cost of energy has reduced consumer demand, further escalating prices. The real problem lies not just in the capacity payments to local IPPs, but in those owed to foreign-invested IPPs. However, it is difficult to place full blame on these foreign investors, as they were invited by successive governments to invest in Pakistan, trusting us when few others would. A deeper, long-term solution is required to break this cycle of mismanagement and ensure a sustainable energy future for the country.

There has been much discussion about the privatization of distribution companies (DISCOs), but in the current environment, no entity would be eager to invest in the heavily burdened power sector. Even if investment were secured, the core issues would persist, as evidenced by the privatization of Karachi Electric (KE). While privatization has relieved the government of certain financial burdens, the KE model has been far from a true success story.

Without a comprehensive, well-thought-out plan, any further intervention in the power sector is likely to backfire. Privatization may indeed be part of the solution, but a successful transition requires more than simply handing over operations to private entities. Short-term policies have consistently trapped the nation in cycles of recurring problems.

What is truly needed is a long-term strategy, agreed upon by all stakeholders, that can guide the sector toward stability. This should take the form of a concrete ten-year plan, implemented through legislative processes and protected by constitutional amendments to ensure its continuity. Only such a durable and unified effort can steer the power sector toward sustainable reform and avoid the pitfalls of past approaches.

The privatization of distribution companies (DISCOs) in Pakistan has long been debated, the current state of the power sector, burdened by inefficiencies, losses, and outdated infrastructure, is unlikely to attract investors without a clear, sustainable model. Even in cases like Karachi Electric (KE), privatization has been a mixed success while it has relieved the government of financial strain, the broader goals of improving efficiency and service delivery remain unmet.

The core challenge lies in the absence of a private market for buying and selling electricity, compounded by the lack of a wheeling charges system and an effective Competitive Open Access Model (CODM). Establishing a private market would allow the government to fully deregulate the power sector, enabling the more efficient private sector to take over. This approach differs from the KE model, where the government remains both the sovereign guarantor to power producers and responsible for maintaining the transmission network.

A deeper, long-term solution is required to break this cycle of mismanagement and ensure a sustainable energy future for the country.

To progress, the government must transition from guarantor to enabler, opening the power sector to a diverse range of investors, power producers, distributors, and contributors. This would allow these stakeholders to tap into indigenous resources more efficiently, generating much-needed cash flow, foreign direct investment, and the technical expertise that has been lacking since the sector’s inception. India and Western power privatization models provide key lessons.

India’s decentralized market with private sector participation and open access enables producers to sell directly to consumers. Western deregulation fosters competition, offering consumers more choices and lower costs. Both models emphasize the need for strong regulations, consumer protections, and long-term planning. By applying these principles, Pakistan can create a competitive, sustainable power sector tailored to its specific challenges while leveraging global best practices.

A sudden shift to a deregulated power sector in Pakistan, akin to India’s model, could result in more losses than gains. Therefore, it is essential to adopt a phased approach. This transformation should begin with the creation of a new commission, distinct from NEPRA, with legislative backing. The commission would facilitate a national, stakeholder-driven process, engaging experts and consultants to devise a CODM and establish transparent wheeling charges. In the initial phase, the commission should allow distribution companies and large to medium scale industries to purchase electricity directly from any power producer of their choice. This would foster competition and incentivize private sector development of low-cost energy resources. Additionally, it could attract investment in transmission lines, especially to distant power plants in northern areas, thereby diversifying transmission pathways.

The second phase would involve the gradual devolution of DISCOs into distribution blocks. These blocks could then be leased or auctioned to private entities responsible for billing, maintaining infrastructure, and negotiating power purchase agreements with Independent Power Producers (IPPs) or government plants. This step would create a subsidiary power industry within Pakistan, fostering competition at the distribution level. Private companies, while paying rent to the government for infrastructure usage, would work to streamline operations, trapping into cheap power sources and reducing losses. In the next phase, the focus would shift to leasing transmission infrastructure to private companies, encouraging further investment and technological upgrades in the sector. This stage would also enable the government to rationalize manpower in aging power plants and DISCOs, potentially decommissioning older, inefficient plants. Simultaneously, the government should negotiate an exit strategy with China for its IPP investments, ensuring minimal losses. The additional energy generated could be redirected to export-led industries, supporting Pakistan’s foreign currency reserves.

Over a 10-year period, this strategy would rely on two critical policy pillars. First, the government should incentivize private sector investment in infrastructure upgrades, leading to reduced transmission losses. Second, the manpower reduction and plant closures should be managed in a way that optimizes resource allocation and operational efficiency. At the end of this period, Pakistan could move toward complete deregulation of the power sector, granting households the right to choose their electricity provider, mirroring Western models. This would also enable a secondary market for solar power, empowering consumers to become sellers, thereby reducing overall energy costs.

In tandem, the government should establish an electricity exchange on the stock market, facilitating the trading of energy units. This market mechanism would enhance transparency, promote efficiency, and allow the government to shift from bleeding resources into the power sector to collecting revenue. This revenue could be allocated to pay down circular debt, thus stabilizing the sector.

For Pakistan, a future roadmap must prioritize the phased privatization of DISCOs, supported by robust legislative reforms and a transparent regulatory environment. The government must facilitate private sector investment in power generation and ensure fair grid access, supported by clear wheeling charges. This transition should be safeguarded through constitutional amendments and guided by a long-term vision that fosters a competitive, sustainable, and consumer-oriented energy market.

The writer works as a consultant and has dealt with various large scale infrastructure projects. He is also a PhD Scholar at National College of Business Administration (NCBA) and a visiting lecturer at the University of Management & Technology (UMT).