Energy Policy 55 (2013) 271–285

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Chaos in power: Pakistan’s electricity crisis$

Ioannis N. Kessides n
Development Research Group, The World Bank, 1818 H Street N.W., Washington, DC 20433-0002, USA

H I G H L I G H T S

c We analyze the structure, conduct, and performance of Pakistan’s electricity sector.

c The causes and economic impacts of Pakistan’s electricity shortages are analyzed.
c We identify the potential policy response to the power crisis.

a r t i c l e i n f o abstract

Article history: Pakistan is facing a severe electricity crisis due to a persistent and widening gap between demand and
Received 25 June 2012 available system generating capacity. The worsening of power shortages has become a major political
Accepted 2 December 2012 issue, reflecting the hardships for individuals and businesses. It threatens to undermine the credibility
Available online 17 January 2013
and legitimacy of government and to further stress the social fabric of the country. The power crisis did
Keywords: not emerge suddenly. It is the direct result of imprudent and reckless energy policies over the last three
Power crisis in Pakistan decades. These policies have impeded the development of cheap and abundant domestic energy
Circular debt sources. They have also resulted in very inefficient fuel-mix choices, compromising energy and
Loadshedding economic security. Pakistan’s energy bankruptcy is ultimately due to massive institutional and
governance failure. This paper analyzes the problems confronting Pakistan’s electricity sector and
identifies the key elements of a potential policy response to address the country’s severe power crisis.
& 2012 Elsevier Ltd. All rights reserved.

1. Introduction The upsurge in power shortages represents one of the most

Pakistan’s electricity sector is facing the worst crisis in its
history. It is saddled with an overloaded infrastructure with size-
able capacity shortfall and is marred by unprecedented loadshed-
ding, excessive transmission and distribution losses, and a massive
circular debt. According to the Pakistan Electric Power Company, in
April 2011, the shortfall in power generation across the country
was in excess of 5000 MW, with demand standing at 14,475 MW
and supply at 9465 MW. There are reports that some rural areas
have been experiencing loadshedding and blackouts up to 20 h,
while in cities loadshedding increased to 14 h a day. In May 2012,
the shortfall increased to 6000 MW—demand was estimated at
15,000 MW and supply at just 9000 MW (Ebrahim, 2012; NEPRA
(National Electric Power Regulatory Authority), 2011a, 2011b; The
Express Tribune, 2011).
n
Tel.: þ1 202 473 9345.
E-mail address: ikessides@worldbank.org
$
The findings, interpretations, and conclusions are the author’s own and should
not be attributed to the World Bank, its Executive Board of Directors, or any of its
member states. I would like to thank Christine Kessides, Raghuveer Sharma,
Michael Toman, and two anonymous referees for their helpful comments.
serious adverse domestic developments in Pakistan. It has
become a major political issue, undermining the credibility and
legitimacy of government. According to some observers, the
country’s power crisis threatens to further stress the social fabric
of the country and may ultimately eclipse the terrorist threat.
Electricity shortages have been causing substantial damage to
Pakistan’s economy and constitute a binding and powerful con-
straint on the country’s growth. They constrain growth in terms of
GDP foregone and have very significant negative impacts on
employment, international competitiveness and exports, and
poverty alleviation. For the ordinary citizens, extensive loadshed-
ding is causing significant disruption of their daily life. For the
industrial, commercial, and agricultural users, the costs of the
upsurge in power shortages have been enormous. Pakistan’s
industry has been effectively crippled. The textile sector – source
of over half of the country’s exports and about 40 percent of its
manufacturing jobs – has been hit hard. Especially small busi-
nesses have been paralyzed (Leiby, 2012; Siddiqui et al., 2011).
Public protests against the blackouts have been widespread
and riots sometimes have turned deadly. In some parts of the
country, shopkeepers have threatened mass suicide to protest 18
to 20 h of blackouts every day. In response to the deepening

0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.enpol.2012.12.005
272 I.N. Kessides / Energy Policy 55 (2013) 271–285
energy crisis, in 2010, the country’s political leadership held an
energy summit in Islamabad. Thus, for the first time since the
commencement of power shortages, policymakers finally started
giving the problem the attention it deserves. More recently, the
government has been preoccupied with long debates over how to
address the energy crisis. In April 2012, a two-day energy summit
in Islamabad sought to come up with a viable strategy to end
power shortages (APR (Associated Press of Pakistan), 2012; BNU
(Beaconhouse National University), 2010).
The electricity shortage did not emerge suddenly. It is the
direct result of imprudent and reckless energy policies over the
last three decades that impeded the development of cheap and
abundant domestic energy sources. Pakistan’s energy bankruptcy
is ultimately due to massive institutional and governance failure.
The task of restructuring the electricity sector in Pakistan and
of designing an appropriate policy framework for attracting large-
scale private investment and improving its performance is com-
plex and daunting. There are certainly several important elements
of sectoral reform in other countries that can provide useful
benchmarks. However, the unique adverse conditions for better
governance and performance confronting Pakistan generate sig-
nificant obstacles to restructuring efforts.
2. The structure of the electricity supply industry
The electricity supply industry of Pakistan is characterized by a
semi-public/semi-private market structure. The sector has been
dominated by three entities: Water and Power Development
Authority (WAPDA); Karachi Electricity Supply Company (KESC);
and Pakistan Atomic Energy Commission (PAEC), the operator of
the country’s two nuclear plants. Since 1994, a number of Inde-
pendent Power Producers (IPPs) have also entered the market.
WAPDA was created in 1958 as a semi-autonomous entity
with the statutory authority to coordinate the development of the
water and power sectors. In October 2007, WAPDA was split into
two separate entities: WAPDA and Pakistan Electric Power Com-
pany (PEPCO). WAPDA is now responsible only for water and
hydropower development. Its former monolithic Power Wing was
vertically and horizontally restructured into four Generation
Companies (GENCOs), the National Transmission Dispatch Com-
pany (NTDC), and nine Distribution Companies (DISCOs). PEPCO’s
stated mission was to oversee the reform and restructuring of the
power sector and transform the above 14 corporate entities into
autonomous and commercially viable enterprises.1 Due to the
worsening power crisis, in April 2012, PEPCO’s Board of Directors
approved its dissolution. PEPCO’s functions were transferred to
the NTDC which will be subsequently handed over to the Central
Power Purchase Agency (CPPA).2
KESC is the only vertically-integrated power utility in Pakistan.
Its license covers the entire metropolitan area of Karachi. PAEC
operates the country’s nuclear power plants. There are also
several IPPs operating in the market on a Build-Own-Operate
basis, and three Rental Power Plants (RPPs). During 2010–2011,
seven new IPPs entered the market (NEPRA (National Electric
Power Regulatory Authority), 2011a, 2011b).
In June 2011, the total installed generation of the country was
23,412 MW out of which: 16,070 MW (68.6 percent) thermal,
6555 MW (28.0 percent) hydro, and 787 MW (3.4 percent) nuclear.
The installed capacity by system was: PEPCO, 20,818 MW (88.9
1
Rather than overseeing this process of structural reorganization, PEPCO
increasingly assumed a centralized role and made decisions about the unbundled
entities.
2
The News, April 20, 2012 (http://www.thenews.com.pk/Todays-News-13–
14050-Pepco-dissolved-670-employees-transferred#).
percent); KESC, 2594 MW (11.1 percent). In the PEPCO system,
4885 MW of installed capacity was accounted by GENCOS under
PEPCO, 8325 MW by IPPs and 403 MW by RPPs. In the KESC
system, 1821 MW of installed capacity belonged to KESC,
262 MW to IPPs, and 50 MW to RPPs. The bulk of the hydro
capacity was accounted by WAPDA’s stations: WAPDA, 6444 MW;
IPPs, 111 MW (NEPRA (National Electric Power Regulatory Authority),
2011a, 2011b).
The transmission segment of the industry includes two enti-
ties: NTDC, which is the national grid company of Pakistan with
exclusive responsibility for the transmission, overall reliability,
planning, and coordination of electricity in the entire country
except for the area served by KESC; and the vertically integrated
KESC, which is covering the Karachi metropolitan area. NTDC is
also solely responsible for making all the necessary interconnec-
tion arrangements with new power stations. Given its role for
system-wide planning, NTDC prepares the investment plan in the
transmission network and grid stations.
The distribution segment of the industry is comprised of eight
public DISCOs that were established as a result of the unbundling
of the vertically integrated power wing of WAPDA. These dis-
tribution companies serve end consumers in all Pakistan except
Karachi and its suburbs. The latter are being served by KESC under
a separate license granted by the National Electric Power
Regulatory Authority (NEPRA). In addition, NEPRA has granted
ten distribution licenses to small power producers for supplying
electric power to designated bulk power consumers.
3. Insufficient installed capacity—lack of adequate planning
One key, long-term contributing factor to the increased power
shortages has been the robust growth in demand for electricity
during the past three decades. This growth averaged around 11
percent per annum during the 1980s, moderated to 4 percent per
annum during the 1990s, and then increased to an average of over
6 percent during the following decade (Table 1).
Industrialization, urbanization, growth in agriculture and ser-
vice sectors, rising per capita income, and rural electrification led
to this growth in demand. In particular, there has been extra-
ordinary growth in domestic demand for electricity averaging
over 21 percent per annum during the 1980s and 10 percent
during this past decade. This rapid growth in domestic demand
was fuelled by subsidized tariffs, which had declined by 24
percent in real terms during the 1980s (Pasha et al., 1989). The
substantial increase in the use of electrical appliances played a
major role. As a result the share of domestic consumers in total
power consumption increased from 23 percent during 1980–1981
to almost 46.5 percent in 2010–2011 (Fig. 1).
Growth in demand, especially during the current decade, was
not fully anticipated and adequate provisions were clearly not
made to meet it. Indeed, the last few years have been character-
ized by a totally inadequate and ill-proportionate response at the
supply end. After impressive increases in installed generating
capacity which were achieved with the construction of the
Taberla and Mangla dams, policy action in the electricity sector
has been short-sighted, inadequate and even reckless. The power
sector’s share of public sector expenditure, which averaged
around 28 percent since the 1980s, fell to less than 3 percent
during the previous decade (BNU (Beaconhouse National
University), 2010). As Table 1 indicates, while demand grew at
an average of 6.1 percent per annum between 2001 and 2008,
growth in generating capacity was only 1.5 percent per annum
during the same period. Consequently, after having surplus
electricity from the late 1990s to 2004–2005, in recent years
 I.N. Kessides / Energy Policy 55 (2013) 271–285 273

