Pakistan’s power sector is navigating a profound crisis, marked by chronic mismanagement and structural inefficiencies that have rendered it a “zombie sector,” heavily reliant on government subsidies and temporary fixes. Despite an installed generation capacity of approximately 46,000 megawatts, peak national demand hovers around 30,000 MW, creating a significant capacity surplus that paradoxically drives up electricity costs. This imbalance, coupled with an aging transmission grid and a complex cost-plus tariff mechanism, poses substantial fiscal challenges and threatens the nation's economic stability.

The glaring disparity between generation capacity and actual demand has trapped Pakistan in a “capacity trap,” where fixed costs for underutilized power plants, often denominated in US dollars, continue to accumulate regardless of actual electricity production. This has resulted in generation costs 87-140% higher than those in neighboring countries, making Pakistani electricity among the most expensive in the region. Beyond generation, the nation's aging electrical grid suffers from critical transmission bottlenecks, notably the “south-north barrier.” These limitations impede efficient power distribution, leading to the paradoxical situation where cheaper renewable energy sources are curtailed while expensive thermal plants remain operational to meet localized demand.

Pakistan’s top-down electricity pricing mechanism establishes an annual reference tariff, currently averaging approximately Rs. 34 per kilowatt-hour (KWh). This cost-plus regulatory framework, where the government acts as the sole purchaser, means rising costs trigger higher prices, which in turn suppress demand. This forces fixed costs, which constitute approximately two-thirds of generation expenses, to be spread over fewer units, further inflating per-unit prices. The current tariff includes an average energy cost of Rs. 10.9/unit, capacity payments of Rs. 17.05/unit, transmission expenses of Rs. 1.68/unit, and distribution costs of Rs. 4.4/unit.

Amidst these challenges, Pakistan has seen remarkable solar energy adoption, with solar installations now contributing over 25% of the country's electricity, both on-grid and off-grid. While a positive step towards clean energy, this trend also presents a “grid defection” threat, as consumers increasingly opt for solar to avoid expensive grid electricity. This shift could undermine the financial viability of the existing utility model and exacerbate the circular debt that plagues the sector.

Projected electricity sales for fiscal year 2025-26 anticipate a 2.5% decline to 103.6 billion KWh (net of 11% system losses). While lower fuel costs and renegotiated power purchase agreements have reduced energy and capacity charges, a new surcharge of Rs. 3.23 per KWh has been added to service the recent debt accumulation, further burdening consumers. Domestic consumers account for an overwhelming 89% of total grid connections and approximately half of all electricity consumption, with industrial users contributing 24% of total usage. The agricultural sector accounts for 9%, and commercial establishments 8%, with the remaining 10% serving other categories. The looming threat of grid defection, coupled with the fixed cost burden, underscores the critical need for accurate demand forecasting and comprehensive structural reforms to ensure the sector's long-term sustainability.