There was a time when darkness defined Pakistan’s economic rhythm. Prolonged outages disrupted industry, paralysed households and became a symbol of structural dysfunction.
Over the past decade, that crisis triggered an aggressive expansion of generation capacity. Today, the lights may stay on more consistently, but the cost of that transformation is proving to be a far more complex burden.
Pakistan’s power sector now finds itself trapped in a paradox of surplus. According to the latest performance evaluation by the National Electric Power Regulatory Authority, the country paid PKR 2.94 trillion (about USD 10.58 billion) for electricity in FY2024-25.
Yet, a significant portion of that capacity remained underutilised. What was once a strategy to eliminate shortages has evolved into a system in which excess generation capacity is driving costs upward, distorting tariffs, and placing sustained pressure on public finances.
Capacity payments dominate a swelling power bill
The most striking feature of Pakistan’s power sector is the disproportionate weight of capacity payments. These are fixed payments made to power producers regardless of whether electricity is actually generated.
In FY2024-25, 61 percent of the total power purchase cost was absorbed by Capacity Purchase Price (CPP), leaving only 39 percent attributed to actual electricity generation under Energy Purchase Price (EPP).
On a per-unit basis, the imbalance is equally stark. Capacity payments averaged PKR 14.3 (USD 0.051) per kilowatt-hour, significantly higher than the PKR 9.0 (USD 0.032) per kilowatt-hour for energy costs.
This pricing structure reveals a system where consumers and the state are paying more for idle infrastructure than for actual electricity consumption.
The implications are structural rather than cyclical. Capacity payments are locked into long-term contracts, making them largely inflexible.
As a result, even when demand falls or generation remains idle, financial obligations persist, creating a rigid cost base that inflates electricity tariffs.
Underutilisation exposes planning gaps
Despite heavy investment in power generation, utilisation levels remain low across multiple segments of the system.
Thermal power plants, which constitute a major share of installed capacity, operated at just 42.5 percent utilisation during the year. Renewable energy facilities performed even lower, averaging 36.6 percent utilisation.
These figures highlight a critical mismatch between installed capacity and actual demand. The system continues to carry excess generation capacity that is neither efficiently dispatched nor aligned with consumption patterns.
This underutilisation effectively doubles the cost of electricity produced from these plants, as fixed costs are spread over a smaller output base.
The report points to a deeper issue of demand forecasting and planning. Investments made to eliminate load shedding did not fully account for long-term demand trajectories, resulting in a system that now produces more electricity than it can economically absorb.
Imported fuels inflate costs despite surplus capacity
While excess capacity remains idle, Pakistan continues to rely heavily on expensive imported fuels such as re-gasified liquefied natural gas (RLNG), furnace oil and imported coal. This dependence significantly raises the cost of electricity generation.
The paradox is evident. Even as cheaper domestic energy sources exist, higher-cost imported fuel plants are frequently dispatched, contributing to elevated energy costs.
Indigenous options, including gas-based plants like Uch Power and Uch-II, which generate electricity at approximately PKR 13.4 (USD 0.048) per kilowatt-hour, remain underutilised despite their relative cost advantage.
Similarly, coal-fired plants in the Thar region—among the cheapest in the system’s merit order—operated at an average utilisation of 72.9 percent, leaving potential savings unrealised.
The continued reliance on imported fuels, despite the availability of lower-cost domestic alternatives, reflects inefficiencies in dispatch decisions and infrastructure constraints.
Hidden costs of inefficiency accumulate
Beyond capacity payments, additional inefficiencies further inflate the financial burden on the power sector. Part Load Adjustment Charges (PLAC), triggered when plants operate below optimal capacity, added PKR 44.6 billion (USD 160.4 million) in extra costs during the year.
Renewable energy curtailments contributed another layer of inefficiency. More than PKR 13 billion (USD 46.8 million) was paid in Non-Project Missed Volume (NPMV) charges, compensating producers for electricity that could not be absorbed into the grid.
These payments underscore the system’s inability to effectively integrate renewable energy into the overall generation mix.
Transmission bottlenecks between southern and northern regions further exacerbate the problem. These constraints limit the movement of cheaper electricity across the grid, forcing reliance on more expensive local generation.
Outages at key low-cost plants also reduce system efficiency, increasing dependence on higher-cost alternatives.
K-Electric highlights systemic inefficiencies
The challenges are particularly visible in the operations of K-Electric, the country’s largest privatised power utility. Despite its privatisation in 2005, the company’s system operated at an average utilisation of just 34.6 percent, significantly below optimal levels.
K-Electric’s continued reliance on imported fuels keeps its generation costs higher than those of the national grid.
Although a long-delayed interconnection with the national grid became operational in July last year, allowing imports of up to 2,000 megawatts, structural constraints persist.
“Take-or-Pay” contracts tied to RLNG-based plants such as BQPS-III continue to impose fixed costs, limiting the utility’s ability to fully benefit from cheaper grid electricity.
These contractual obligations reflect the broader rigidity embedded in Pakistan’s power sector agreements.
Infrastructure delays and logistical constraints
The inefficiencies extend beyond generation and into infrastructure development.
The transition of certain power plants from imported coal to domestic Thar coal depends on the timely completion of critical rail infrastructure. Delays in these projects risk prolonging dependence on costly imports.
Transmission limitations also play a significant role. The inability to efficiently transmit electricity from surplus regions to demand centres reduces system flexibility and increases reliance on suboptimal generation choices.
These logistical challenges compound existing inefficiencies, reinforcing a cycle where excess capacity coexists with high costs and limited operational efficiency.
A high-cost system burdening consumers and the state
The cumulative effect of these structural issues is a power sector characterised by high costs and limited efficiency.
Consumers are required to bear tariffs that exceed the actual cost of production, as they effectively pay for both electricity consumed and capacity that remains unused.
This dynamic places additional strain on households and businesses, particularly in an economic environment marked by inflation and constrained incomes.
For industries, high electricity costs undermine competitiveness, affecting production costs and export potential.
At the fiscal level, the burden extends to public finances. Capacity payments and inefficiencies contribute to the accumulation of circular debt, a persistent challenge in Pakistan’s energy sector.
Although authorities have reported reductions in circular debt by over PKR 780 billion (about USD 2.81 billion), the underlying structural issues identified in regulatory assessments remain unresolved.
A structural imbalance with long-term consequences
The findings from the regulator’s performance report present a consistent narrative. Pakistan’s power sector is not merely dealing with temporary inefficiencies but with a deeply embedded structural imbalance.
The system continues to pay billions of dollars annually for capacity that it does not fully utilise. At the same time, reliance on expensive imported fuels, rigid contractual obligations and infrastructure constraints prevent cost optimisation.
The result is a high-cost electricity system that operates below its potential while imposing sustained financial pressure on both consumers and the state.