Historical Analysis of Pakistan’s Energy Sector
In terms of energy production and energy availability, Pakistan has always been lacking. These problems are as old as Pakistan is, and with a growing population and other factors, the problems have turned into a crisis. At its birth, Pakistan only had a generating capacity of merely 60MW which gradually increased with time. Even though the country’s energy-generating capacity increased, so did the population and industries, thus increasing the energy demand.
In the 1990s, demand for energy exceeded supply, therefore creating a crisis-like situation. In the wake of this crisis, a power policy was designed in 1994 in which Independent Power Producers (IPPs) contributed an additional 13,000 MW of energy. The problem didn’t go away because the power-distributing sectors lacked the infrastructure to draw off the additional energy. In the 2000s, Pakistan made some progress by reducing power outages and increasing energy production.
In 2022, NEPRA reported that the total power generation capacity installed in Pakistan stands at 43,775 MW. 59 percent of this energy comes from thermal/fossil fuel resources, 25 percent from hydro resources, 9 percent from nuclear resources, and 7 percent from renewable energy resources. Pakistan is currently facing an energy crisis and high electricity rates, which can be attributed to many factors.
Pakistan’s Energy Crisis
Pakistan merely uses 452 kWh per person which is one-fourth of what is being used globally. In recent years, there has been almost a 4 percent annual loss of GDP due to the power deficit. So, what are the factors behind this persistent energy crisis in the country? Pakistan has always seen a disparity between demand and supply of energy due to fluctuating oil and gas prices, administrative incompetency and mismanagement, political instability, lack of adequate infrastructure, and reliance on foreign energy imports.
Rather than focusing on producing energy through renewable means, abundantly available in Pakistan, the state is dependent upon foreign energy sources. These factors have led to electricity theft, power outages, load shedding, and fluctuation in electricity prices throughout the country.
Explaining the Increase in Electricity Prices in Pakistan
Both domestic and international factors are behind this dilemma. Internationally, petroleum prices keep fluctuating. For example, due to COVID-19 followed by the Russia-Ukraine war, petrol prices have not only hiked, but there has also been a global fuel shortage. In the year 2022, the oil import costs increased by almost 95.5 percent, from US$8.96 billion to US$17.03 billion.
Domestically, electricity prices in Pakistan have long been incorrectly adjudged. Not only has the electricity been subsidized at the rate of 3 PKR per unit, but also the tariffs have been quite low, due to which the government is bearing the cost of electricity generation. When the cost gets accumulated on the government side, we see a hike in tariffs and, in return, a hike in the electricity price.
Recently, the Pakistani government announced a 15% reduction in electricity prices, lowering rates by Rs 7.41 per unit for approximately 40.3 million consumers, mainly residential users. This price cut includes quarterly tariff adjustments (Rs 3.40), monthly fuel cost reductions (under Rs 1), and increased subsidies (Rs 1.71). Domestic electricity rates now average Rs 34.37 per unit, down from Rs 48.70. These changes aim to ease the financial burden on households and businesses amid rising living costs. However, their effect is yet to be seen.
Another enormous reason is circular debt. The Central Power Purchasing Agency (CPPA) is the main capital buyer of electricity in Pakistan. It buys electricity from all the generation companies and transfers it to the distributing companies. The distributing companies are quite incompetent, not only at distributing the electricity but also at the collection of electricity bills. Since the consumers don’t pay, the companies are unable to retrieve the bill, leaving a payment gap.
The CPPA needs to pay the generation companies for electricity, and the DISCOs (distribution companies) need to pay the CPPA for taking electricity. Since DISCOs are unable to retrieve the bills from all the consumers, the consumers who are already paying the bills are burdened even further with increased prices. Now, the government tries to relieve the consumers by providing subsidies, and a loan is taken to keep the power sector running. This leads to more and more nonpayments and, in return, more circular debt.
The circular debt of the power sector is close to Rs 1.8 trillion. Another issue is that some power plants are generating energy below their capacity while taking payments according to their actual capacity. This makes the government pay them extra and burdens the consumers using electricity by hiking the prices. Hence, each month, even if the units per month remain the same, consumers are charged more.
Comparing Bangladesh, India & Pakistan’s Power Scenario
If we compare Pakistan’s electricity prices to those of other countries in the region, we will see that Pakistan has one of the highest electricity prices in the region. It has cost Pakistan a lot in terms of the loss of foreign direct investments (FDI). Many existing multinational companies have relocated, and many new companies opt to set up their firms in the neighboring countries due to cheap electricity and fewer power outages.
According to the National Energy Efficiency and Conservation Authority report of 2021, Pakistan’s electricity price is US $0.13 kWh, whereas in India, it is US $0.12 kWh, and in Bangladesh, it is US $0.09 kWh. Although the DISCOs in India are as inefficient as the DISCOs of Pakistan, in Pakistan, the loss is augmented due to circular debt. Another comparison is the difference in tariffs among these nations. Compared to India, Pakistan’s maximum average base tariff for large consumers is 40 percent higher, and for residential consumers, it is 31 percent higher.
While comparing it to Bangladesh, Pakistan’s maximum tariff for large residential consumers is 16%-29% higher. Bangladesh provides electricity at a tariff of PKR 25.33 kWh, whereas Pakistan is providing electricity at a tariff of PKR 29.33 kWh–PKR 32.77 kWh. However, Bangladesh and Pakistan face a similar problem in that their power generation plants are not producing electricity to their maximum capacity.
Yet, lower electricity prices in Bangladesh can be attributed to subsidies given by the government and the efficient working of transmission and distribution companies, accounting for lower losses. For all the technical reasons stated above, foreign companies find it cheaper to utilize Indian and Bangladeshi land rather than Pakistani.
There are some non-technical reasons as well that are adding more fuel to the fire. Those reasons include the fluctuation in the international prices of crude oil. The ongoing Middle Eastern crisis and the Russia-Ukraine war have caused the prices to skyrocket internationally, and their effects are being felt domestically as well. Pakistan is left with no option but to increase the electricity prices to match the international pricing.
In 2024, our dwindling economy and the declining value of the Pakistani rupee have made the conditions much worse. In comparison to India and Bangladesh, Pakistan’s currency is a poor-performing one against the US dollar. Therefore, whenever there is a change in international pricing, Pakistan sees a drastic hike in electricity tariffs, whereas the same change does not cause the same drastic effect in India or Bangladesh.
Bangladesh and India have much more stable economies as compared to Pakistan. Pakistan’s economy is dependent on the IMF and foreign aid. The conditionalities of the IMF (also called Structural Adjustment Programs) also call for increasing the electricity tariffs, and Pakistan has no choice but to comply in order to get the loan from the IMF.
Moreover, political instability has exacerbated the crisis. India and Bangladesh have much more stable democracies in the region, but Pakistan lacks stability even after 77 years of independence. This political instability has led to the non-development of infrastructure due to less FDI.
Conclusion
Henceforth, not only is Pakistan facing transmission and distribution losses of electricity in 2024, but also the burden of surplus energy that Pakistan has is being endured by the consumers by paying higher electricity costs. The government should regulate the DISCOs to ensure minimum power loss during transmission and distribution and build the required infrastructure so that the surplus energy can be provided to the citizens. The Pakistani government should also consider producing energy through renewable resources to minimize the dependency on fuel imports, which has made Pakistan susceptible to external shocks.
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Hareem Amna graduated with a degree in applied psychology from GCUF and a post-graduation certification in clinical psychology from Kinnaird College. She is an aspiring writer focused on writing about current issues.