The Economic Survey of Pakistan 2025–26, released ahead of the federal budget on June 10, 2025, underscores persistent energy sector challenges. Despite acknowledging the deepening electricity crisis, the government once again resorted to tariff hikes and circular debt restructuring, offering no meaningful reforms to address inefficiencies or chronic load shedding.

Pakistan’s energy paradox is striking: despite an installed generation capacity of 46,605 megawatts, the country generated only 90,145 gigawatt-hours during the fiscal year — reflecting an average utilisation of just 10,290 MW. This underuse stems not from insufficient supply but from a structural disconnect between capacity and productive demand. The result is a costly surplus of idle power, burdening public finances without contributing to economic growth. We urgently need a demand-driven strategy that links energy planning with industrial revival, economic expansion, and productive consumption.

This mismatch reflects broader economic stagnation. In FY25, Pakistan’s real GDP grew by just 2.68 per cent, driven mainly by services, while large-scale manufacturing — one of the largest consumers of electricity — contracted by 1.5pc, and agriculture grew only 0.56pc. With limited industrial activity, electricity demand remains weak, rendering existing capacity investments economically unviable.

Pakistan’s energy crisis is not one of insufficient generation but of unrealised, unproductive demand reflecting weak economic linkages, fragmented planning, and institutional inertia

Meanwhile, idle power plants continue to receive capacity payments, further straining public finances. The circular debt is now close to Rs2.4 trillion, driven by theft, poor bill recovery, and unsustainable subsidies. These fiscal pressures undermine sectoral investment and discourage private participation. Without integrated, demand-responsive reform, Pakistan’s energy sector risks remaining a financial drain rather than an engine of growth.

Technical losses compound the crisis. Transmission and distribution losses hover between 25pc and 30pc, fuelled by outdated infrastructure, rampant theft, and systemic inefficiencies. The government’s response — imposing a Rs3.23 per unit Circular Debt Surcharge — penalises compliant consumers while failing to tackle root causes. Instead of punitive measures, Pakistan needs modern solutions: smart meters, aerial bundled cables (ABC), GIS-based grid monitoring, and artificial intelligence (AI)-powered analytics to reduce losses and improve efficiency. Prolonged load shedding — reaching up to 12 hours in some areas — disproportionately harms vulnerable communities even as surplus electricity remains unused.

The rapid, unregulated expansion of rooftop solar adds new complexity. In the first half of FY24, Pakistan imported over 13 GW of solar panels, mainly from China. Yet, only 2.5–4.9 GW has been integrated into the grid via net metering, much of which operates off-grid outside formal oversight. This surge in behind-the-metre generation further reduces grid demand, escalates idle capacity payments, and undermines revenue for distribution companies.

The consequences extend beyond energy. High electricity costs erode industrial competitiveness, discouraging investment despite improved macroeconomic indicators such as lower inflation and reduced fiscal deficits. With gross fixed capital formation at just 13.8pc of GDP and domestic savings at 7.4pc, private sector confidence remains weak, limiting sustainable electricity demand and broader economic revival.

In a notable policy shift, the government has terminated Power Purchase Agreements with several Independent Power Producers (IPPs), effective October 2024, including HUB Power, Lalpir, Pakgen, Roush, Saba, and Atlas Power. Simultaneously, 2,813 MW of decentralised capacity was integrated through net metering, reflecting an ongoing transition toward distributed renewable energy and away from expensive thermal IPPs.

To address chronic underutilisation, Pakistan must embrace demand-led energy planning. One promising avenue is the development of data centres, which are emerging globally as significant energy consumers. With targeted incentives — reduced tariffs, tax breaks, and streamlined approvals — Pakistan could position itself as a regional data hub, leveraging the growing demand driven by 5G, AI, and cloud computing.

Electric mobility offers another opportunity. Developing electric vehicle (EV) charging infrastructure and local EV manufacturing can stimulate demand while advancing environmental goals. Offering concessional electricity rates for charging stations and tax incentives for EV assemblers can create a stable, growing customer base for the grid.

Pakistan also has a unique opportunity to attract energy-intensive industries being phased out in developed economies. Energy-secure Special Economic Zones dedicated to export-orientated sectors such as textiles, leather, surgical instruments, and agro-processing can create concentrated, stable demand.

Guaranteed uninterrupted power, competitive tariffs, and predictable pricing structures can help these industries thrive, enhancing global competitiveness while ensuring productive use of surplus capacity.

The agriculture sector similarly offers untapped potential. Electrifying irrigation through solar-powered tube wells, expanding cold storage, and adopting precision farming technologies can boost rural electricity demand and productivity.

A transparent and predictable tariff structure is critical across all these initiatives. Cross-subsidisation and unpredictable pricing discourage industrial users and complicate planning. Cost-reflective tariffs, aligned with the best international practices, are essential to restoring investor confidence and expanding industrial and commercial uptake.

Pakistan’s energy crisis is not one of insufficient generation but of unrealised, unproductive demand. The current surplus reflects weak economic linkages, fragmented planning, and institutional inertia. We needs a coherent, demand-driven reform agenda that integrates energy policy with industrial development, agriculture, and digital infrastructure.

Only a unified, strategic vision can convert Pakistan’s energy surplus from a fiscal burden into a foundation for long-term economic revival.

The writer is the Pro Vice Chancellor at Dawood University of Engineering and Technology

Published in Dawn, The Business and Finance Weekly, June 23rd, 2025