The power sector of Pakistan is in a stable zone concerning the ever-increasing capacity payments in recent times, a situation that is worrisome as far as the sustainability of the sector as well as the affordability of the consumers is concerned. This situation has raised concerns, as it is known that capacity payments, which result in the fixation of excess capacity, have grown sharply from 384 billion PKR in 2017 to 2142 billion PKR in recent years as well. This is mostly a result of new Independent Power Producers (IPPs) entering the market and a substantial increase in the excess electricity generating capacity within the country as compared to the average electricity demand in the country.
Historical Context: Capacity and Demand Orientation 1999 – 2014 READ MORE Capacity Payments
Beginning particularly in the year 2015, Pakistan’s electricity whereby, on average, resistive electrical loads have consumed at least 15,000MW of thermal and gas load whilst the total capacity generation within that period was 20000MW. Even if the generation capacity exceeds the demand, the capacity payment totaled 200 billion PKR. However, the construction of new power plants under the 2015 Power Policy marked the beginning of significant changes in the political landscape.
By 2024, the electricity demand averaged at 13000 MW, a slight dip compared to the year 2006. However, the installed capacity for generation nearly doubled and reached 43000 MW. This void in the relationship between demand and supply of electricity has been the root cause for the ever-soaring capacity payments that have since risen to a whopping PKR 2, 142 billion.
The 2015 Power Policy has led to increased tariff consequences, reinforcing the rationale behind the policy recommendations made in 2015. This strategy, which aimed to address peak cost areas, has contributed to the rise in costs.
Then, during the one of fy2015 to fy 2016, the average capacity tariff stood at 2.78 units. But as more power plants came online due to the Pakistani rupee depreciating the tariff went up to pkr 18.39 per unit for the 2025 financial year. These imposing tariff rate escalations have indeed exerted extreme pressure on the government as well as the consumers doing business more.
The Effect of Currency Depreciation on the Rising Costs Capacity Payments
The devaluation of the Pakistani rupee has been one of the dominating factors in the enhancement of electricity tariffs. For instance, in the year 2015, the value of the Rupee was PKR 97.33 against the US dollar. As of 2024, it had fallen to PKR 278 per dollar. This devaluation has made imports costly, particularly in the energy sector where a large percentage of the expenses is in hard currency terms. Hence, the price of generation of electricity has worsened and as a result, capacity payment and tariffs have been pushed up.
Consumer Behavior and Geographical Differential Capacity Payments
The rise in electricity tariffs has also brought about changes in the behavior of the increase in electricity tariffs. The majority of Pakistani consumers have decreased their electricity consumption due to one of the highest tariffs in the region. Therefore, this reduction in demand, together with the current excess in generation capacity, has worsened the problem of capacity payments. Now, not only are the consumers paying more in terms of tariffs, but they are also incurring charges for the electricity that is not used.
Financial Burden to Consumers and the StateSurge
The growing capacity payments carry serious financial consequences. People currently spend PKR 1,083 billion annually to meet debt obligations primarily tied to investments in expanding electricity generation infrastructure. Additionally, they incur PKR 218 billion each year in operation and maintenance costs. All such obligations thin an unquestionable amount of stress on the economy as both the consumers and the government cannot seem to cope with the ever-rising expenses.
Conclusion: Suggestions for Policy Changes
The current scenario in Pakistan’s power sector demands a complete re-engineering of the sector. If we do not address these issues, the economic viability of the power sector will likely remain in the doldrums, with serious consequences for the overall economy of the country.
