Among the major evils that plague Pakistan, the circular debt of its power sector clearly stands out. It has reached Rs 2.39 trillion and shows no signs of relenting. To save this sector from financial ruin, the government must explore and use every option to relieve the country’s economy and people as both are suffocating under the endless streak of tariff hikes.
According to NEPRA’s State of Industry Report 2024, poor governance of the power sector is leading to huge financial losses which exceeded Rs 740 billion in FY 2024. The main causes behind these (over 79%) were excessive losses in the systems controlled by DISCOs and lack of full revenue recovery. Out-of-merit-generation and penalties paid to IPPs for some contractual violations made up the rest (21%).
NEPRA, in its above report, sums up this sector’s performance in the following words:
“Pakistan’s power sector is entangled in a complex web of challenges, including high tariffs, ….., inefficiencies in generation, transmission, distribution and supply of electricity marked by serious governance issues….External factors like high prices of imported fuels, devaluation of the Pak Rupee, and the impact of global issues have certainly had a negative impact on the cost of electricity generation in the country. There are unabated inefficiencies, particularly on the part of monopolistic entities, making electricity increasingly unaffordable and placing an unprecedented strain on the country’s economic and financial stability.”
NEPRA continues its tirade in the following words:
“Persistent administrative and governance issues, combined with lack of planning and under-investment in technology have aggravated the power sector’s difficulties.”
Sustainable power supplies are to modern society what a healthy cardiovascular system is to the human body. The power grid is among the most critical, complex, and capital-intensive infrastructures for any country. It’s critical for providing the basic amenities to people and powering the economy. It’s even more important as it underpins the functioning of all the other infrastructures, facilities, and services in a country.
Our terminally sick and constantly bleeding power sector needed a strategic vision from our political leaders and a strong belief in that vision undeterred by any resistance on the ground from bureaucracy, political opponents, and vested interests
Pakistan was not thunder-struck with its present power sector mess It’s the culmination of decades of ill-conceived policies devised and implemented on personal whims and vested interests, bypassing the regular institutional channels. The fate of the power sector is a foregone conclusion unless the government reconsiders its own approach to running this complex enterprise and changes its course radically.
Pakistan’s Power sector issues are complex, deep-rooted, and chronic, and can’t be resolved through ad hoc policies and initiatives. It’s in dire straits now and needs a systemic overhaul. The government is welcome to use any fast-track solutions, but first, it must correct the fundamentals of this sector that are constantly sucking the blood of this nation and are potent to defeat any future efforts no matter how promising it appears in theory.
Five pillars will be essential for a viable, vibrant, and sustainable power supply system in Pakistan:
- a strategic national vision to guide planners and decision-makers in the entities downstream;
- an imaginatively crafted strategic plan to realise the strategic vision;
- a set of consistent and mutually supportive policies to achieve the strategic objectives;
- a flexible and responsive institutional setup to effectively implement the strategic plans and policies; and
- a competent team of managers to pursue their objectives and targets, free from any external meddling.
A moment’s reflection on the performance of our successive governments should make it evident that they have failed on every single count.
But before looking for a way out of the present mess, let’s first reflect on how we came here.
No strategic vision: Our terminally sick and constantly bleeding power sector needed a strategic vision from our political leaders and a strong belief in that vision undeterred by any resistance on the ground from bureaucracy, political opponents, and vested interests. What we have seen is a total lack of foresight and only band-aids—good prescriptions for headaches but not for a patient suffering from cancer. The piecemeal, disjointed, issue-specific, and lobbyist-driven initiatives can hardly be termed imaginative strategic vision.
No strategic plan: While we do see a hotch-potch of initiatives by every government to reform the power sector, these did not form part of a cohesive and integrated strategic plan. The National Electricity Plan was approved by the Cabinet Committee on Energy (CCoE) in August 2023 but is yet to be implemented. It also misses a fundamental feature. We cannot have sector and sub-sector plans in isolation. We must first have a national socio-economic development plan to guide the energy plan to further guide other plans in this sector.