Table 1 (CGD (Center for Global Development), 2010). Investor fears

Growth rates of electricity demand and supply (ACGR%). about quasi-expropriation were not unfounded. In May 2012,
Source: IPP (Institute of Public Policy) (2010).
the government’s failure to reimburse nearly $ 500 million to a
Demand Supply group of nine IPPs that were supposed to be guaranteed payments
led to Pakistan’s first sovereign default. These developments
Installed capacity Generation could have significant implications for the country’s credit rating
and further undermine investor confidence.
1972–1980 8.6 8.3 8.9
1981–1990 10.9 6.8 9.9
1991–2000 4.2 8.5 5.4
2001–2008 6.1 1.5 5.0

4. The circular debt

Other Govn't, Commercial,
6.10% 7.50%
In addition to insufficient installed capacity, Pakistan’s elec-
tricity shortages are closely interlinked with the growing circular
debt problem. The circular debt arises when an operating entity
Industrial,
facing problems with outstanding receivables holds back pay-
27.50%
ments to its suppliers and creditors. More specifically in Pakistan’s
power sector, it refers to the debt prevailing among the various
Domestic,
government departments, DISCOs, IPPs and the GENCOs under the
46.50%
control of PEPCO and KESC, domestic fuel suppliers, refineries and
Agricultural, international fuel suppliers.
11.60% Fig. 2 illustrates the profile of the energy sector in Pakistan. It is
Street Lights, easy to see how problems in the cash flow of a given operating entity
0.80% can cascade to other segments of the payment chain. For example
PEPCO – until recently the holding company of the GENCOs, NTDC
Fig. 1. Electricity consumption by sector, 2010–2011.
and CPPA – supplies power to and collects tariffs from the private
Source: HDIP (Hydrocarbon Development Institute of Pakistan) (2011).
sector, all government departments and KESC. PEPCO in turn has to
pay for the power it receives from the IPPs and the fuel it purchases
Pakistan has been facing severe electricity shortages.3 The present
from oil marketing and gas companies. However, it can face delays
acute crisis started in 2005–2006 and since then electricity
and even non-payment in its receivables—i.e., there are delays in
shortages increased and by 2010 they exceeded 5000 MW
tariff payments, especially from the various government depart-
(Table 2). Under current policies, the supply gap is projected to
ments.5 The government also delays providing the tariff differential
persist into the future. By some estimates, electricity shortages
subsidies to DISCOs to make up for the shortfall between the
will increase to 8000 MW by 2017 and rise to over 13,000 MW in
customer tariff and the cost recovery tariff. Thus, PEPCO is facing an
2020 (Shahbaz, 2011).
imbalance in its cash flows—inflows are uncertain and lag behind
The severe shortfall in electricity supply that the country is
outflows, most of which are contractual in nature. The buildup of
facing today is a direct result of the failure to forecast and plan for
receivables eventually leads PEPCO to delay or suspend payment to
the future, upgrade existing plants, and set up new generating
its suppliers. Consequently, the payment arrears facing PEPCO seep
stations in the face of rapidly rising demand. An example of
into the other segments of the supply chain: power generation
failure to design and implement an effective and coherent policy
companies (IPPs, GENCOs, WAPDA hydel), oil marketing companies,
response to the country’s growing electricity needs is provided by
gas distribution companies, refineries, and oil and gas exploration
the saga of the IPPs in the 1990s. As a result of the inadequate
companies. Thus, the main causes of circular debt are: failure of
capacity expansion during the 1980s and early 1990s, the govern-
distribution companies to collect dues from consumers and non-
ment decided to go for thermal generation through IPPs. It is
payment of dues by the public sector including provincial govern-
generally acknowledged that the IPPs made a significant con-
ments; subsequently, the distribution companies default on payment
tribution to the country’s energy balance, enhancing generating
to generation companies; power producers in turn are unable to pay
capacity by more than 5000 MW. Still, the terms under which the
for fuel purchased from oil companies; in turn, oil companies delay
IPPs were negotiated, and especially their tariff structures, raised
settling their dues to refineries. Ineffective contractual arrangements
concerns and became a matter of significant controversy. The
between PEPCO and KESC are also a major contributor to the inter-
protracted legal, political and economic battles that followed the
corporate debt problem (Ali and Badar, 2010).6
introduction of the IPPs were partly due to inexperience on both
In July 2010, independent experts put the figure of circular
sides of the fence and are suggestive of a move made in panic
debt at around Rs 420 billion. By September 2010 it was reported
rather than deliberate planning.4 The environment became highly
to have touched Rs 584 billion. In November 2011, the Special
politicized, eroding investor confidence and the perceived threat
Parliamentary Committee on Energy Crisis was informed and the
of political quasi-expropriation scared off foreign investment,
circular debt in the power sector had reached Rs 665 billion
especially in assets characterized by high degree of sunkeness
(Ahmad, 2010; Chaudhry, 2011).
The circular debt problem is closely related to PEPCO, the
3
It should be noted that according to some studies, Pakistan faced an sector’s core entity. As of May 2012, the company’s receivables
electricity demand–supply gap since 1980 (Alter and Syed, 2011).
4
In 1998 the Nawaz Sharif government accused the IPPs – particularly
5
HUBCO – of hoodwinking the former government of Benazir Bhutto into signing When private sector (domestic, commercial, or industrial) customers default
fraudulent and unaffordable agreements with WAPDA. Despite intensive investi- on their bill payments, they normally get disconnected. However, big defaulters
gations, no charges of corruption have been proven. However, the Supreme Court from the public sector are generally spared of such actions.
6
in their June 2000 ruling drew attention to the fact that prolonged negotiations on The electricity arrears of public sector commercial entities such as Pakistan
tariffs between WAPDA and HUBCO suddenly ended after the installation of a new Railways, Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM), and
government in 1993 and supplementary amendments were suddenly executed provincial and federal government departments are running into billions of
(Bayliss and Hall, 2000). rupees.
274 I.N. Kessides / Energy Policy 55 (2013) 271–285

Table 2 government to prescribe adequate rate increases, especially dur-

Historic demand and corresponding generation capacity (MW).
Source: USAID (United States Agency for International Development) (2010).
Fiscal year Computed peak demand Supply Surplus/shortfall
2001–2002 10,459 10,894 435
2002–2003 11,044 10,958  86
2003–2004 11,598 11,834 236
2004–2005 12,595 12,792 197
2005–2006 13,847 12,600  1247
2006–2007 15,838 13,292  2546
2007–2008 17,398 12,442  4956
2008–2009 17,852 13,637  4215
2009–2010 18,467 13,445  5022
amounted to Rs 360 billion—approximately Rs 40 billion from
federal ministries and Rs 90 billion from the provinces and other
federal institutions. PEPCO in turn has substantial arrears to IPPs,
oil and gas companies. Indeed, due to the swelling circular debt,
once well-performing state-owned entities such as the Pakistan
State Oil, Sui Northern Gas Pipelines Limited, and Sui Southern
Gas Company, are on the verge of financial collapse. Oil refiners in
particular have been hit hard. As a result, they have been forced to
operate at much lower capacities and are close to crossing their
borrowing limits from banks. Thus, the oil refineries are not in a
position to import crude oil for a long period. Default by these
companies could lead to shutdown of generation plants, thus
further exacerbating the country’s already severe power
shortages (Javaid, 2012).
Delays in the differential subsidy payments by government
have undermined considerably the financial condition of PEPCO
and its affiliated DISCOs, limiting their capacity to pay their own
liabilities for the purchase of electricity. Delays also curbed the
maintenance and expansion funding of the DISCOs, thus further
exacerbating existing problems related to high distribution losses,
continuity of supply, and low coverage. Because of significant
imbalances in their cash flows and their constrained ability to pay
for their fuel inputs, the IPPs have been running at less than their
generating capacity.
As its cash flow became increasingly strained, beginning in
2006, PEPCO sought bank financing supported by government
guarantees. Running finance requirements from a few power
companies increased because of the inter-corporate circular debt
problem. As a result, the overall exposure of the banking industry
to the power sector increased substantially.7 Furthermore, bank-
wide analysis indicates that the loans extended to the power
sector (both public and private) during FY09 were concentrated in
the top five banks (Fig. 3). These banks have almost reached their
exposure limits to the power sector and consequently are reluc-
tant to finance any new power projects. This is especially serious
because the top five banks have traditionally accounted for a very
large share of the credits extended to the power sector. Thus the
circular debt has become a major hurdle to potential power
investment (SBP (State Bank of Pakistan), 2011).
5. Revenue inadequacy
Inefficient and below-cost recovery tariff structures have been
one of the most important causes for the secular deterioration in
the performance of Pakistan’s electricity sector. The failure of
7
To put this in perspective, at the end-December 2009, the banks’ out-
standing credit to PEPCO, IPPs and Shell (oil marketing company) stood at just
over Rs 485 billion while their outstanding credit to the textile sector – the largest
industrial sector of the country – was Rs 535 billion (Ali and Badar, 2010).
ing periods when the price of primary energy inputs (oil and
natural gas) increased dramatically, subjected the sector’s oper-
ating entities to considerable financial distress and substantially
impaired their ability to maintain and expand service.
NEPRA determines tariffs for the three segments of the market
– generation, transmission and distribution – on a cost-plus basis.
However, there is a fundamental difference in the way tariff
determinations are implemented for generation companies and
final consumers. Tariffs for generation companies are governed by
long-term (25 to 30 years) power purchase agreements (PPAs),
which include specific provisions for adjustments due to rising
fuel costs, inflation, exchange rate changes, etc. Thus, once NEPRA
validates the cost claims of the power suppliers, the tariff
revisions are automatically reflected in the power purchase
prices. In the case of final consumers, on the other hand, NEPRA’s
tariff determinations become legally binding only after being
notified by government. This enhances significantly the scope
for political intrusion in the process of tariff determination.
The government effectively froze end-consumer tariffs from
November 2003 to February 2007.8 No tariff adjustments were
allowed by NEPRA despite requests from the DISCOs. During the
same period, the price of imported furnace fuel, accounting for
approximately one third of the fuel mix in power generation,
increased by over 75 percent. And the price of natural gas
increased by 78 percent. Thus the cost of electricity generation
increased. In turn, the tariffs for power suppliers (IPPs and
GENCOs), whose adjustment required no government approval,
also increased. Consequently, the notified end-user tariffs were
not able to cover these higher costs. After February 2007, NEPRA
allowed some upward revision in tariffs in response to the
increase in the power purchase price. However, the notified tariffs
remained below those determined by NEPRA, reflecting the
government’s unwillingness to pass the tariff increases to end-
users (Fig. 4).
The government provides a Tariff Differential Subsidy (TDS) to
DISCOs to cover the gap between the notified tariff and the cost of
service tariff as determined by NEPRA. In FY2009–2010 alone, the
cost of electricity subsidies was estimated to be around Rs 226.6
billion, despite the fact that tariffs were raised by approximately
34 percent during the same year. Thus the TDS imposes a very
heavy burden on the budget and is clearly unsustainable. Still, the
government’s subsidies have not been sufficient to fill the gap
between the cost of electricity and the notified tariff. As Fig. 5
indicates, the wedge between end-user tariffs and unit costs has
been rising consistently, especially after 2007 (ADB (Asian
Development Bank), 2010)
The government’s decision to approve lower tariffs than those
determined by NEPRA perhaps was due to socio-political con-
siderations and legitimate affordability concerns. Moreover, the
fact that the government did not pay the TDS to the DISCOs on
time or in full perhaps reflected genuine fiscal constraints.
However, no matter how well-intentioned or understandable
the policy, it had devastating impacts on the balance sheets of
the operating entities and caused serious financial instability in
the power sector. PEPCO’s receivables increased substantially
from 2006 onwards. As a result of its deteriorating financial
condition, beginning in 2006, PEPCO started delaying its pay-
ments to its suppliers—especially the IPPs, but also the oil and gas
supply companies. Thus, PEPCO’s cash flow problems spilled over
and contaminated the other segments of power supply chain. This
is the point at which the circular debt problem emerged.
8
Electricity prices increased, on average, 12 percent per annum during
1993–2003 (Siddiqui, 2004).
 I.N. Kessides / Energy Policy 55 (2013) 271–285 275