Policy failure: Since 1994, Pakistan has seen a streak of power policies introduced at regular intervals by governments in their bid to attract private investment, mostly in generation. These policies failed to deliver the desired results and have led to serious unintended consequences like excess capacity, suppressed demand, runaway circular debt, business shifting to other countries, and punishingly high electricity tariffs.
Our governments needed to deploy competent teams of professionals in the power sector entities, selected strictly on merit and for their vision, competence, and capability to materialise the governments’ vision and effective execution of their strategic plans
When formulating public policies, effort is always made to set a clear hierarchy among different policies, from top national down to local ones. It’s also ensured that the policy for a specific sector of the economy guides those in its subsectors. Our governments seem to have been following a reverse order and issued sub-sector policies first (for instance, ARE Policy 2019 and Electric Vehicles Policy 2019), then the National Electricity Policy 2021, and we believe it plans to issue a National Energy Policy soon.
Dysfunctional institutions: Organisations often lose effectiveness with the passage of time as the environment around them changes. No meaningful institutional reforms were carried out in the past and this sector is still being run in the same old manner from the top. While case after case from power sector reforms undertaken over the past three decades from around the world revealed that a critical factor to the success of these reforms was the provision of reform-friendly institutions and capacity on the ground, our leaders thought that they could squeeze space-age performance from our stone-age institutions.
Poor management: Our governments needed to deploy competent teams of professionals in the power sector entities, selected strictly on merit and for their vision, competence, and capability to materialise the governments’ vision and effective execution of their strategic plans. No step was taken by any government on such lines and these entities have been and continue to be run by ad hoc appointments, often violating merit, and ignoring the track record of the incumbents.
Years of poor leadership and misgovernance have brought the power sector to the brink. Our leaders must realise that time is running out fast. Each passing day further multiplies its problems. They must change their present mindset and make the fundamental improvements that are long overdue to pull it out of the abyss and put it back on a path to recovery. The rewards of having a viable and effectively functioning power sector will be countless for the country when contrasted with the politically expedient and short-sighted remedies.
Recent Developments
Small power plants have emerged that now beat the cost and performance features of large conventional plants. Renewable technologies are proving competitive with conventional options. Smart grid technologies are unlocking new opportunities for squeezing more value from existing assets and for managing demand. Affordable battery storage is enabling consumers to reduce, and even eliminate, their grid dependence by coupling them with rooftop PV systems. Electric vehicles (EVs) are also opening new vistas as both demand and sources of supply.
The future of this industry is expected to be ruled by small, distributed, and renewable power supply schemes that could be managed best by liberalising and devolving planning and decision-making in its various functions. Our leaders should use this opportunity to phase out our dependence on large, capital-intensive, and import-dependent supply schemes and rebuild the power sector on a distributed grid concept.
Three essential features of a viable power system are its affordability, security, and sustainability. Carefully planned distributed and renewable-based supplies can outperform the traditional centralised schemes. With over a quarter of the country’s population still without electricity and the existing consumers choking under prohibitively high electricity prices, demand-oriented supplies at lower costs can provide a sigh of relief to consumers.
These systems, due to their reliance on ubiquitous renewable supplies, will add to the energy security of the country. This security can be enhanced even further by promoting their local manufacture. These will be sustainable not just because they do not degrade our ecosystem but also because they will promote substantial industrialisation and employment in the country.
New vision: The country’s new vision for the power sector must include at least the following five strategic threads:
- It should be alive, responsive, and aligned to new technology and market trends;
- it should provide enabling legal, regulatory, and business frameworks to reorganise this sector along open, transparent, fair, and competitive lines;
- it must replace the traditional business operating model with a more innovative, liberal, and flexible model in which all players can participate fairly and equally;
- it should shift decision-making as closely as possible to the end-users; and
- It should catalyse a visionary R&D program to inform evidence-based decision-making and policy formulation in the country.