Oil refineries:
Exploration companies
Bossicar/NRL/ARL/ POL imports
OGDCL/PPL
PRL/PARCO etc.

Payment
Energy
Gas companies: OMCs: POL consumers:
SNGPL/SSGPL Shell, PSO, Individuals, industries
Caltex, APL, etc.

Pepco
KESC:

Fuel subsidy
Vertically integrated IPPs: WAPDA
HUBCO/KAPCO etc. Gencos
company involved in Hydel
generation and distribution

NTDC/CPPA
(under PEPCO)
Supplying power

Power distributors GoP notifies end-users

(under PEPCO): prices and provides
LESCO/HESCO/TESCO subsidy when these
MEPCO/FESCO/PESCO charges are not
QESCO/GEPC adjusted as required

Power consumers:
Individual HH, industrial
consumers, government
(federal/provincial/local), Power subsidy
FATA

Fig. 2. Key players in the energy sector.

Source: Ali and Badar (2010).

Tariff inadequacy, coupled with persistent operational ineffi- 400

ciencies, has caused considerable financial distress in Pakistan’s
electricity system. It has resulted in the sector’s weak self-
financing, debt service and liquidity capabilities. Thus it has
substantially impaired the sector’s ability to undertake the
needed investment in capacity expansion and modernization,
and to maintain service. In view of the key role that revenue
inadequacy has played in the deterioration of the sector’s perfor-
mance and the circular debt problem, any policy to address the
root causes of the sector’s problems and prevent their cata-
strophic consequences, will have to include significant tariff
rebalancing. In addition to the level of prices there are significant
policy issues related to the structure of electricity prices and
potential cross-subsidization from industrial and commercial to
agricultural and domestic consumers. According to Figs. 6 and 7,
current residential tariffs in Pakistan are the lowest among Asian
oil-importing countries, while the industrial tariffs are some-
where in the middle of the range.9
Electricity service is regarded as ‘‘essential’’ both to the public
and to the effective functioning of the economy. Like other infra-
structural services, it tends to be extremely price and income
inelastic. Thus, its pricing has important distributional implications.
Raising the price of electricity appears like a lump-sum tax bearing
heavily on the poor, elderly, and those with large families. Not
surprisingly, the movement towards cost-reflective electricity tar-
iffs frequently encounters strong political obstacles. However, the
tariff differential subsidy has imposed a very heavy fiscal burden on
Pakistan’s economy. Therefore, it is important to ascertain whether
it can be justified on social equity grounds.
350 All banks
Excluding top five
300
250
200
150
100
50
0
Jan-08 Jan-09
Fig. 3. Top five banks’ loans in the power sector.
Source: ADB (Asian Development Bank) (2010).
Casual empiricism suggests that, as in many other countries,
electricity subsidies in Pakistan are very poorly targeted. One of the
frequent limitations of subsidy schemes is that they suffer from
leakage to untargeted groups. In Pakistan, poor people and other
vulnerable groups capture only a small share of the subsidy. As Fig. 8
illustrates less than .5 percent of the TDS is allocated to customers
who consume less than 50 kW h per month, and less than 10 percent
to those consuming up to 100 kW h per month. Thus, poor rural
customers who can experience loadshedding for up to 20 h a day, and
low-income lifeline customers, capture a tiny portion of the subsidy.
And those without access to electricity services – most of them the
rural poor – clearly receive no subsidy at all. On the other hand, more
than 60 percent of the subsidy is allocated to customers whose
consumption exceeds 100 kW h per month.

9
6. Availability and efficiency of existing power plants
These figures represent the fiscal year 2009–2010. During 2010–2011, the
average residential and industrial tariffs in Pakistan were PKR 9.84/kW h and PKR
8/kW h, respectively (NEPRA (National Electric Power Regulatory Authority), Revenue inadequacy and the lack of timely capacity additions
2011a, 2011b). to meet the growth in demand for electricity had profound
276 I.N. Kessides / Energy Policy 55 (2013) 271–285

12 50%
Determined by NEPRA 45.13%
Approved by GOP 45%
10
40%
8 35%
30%
6
25%
4 20%

2 15%
9.45% 9.45%
10%
5.53%
0
5%
Nov-03 Feb-07 Mar-08 Sep-08 Feb-09 Oct-09 Dec-09 Jan-10 0.42%
0%
Fig. 4. Electricity tariffs for consumers. Up to 50 units 1–100 units 101–300 units 301–700 units Above 700 units
Source: Ali and Badar (2010). per month

Fig. 8. Allocation of TDS to residential customers.

9 Source: ADB (Asian Development Bank) (2010).
Average consumer end-tariff PKR/kWh
8
Cost in PKR/kWh
7 Designed Thermal Efficiency (%)
45
De-rated Thermal Efficiency (%) 40.10
6 40 37.58
5 35 32.03 33.28 32.29
29.23 27.85
4 30
24.40
25 21.54
3
20
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 15.64
15
Fig. 5. Gap between cost of service and retail price. 10
Source: PEPCO data. 5
0
(PKR/kWh) Unit 1 (TPS Units 2–4 Units 1–2 Units 3–6 Units 3–7
Jamshoro) (TPS Jamshoro) (GTPS Kotri) (GTPS Kotri) (GTPS Kotri)
Philippines 16.32
Fig. 9. Designed vs. de-rated thermal efficiency GENCO—I.
Japan 15.05
Source: NEPRA (National Electric Power Regulatory Authority) (2010).
Singapore 12.85
Sri Lanka 11.81
implications for the operating performance of Pakistan’s power
Hong Kong 10.33
plants. Both the efficiency and availability of those plants have
Korea 9.94 reached alarmingly low levels. The inability of the utilities to
India 9.16 operate their generation plants due to the liquidity crunch has
Malaysia 7.46 been the primary reason for the non-utilization of all available
Thailand 7.39 capacity—there has been a shortage of natural gas and govern-
ment has been unable to finance the purchase of furnace oil.
Nepal 7.29
These developments are a direct consequence of the circular debt
Bangladesh 6.62 problem and the huge pressures it has been generating on the
Pakistan 5.62 total supply management of the power sector. At the one end of
the supply chain, oil marketing and gas supply companies are not
0 5 10 15 20
receiving timely payments for their deliveries. At the other end,
Fig. 6. Residential tariffs. IPPs are not being paid for the electricity supplied to the national
Source: ADB (Asian Development Bank) (2010). grid. Thus the circular debt has made it very difficult for fuel
suppliers to deliver fuel on credit. The generating companies, in
(PKR/kWh) turn, have no other option but to curtail their outputs. Thus the
Philippines 13.89 net effect of the circular debt has been a significant decline in the
effective utilization of available generation capacity in the system.
Singapore 9.51
On July 1, 2011 total installed capacity stood at 23,412 MW, whereas
Japan 9.32 the available capacity was 19,669 MW. During 2010–2011, capacity
Thailand 8.93 utilization was approximately 59 percent (NEPRA (National Electric
Vietnam 7.40 Power Regulatory Authority), 2011a, 2011b).
The chronic shortfall in electricity revenues has also severely
Hong Kong 7.36
undermined the ability of operating entities to modernize, main-
Pakistan 7.12 tain and rehabilitate existing power installations. Most PEPCO
China 5.96 plants have been substantially de-rated because of low budget
allocations for operation and maintenance. In the face of significant
Malaysia 5.58
loadshedding, there have been understandable pressures to minimize
Korea 5.38 plant shutdowns for routine maintenance and inspection activities.
Indonesia 4.20 This failure to adhere to recommended operations and maintenance
practices has further exacerbated the operational performance pro-
0 5 10 15
blems of existing power plants.
Fig. 7. Industrial tariffs. On installation, generation plants have rated (design) thermal
Source: ADB (Asian Development Bank) (2010). efficiencies which thereafter can only be maintained through
 I.N. Kessides / Energy Policy 55 (2013) 271–285
Picture 1
stringent maintenance and rehabilitation processes. In case of
negligence in the level and timing of their maintenance, plant
thermal efficiencies de-rate at a much faster rate. According to
Fig. 9, in Pakistan, the efficiencies of power plants, specifically in
the public sector, have been substantially reduced below their
design values. This creates the need for greater amount of fuel to
generate the same amount of power.
7. Transmission and distribution losses
The safe and reliable transmission and distribution of electri-
city remains a major problem in Pakistan. In addition to the ever
widening gap between demand and supply, the country’s elec-
tricity system has been marred by inefficient administration, poor
maintenance, and a dilapidated transmission network. Due to
weak grid infrastructure and significant theft of electricity,
technical and commercial losses from the transmission and
distribution network are substantial. In 2009–2010, official esti-
mates put transmission and distribution (T&D) losses at around
22 percent, which are extremely high in comparison to other
Asian countries—in Korea T&D losses are 3.6 percent, in China
8 percent, and in the OECD countries below 7 percent (Malik,
2012).
In recent years the nature of load has changed drastically. House-
hold and agricultural demand has experienced very robust growth
and it now accounts for almost 60 percent of electricity consumed.
This led to a dramatic increase in the use of electrical machinery (i.e.,
mercury lamps, transformers, motors, and switchgears) that are
running inherently at low power factor. When a large number of
dispersed residential customers and villages using low quality equip-
ment (e.g., tubewells made from sub-standard materials) are supplied
with power, technical losses are high due to the length of lines and
the low power factor of the equipment used. Moreover, while projects
in generation and transmission segments of the industry have
benefitted from technical assistance and funding from international
lending agencies, for many years distribution was neglected. Thus, the
development of the distribution network has been somewhat hap-
hazard and lines have been extended, especially in rural and tubewell
electrification, without any careful technical design criteria to mini-
mize losses. Due to political pressures, 11 kV lines have been
hurriedly extended over long distances to feed loads over large areas.
Many of the 11 kV feeder lines are more than 150 km long. This
results in high resistance losses. In many areas, the 11 kV line losses
account for the bulk of total distribution losses. Moreover high
distribution losses are caused by inadequate conductor sizes and
undersized transformers in urban areas which have been experien-
cing very rapid growth in demand. Oversized transformers in rural
areas, on the other hand, add to technical losses. Not surprisingly,
distribution losses make a major contribution to system losses and
277
account for about 70 percent of the total (Qureshi and Mahmood,
2009; Beg, 1986).
The poor physical condition of the transmission and distribution
network is not the only or most important cause for the high T&D
losses. Although the precise percentage breakdown of technical and
non-technical losses in distribution is a matter of controversy, there is
ample evidence of rampant electricity theft. For example, there is a
strong variance in system losses across the different provinces, which
cannot be explained by differences in the characteristics of their
networks alone. Line losses in Punjab are much lower than those in
Sindh—in 2008–2009 these losses were 13.1 percent in Punjab and
34.7 percent in Sindh. Moreover, there has been a substantial increase
in the losses reported in the North-West Frontier Province (NWFP)—
they increased from 13.2 percent in 2006–2007 to 35.3 percent in
2008–2009. If the condition of the transmission and distribution
system was the main cause, it is unlikely that the losses in NWFP
would have increased at that rate. Clearly, there are significant non-
technical losses (Mushtaq, 2010).
Non-technical losses of WAPDA’s distribution system are extre-
mely high. It is estimated that they account for over 33 percent of the
total distribution system losses. Theft and pilferage are very extensive
and are partly due to the lack of a rational pricing policy characterized
by orderly price adjustments. Instead, in Pakistan, periods with very
little or no adjustment in the level of tariffs have been followed by
upward revisions that have been instituted extremely rapidly. These
caused large and unnecessary adjustment costs to consumers and
firms alike and have increased the temptation to steal electricity.
However, the widespread theft of electricity also has an important
cultural dimension—nonpayment of government dues has little
stigma attached to it. In Baluchistan and the tribal areas of NWFP,
the people are not convinced that stealing electricity is as immoral or
illegal as any other form of theft and therefore that they need to pay
for electricity services (Qureshi and Mahmood, 2009).
Electricity theft has become a prevalent practice in many parts
of the country. Surveys conducted during fiscal years 2009 and
2010 indicate that stealing of electricity was endemic in the
provinces of Khyber Pakhtunkhwa, Balochistan, Sindh, and to a
lesser extent Punjab. From March 2007 to March 2009, a total of
165,963 cases of pilferage were registered in Punjab alone. In
2009, KESC stated that thieves were costing it Rs 1 billion a
month.10 Moreover, the act of electricity theft is not particular to
the less advantaged. The actors in the theft game also include:
agricultural and industrial units – accounting for the biggest
losses; middle, upper middle, and upper class households –
accounting for a big portion of the losses; and various local
organizations (Picture 1). Even private schools have been caught
10
Daily Times, February 25, 2010; BBC News, July 13, 2009 (http://news.bbc.
co.uk/2/hi/south_asia/8148328.stm); The DAWN Media Group, August 28, 2009.
278 I.N. Kessides / Energy Policy 55 (2013) 271–285

Installed Generation Capacity in the Country Installed Generation Capacity in the Country
for the year 1985 (MW) for the year 2011 (MW)
137 787
(2.44%) 2897 (3.36%)
(51.60%) 6555
2580 (28.00%)
(45.96%)

16070
(68.64%)
Nuclear Hydel Thermal Nuclear Hydel Thermal

Fig. 10. Shift from hydro to thermal generation. Source:

NEPRA (National Electric Power Regulatory Authority) (2011a, 2011b) and earlier years).