Strategic electricity plan: The government will need to convert its new vision into a strategic plan to gradually phase out central-station conventional power supply schemes and substitute these with small-scale renewable power supply options at demand-ends or as close as possible to end-users of electricity. The issuing of the National Electricity Plan is a good first step and deserves proper implementation.
This plan must be unified, integrated, and holistic by clearly identifying the most appropriate blending of various energy carriers, including electricity, in serving the various energy-based needs of the people, businesses, and industries. It will also need to transcend the typical but largely artificial boundaries among the various sectors of the economy and their traditional reliance on specific fuels.
The government should devolve decision-making in the power sector by moving it as close as possible to the DISCOs and end-users, by gradually lateralising the existing vertical hierarchies and replacing these with those that are open and flexible
Improved policy frameworks: The government should streamline and institutionalise the policy formulation process in the country by making it transparent, objective, and consultative. Every proposed policy must be screened through specified criteria such as efficiency, cost-effectiveness, and equitable distribution of its cost and benefits among various stakeholders. Specifically, the compatibility of the existing institutions for effectively implementing these reforms must not be overlooked.
The existing policies should be reviewed and improved to encourage the deployment of distributed energy resources and discourage mega projects, especially those based on foreign technologies and fuels. These policies should also encourage the deployment of storage technologies in the system to enhance the value of renewable energy technologies while relaxing their intermittency and variability constraints. Similarly, besides being a source of demand, battery packs in EVs can also support the power grid in more economical ways than the traditional solutions.
Consistency of policies among the major sectors of the economy and sub-sectors and their stability over time are two prerequisites for converting the strategic vision into reality as they will raise investors’ confidence, reduce risk perceptions, and increase investment flows.
Institutional structure: There’s strong evidence that a primary cause of the failure of Pakistan’s previous efforts to power sector reforms has been its failure to change the institutional structure and capacity needed for their implementation. Any new effort, therefore, must acknowledge the critical role of institutional capacity and managerial competence.
The government should devolve decision-making in the power sector by moving it as close as possible to the DISCOs and end-users, by gradually lateralising the existing vertical hierarchies and replacing these with those that are open and flexible. This is imperative as DISCOs are in a much better position to grasp the dynamics of electricity demand, the potential of serving it through supply- or demand-side solutions, and the viability of different strategies for this purpose.
The Power Division and NEPRA’s role in the new setup should be restricted to just setting the rules of market participation. They should avoid micro-managing the actual business. Both should let go of their present “command and control” mindset. Instead, they should take a more liberal approach to encourage small power producers and consumers to assume a more active role in this sector’s activities.
Professional management: Managers will be the true change agents of organisational transformation. They must lead the new processes and workstreams and guide their successful implementation. We can’t over-emphasise the importance of competent professional managers in the success of any future power sector reforms. As the saying goes, “Good organisations require good managers.”
Supportive R&D: The government will also need to catalyse, with sufficient seed money, a visionary R&D program to promote distributed and renewable technologies in the country, by suitably segregating it among the local institutions. This R&D should aim to provide the presently missing, but requisite, information base to promote evidence-based decision-making and policy formulation in the country.
This R&D should focus on issues such as the following:
- Understanding consumer behavior with respect to choice of the built environment, selection of appliances, and their post-purchase usage;
- Adoption of already commercial supply and demand technologies, identifying any existing barriers to their uptake, and how these can be removed; and
- Renewable resource distributions at different sites, their correlations with electricity demand, and the most feasible ways to match distributed supplies with demand.
Pakistan is arguably at an extremely difficult point in its history as far as energy is concerned. It’s time for our leaders to demonstrate true grit and act. They must act boldly to deconstruct the monolithic, inefficient, and poorly managed power sector and reconstruct it on the five strategic pillars suggested above by embracing the new technology and market trends that hold great promise for setting it on an affordable, secure, and sustainable footing.