stealing electricity. In 2009, the National Assembly was informed 8000

that several politicians, bureaucrats, industrialists, and sensitive
organizations were stealing electricity in Karachi (Cheema, 2010).
8. Shift from cheap hydro to expensive oil-fired generation
After the construction of the Mangla and Tarbela reservoir-
based generation stations, with the exception of Ghazi Barotha
(a peaking plant) no major hydropower project was undertaken.
And this despite the fact that: (i) a very small portion (around 16
percent) of the country’s substantial hydro potential of over
41 GW has been exploited; and (ii) hydro is one of the cheapest
options for power generation in Pakistan. In recent years, most of
the generating capacity additions consisted of thermal plants.
Thus there has been a marked shift from hydropower to thermal
generation. In terms of installed capacity, between 1985 and 2011
the share of hydro declined from 52 percent to 28 percent while
during the same period the share of thermal increased from 46
percent to 69 percent (Fig. 10; NEPRA (National Electric Power
Regulatory Authority), 2011a, 2011b).
The adverse economic consequences of shifting from cheap
hydropower to more expensive thermal generation were com-
pounded by the rapid depletion of the country’s natural gas
reserves. Natural gas has been a key primary energy and power
source in Pakistan. Against all forecasts the gas reserves have
been depleting rapidly. By 2011, 49 percent of the original
recoverable reserves [54 trillion cubic feet (TcF)] had been
exhausted. The country now has sufficient reserves to last just
over 20 years—assuming that the current production rates are
maintained. There are also 35 Tcf of additional reserves in tight/
difficult gas.11 However, due to the lack of a coherent develop-
ment strategy and a facilitating policy framework, gas production
is projected to rapidly decline in the medium term (2014–
2015).12 Gas production is facing an even bigger decline in the
long-term (2019–2020). Gas demand, on the other hand, will
continue to increase during the same period. Thus, there will be a
growing gap between gas demand and supply (Fig. 11). Under a
business-as-usual scenario, Pakistan’s gas shortage is likely to get
much worse in the next two decades and could ultimately cripple
11
This is gas whose surrounding sandstone, shale, or other sedimentary rock
is very dense rather than porous or permeable as with conventional gas. The lack
of permeability locks the gas underground and makes it more difficult and costly
to drill.
12
The gas pricing system has caused significant distortions in demand and
supply.
7000
6000
5000
4000
3000
Gross Demand
2000
Domestic Production
1000
0
2008–09 2009–10 2010–11 2011–12 2013–14 2014–15 2019–20
Fig. 11. The increasing gap between gas production and demand under a do-
nothing scenario (in million cubic feet per day).
Source: ADB (Asian Development Bank) (2010).
the economy (SBP (State Bank of Pakistan), 2011; ADB (Asian
Development Bank), 2010).13
Due to limitations in natural gas supply growth and the rapid
depletion of natural gas reserves, within thermal generation there
has been increased reliance on more expensive furnace oil. During the
fiscal year 2005–2006, the respective shares of thermal electricity
generated using furnace oil and natural gas were 31.2 percent and
68.6 percent; during 2010-2011, the corresponding shares were 55.1
percent for oil and 44.7 percent for natural gas (NEPRA (National
Electric Power Regulatory Authority), 2011a, 2011b).
The increased reliance on furnace oil for electricity generation
has rendered power tariffs in Pakistan vulnerable to spikes in oil
prices. Unfortunately, the shift from gas to furnace oil was
concurrent with the sharp escalation in the international price
of oil. Basically it occurred at a time when the price of oil and
furnace oil more than doubled (Fig. 12a and b). This had profound
negative implications for the cost structure of electricity genera-
tion in Pakistan.
9. The economic impacts of loadshedding
In recent years there has been a significant increase in the
frequency and intensity of power outages generally in Pakistan
and in the industrial sector in particular. A manifestation of this
problem can be seen in the large number of reports in the popular
press highlighting the incidence of outages.
During 2010–2011, the problem was aggravated to such an
extent that it led to protests and riots in several cities across the
13
The country experienced some of the worst gas shortages in its history in
2011. Supply to the industrial, compressed natural gas, and power sectors, was
significantly curtailed [Daily Times, December 28, 2011 (http://dailytimes.com.pk/
default.asp?page=2011%5C12%5C28%5Cstory_28-12-2011_pg5_10)].
 I.N. Kessides / Energy Policy 55 (2013) 271–285 279

1200
80%

Gas FO

77%

75%
1000 70%

68%
60%
Gas HSFO
800

57%

55%
50%

52%
51%
47%

46%
600

44%
40%

43%
30%

32%
400

24%
20%

21%
200
10%

0 0%
01–02 02–03 03–04 04–05 05–06 06–07 07–08 08–09 09–10 03–04 04–05 05–06 06–07 07–08 08–09 09–10*
Jul-Dec

Fig. 12. (a) Price of gas and furnace oil delivered to the power sector. (b) Shift in fuelmix (proportion of thermal generation).
Source: Saeed (2011).

country.14 There have been persistent complaints by various Table 3

chambers of commerce and other industrial associations that
the outages have forced a significant reduction in the level of
output across a large number of industries. The normal rhythm of
production cycle has been especially disrupted in electricity-
intensive sectors like textiles, basic metals, rubber and plastic,
paper, and leather products.15 Loadshedding is causing significant
dislocation of economic activity in the industrial sector.
The costs of loadshedding consist of two components: (i) direct
costs which include the net value of production permanently lost,
spoilage costs, process restart costs, damage to machinery, etc.; and
(ii) indirect costs arising from the adjustments made by firms in their
operations to recover at least part of the output lost during and
immediately after outages. Firms can make multiple types of adjust-
ments in response to outages depending on their time of occurrence
and duration, warning time, frequency, and coverage. Typically such
adjustments may include: acquisition of self-generation capacity,
more intensive utilization of existing capacity (machinery and other
assets), overtime work, working additional shifts, and changing shift
timings. There are also indirect costs that do not fall upon the sector
impacted by the outages but on the rest of the economy. These may
include: (a) consumer surplus losses—welfare losses incurred by
consumers of various industries due to the contraction in the level
of these industries’ production induced by the power outages;
(b) multiplier and ripple effects of the outages in a given sector—
contraction in the level of activity in other sectors of the economy
14
Consumers have been facing extensive scheduled and unscheduled load-
shedding across most of the country’s jurisdictions. The distribution companies
have been complaining that PEPCO has kept them in the dark regarding the
shortfall faced by the national grid and has not been providing them with proper
loadshedding and management plans. There have also been persistent complaints
about discriminatory loadshedding especially from officials of the Punjab pro-
vince. In July 2012, the Chief Justice of the Lahore High Court (LHC) observed that
discrimination was being meted out to Punjab by the federal government and
directed the federal government and PEPCO to carry out equitable loadshedding
across the country. LHC further ordered PEPCO to submit its loadshedding
schedule to the court. Due to mounting public pressure, the federal cabinet
decided that loadshedding would be conducted on an equal basis across the
country (http://dawn.com/2012/07/31/lhc-orders-equitable-outages/ and http://
www.samaa.tv/newsdetail.aspx?ID=51873&CID=1).
15
In April 2012, the federal government instructed PEPCO to exempt the
textile industry – both prime users and those having self-generation – from
loadshedding (http://paktribune.com/business/news/Textile-industry-exempted-
from-load-shedding-PEPCO-9734.html).
Types of adjustments to loadshedding.
Source: IPP (Institute of Public Policy) (2009).
% Of Extent of recovery
sample (%)
Self-generation of electricity 75 85
Working overtime 18 30
Working additional shifts 15 33
More intensive utilization of machinery 10 28
Changing shift timings 6 30
Changing working days 5 6
Firms making some adjustment to 84 60
loadshedding
because of the fall in demand caused by the decline in income
generated in the former sector (Pasha et al., 1989).
Given the long history of outages, most firms in Pakistan have
incorporated into their production planning the expectation that
power outages will persist in the long run. As a consequence of
those strong expectations about future outages, firms tend to
undertake mitigation options that are either not feasible or econom-
ically justified when outages are a temporary phenomenon. Installa-
tion of stand-by self-generation facilities is the best example of such
a mitigative response that is being increasingly observed in
Pakistan—especially by industrial units that are facing large time
losses due to outages.16 The extent to which a given firm substitutes
conventional power with self-generation will clearly depend upon
the energy-intensity of the firm’s operations, the terms and condi-
tions governing its access to capital, the availability of alternative
less-costly adjustments, and its ability to pass on the higher energy
costs to final consumers in the form of higher prices. In a survey
conducted during 2008 on a stratified (by city and industry group)
16
In response to inefficiencies (especially the unreliability) in public elec-
tricity supply, industrial firms typically adopt four strategies: self-sufficiency—the
firm provides its own electricity to the point where it no longer needs the supply
from the public utility; standby private provision—the firm switches to its own
generators only when the reliability of public supply falls below a certain
minimum level; public source as standby—the firm relies on its own generating
facilities but switches to the public supply during those times of the day when the
public utility is highly reliable; captivity—the firm relies entirely on the public
utility despite the low reliability of service (Anwar, 1999).
280 I.N. Kessides / Energy Policy 55 (2013) 271–285
sample of 65 industrial units, 75 percent of the sample units
indicated that they invested in self-generation capacity (Table 3).
More intensive utilization of machinery and other assets to
compensate for output lost during outages generally leads to
higher repair and maintenance costs. Also, because of the fixity of
contractual arrangements with labor, overtime work, additional
shifts and major changes in shift timings or working days are
likely to result in additional labor costs. According to Table 3: 10
percent of the firms tried to recover some of the lost output
through more intensive operation of their machinery; 18 percent
by working overtime; 15 percent have worked additional shifts;
6 percent changed shift timing; and 5 percent changed working
days. Although the figures for these mitigative options are low by
comparison to self-generation, they still indicate a definite cost of
adjustment in response to outages.
The estimates from Table 3 indicate that 84 percent of the firms
sampled made an effort through various adjustments in their
operations to recover part of their lost output lost. For the sample
as a whole, the extent of recovery was 60 percent—although such a
recovery was achieved at a higher cost. In 2008, for example, the
average DISCO tariff was Rs 7.94 per kW h. The average cost of self-
generation, on the other hand, was Rs 19.85 per kW h, implying
that self-generation costs an extra Rs 11.91 per kW h (Sheikh,
2008). Therefore, the extra cost to the industrial sector due to self-
generation was estimated at Rs 32 billion. The firms that acquired
self-generation managed to recover 85 percent of the lost output.
The cost of the remaining 15 percent which was permanently lost
by the same firms was estimated at Rs 42 billion. Thus, for firms
that acquired self-generation the total cost of loadshedding in 2008
was approximately Rs 74 billion.
Firms that utilized mitigative mechanisms other than self-
generation recovered on average approximately 29 percent of their
lost output. In 2008, the estimated costs (overtime/shift/changing
working days premia to labor, additional wear and tear of machin-
ery due to more intensive utilization, etc) of these mechanisms were
estimated at Rs 6 billion. For these firms the cost of permanently lost
output was estimated at Rs 77 billion. Thus, the total cost of
loadshedding to firms that did not engage in self-generation was
approximately Rs 83 billion. Over all, in 2008, the cost of loadshed-
ding to the industrial sector was estimated at Rs 157 billion or
9 percent of the total industrial value-added. This reduction in
value-added led to a likely loss of industrial employment of around
300,000 workers (IPP (Institute of Public Policy), 2010).
A proper valuation of the costs of power outages must also
take into account the secondary or multiplier effects of the
decline in industrial value that is caused by these outages—i.e.,
the secondary or multiplier effects in other sectors of the
economy like wholesale and retail trade, transport and commu-
nications, banking and insurance, etc. In 2008, these indirect costs
were estimated to be around Rs 53 billion. Thus the total cost
to the economy due to loadshedding in the industrial sector
was approximately Rs 210 billion or around 2 percent of GDP,
approximately $ 1 billion in lost exports, and potential displace-
ment of around 400,000 workers. The year 2009 witnessed a
significant increase in the frequency and intensity of loadshed-
ding, especially in the industrial sector—the incidence of outages
increased in 2009 as compared to 2008 by around 30 percent.
Given the upsurge of power outages, the damage to the economy
in terms of adjustment costs, and foregone output and GDP, was
higher in 2009. Overall the cost to the industrial sector (extra
costs due to self-generation, adjustment costs, and the cost of
output permanently lost) climbed from Rs 157 billion in 2008 to
Rs 230 billion in 2009. Similarly, the spillover costs of industrial
loadshedding to the rest of the economy rose from Rs 53 billion to
Rs 95 billion. Thus the total cost of industrial loadshedding to the
rest of the economy rose from Rs 210 billion (2 percent of GDP) in
Table 4
National costs of loadshedding.
Source: IPP (Institute of Public Policy) (2009, 2010).
2008 2009
Cost to the industrial sector Rs 157 Rs 230
billion billion
Cost to the other sectors of industrial loss of value- Rs 53 Rs 95
added billion billion
Total cost of industrial loadshedding to the Rs 210 Rs 325
economy billion billion
Cost as % of GDP 2 2.5
Loss of employment in the economy 400,000 535,000
Loss of exports $ 1 billion $1.3 billion
2008 to Rs 325 billion (2.5 percent of GDP) in 2009. Moreover, in
2009, loadshedding caused a loss of $ 1.3 billion in export earnings
and led to the potential displacement of 535,000 workers (Table 4).
10. Key policy issues and options
We summarize below the problems confronting Pakistan’s
electricity sector and the key elements of a potential policy
response to address the country’s severe power crisis.
10.1. Inefficient generation mix
In recent years, the generation mix has deteriorated substan-
tially with serious adverse consequences for the country’s energy
and economic security. Today, Pakistan’s electricity mix is very
heavily skewed in favor of thermal generation—mostly oil- and
gas-fired with a tiny contribution from coal-fired plants. Even
more problematic is the country’s heavy dependence on oil-fired
generation—at present almost 35 percent of total electricity
generated compared to a global average of just 5 percent. Not
surprisingly, the steep increase in furnace oil prices in the
international market has played havoc with Pakistan’s power
sector. In the face of escalating oil prices, rapidly depleting
domestic gas reserves, and inadequate liquefied natural gas
(LNG) terminal infrastructure, continued heavy reliance on fuel
oil and natural gas could further undermine the country’s energy
and economic security. There is an urgent need to rationalize the
country’s generation mix in order to reduce its vulnerability to
the oil price shockss in the global energy market (Malik, 2010).
Pakistan is blessed with an abundance of renewable energy
resources—including hydropower, solar, wind, geothermal, and
biomass. Renewable technologies could offer tremendous benefits
for meeting the country’s energy needs. They would reduce costly
fuel imports and their attendant foreign trade impacts; diversify
Pakistan’s energy mix, an important consideration in the face of
significant technological, market, and climate disruption risks and
uncertainties; and match well to a variety of grid, off-grid, remote,
and distributed applications, thus offering the least-cost option
for the electrification of the country’s large number of remote
villages without the need for costly grid expansion; and create
local job and income opportunities.
However, with the exception of a few large hydroelectric projects,
the bulk of the country’s renewable energy potential has not been
adequately explored and developed. Pakistan has a substantial hydro
potential of over 41 GW. To date only 6.5 GW or around 16 percent of
that potential has been developed.17 While the benefits of utilizing
17
For an insightful analysis of the costs and benefit of large dams see Ansar
et al. (2012).
 I.N. Kessides / Energy Policy 55 (2013) 271–285
World
World powergeneration fuel mix 2009–10
Others,
3.30%
Nuclear,
Coal, 40.50% 13.50%
Others
Nuclear
Hydro
Hydro,
Gas
16.20%
Oil
Coal
Oil, 5.10% Gas, 21.40%
Fig. 13. A comparison of fuel mix in electricity generation.
Sources: IEA (International Energy Agency) (2011), NEPRA (National Electric Power Regulatory Authority) (2011a, 2011b).
the country’s renewable resources have been long recognized and
figured prominently in most of the energy policy and plan documents
since the early 1980s, little concrete and substantive action has been
taken for their effective utilization. Indeed, the government’s pro-
nouncements on sourcing a significant portion of electricity genera-
tion from renewables have been interpreted by skeptics as more
symbolic rather than representing a strong and committed policy
push (Mirza et al., 2009).
Pakistan has the world’s fifth largest coal reserves—around
185 billion tonnes. Yet, coal-fired plants accounted for just
0.2 percent of the country’s electricity generated as contrasted
to a global average of 41 percent (Fig. 13). Two units of the Lakhra
power plant – the only coal-fired power plant in Pakistan – have
been out of order since 2006 due to a leasing dispute.
It will be exceedingly difficult, if not outright impossible, to
resolve the power crisis in Pakistan without a more aggressive
rebalancing of the country’s energy mix and greater deployment of
its immense coal resources. Indeed, coal might ultimately present
itself as one of the key solutions to Pakistan’s current power crisis
(Malik, 2010). However, there are strong international pressures for
curtailing carbon dioxide emissions from coal-fired electricity gen-
eration. Pakistan faces serious fiscal limits on its ability to finance
generation through costlier lower-carbon alternatives. Given the
enormous damage that the country’s economy has already suffered
because of extensive loadshedding, the need to balance reductions in
carbon emissions against developmental needs is very relevant.
The resolution of Pakistan’s power crisis is likely to require an
aggressive rebalancing of the country’s energy mix and greater
deployment of its substantial hydropower and immense coal
resources.
In the face of escalating imported fuel oil prices and falling
supplies of indigenous natural gas, in October 2012, the govern-
ment announced that it plans to convert its oil- and gas-fired power
stations to coal-fired plants. Initially, the Jamshoro and Guddu
stations (with de-rated capacities of 675 MW and 580 MW, respec-
tively) will be converted. The Muzaffargarh, Multan, and Faisalabad
plants (with respective capacities of 1130 MW, 120 MW, and
100 MW) will be taken up in the second phase (Siddiqui, 2012).
10.2. Lack of an effective and credible regulatory regime has
undermined incentives for private investment
A major factor for the slow progress in addressing the
performance problems of the power sector is the ineffectiveness
of its governance structure and the low credibility of its
281
Pakistan
Pakistan power generation fuel mix 2009–10
Others, Nuclear,
0.30% 3.20%
Gas, 25.40%
Hydro,
32.30%
Coal, 0.20%
Oil, 38.20%
regulatory regime. The sector’s policy and regulatory framework
are designed, at least in principle, to encourage private invest-
ment and participation. However, the inefficiency of implementa-
tion exhibited by NEPRA – e.g., long lead times and delays in tariff
agreements – and its tendency for regulatory micromanagement,
as well as the government’s continuing interference in the
regulatory process, have undercut investor confidence (Malik,
2007). Moreover, the experience with the IPPs during the 1990s
has entrenched in the minds of private investors strong fears of
political quasi-expropriation. Thus, despite the very attractive
terms and conditions of the 2002 Policy, very little foreign
investment has flowed into the power sector.
Resolving Pakistan’s power crisis and reducing the severe
shortfall between supply and demand will require substantial
new investment, especially in generation but also in transmission
and distribution. The government’s ‘‘Vision 2020 Program’’ envi-
sages adding around 20 GW of capacity into the system by 2020
at an estimated cost of around US$ 32 billion—an average annual
investment requirement of US$ 3.2 billion (IGI Securities, 2010).
Given that the government’s fiscal space is very limited, a
significant portion of the requisite investment will need to be
raised by the private sector. 18 However, continuing perceptions
of high country and sector risk are major stumbling block to
private investment. Owners of private capital will be unwilling to
invest in sunk electricity assets in Pakistan unless there is a
convincing commitment that the government will not explicitly or
implicitly expropriate the resulting private value. Foreign investors
in particular that are vulnerable to administrative intervention will
make disproportionately low investments in electricity activities
characterized by large sunk costs and will demand high risk premia.
Thus, there is an urgent need for a mechanism that provides
appropriate limits on the discretionary exercise of government’s
regulatory powers.
To adequately address the huge shortage of power capacity
and improve the supply-side of the electricity market will require
substantially enhancing the effectiveness of the sector’s regula-
tory regime. This regime must include an institutional mechanism
that imposes substantive and procedural restraints on arbitrary
18
The 20 GW capacity additions envisaged by the Vision 2020 Program
include: 6 GW of hydro; 6 GW of coal; 5 GW of gas; 1 GW of naphtha; and
2 GW from alternative energy resources. The government foresees a 55–45%
public–private financing mix (ESMAP (Energy Sector Management Assistance
Program), 2010).
282 I.N. Kessides / Energy Policy 55 (2013) 271–285

administrative intervention and credibly commits against politi- 10.4. Inefficient, below-cost tariff structures have been one of the
cal quasi-expropriation of private investor value. most important causes for the deterioration over time in the
performance of Pakistan’s power sector

Tariff policy is one of the most controversial issues in most

10.3. Pakistan’s extensive loadshedding highlights the need for
countries’ power sectors. Nevertheless, the failure of past govern-
electricity governance reform
ments in Pakistan to realign prices with underlying costs and
prescribe adequate rate increases, especially during periods when
The shortfall in electricity supply (Table 2) has been exacer-
the price of furnace oil increased dramatically, has substantially
bated by extremely high T&D losses due to poorly maintained and
undermined the financial viability of the electricity sector.
outdated generation plants and grid infrastructure, inaccurate
End-consumer tariffs were effectively frozen by government
metering and billing, and extensive theft from illegal connections.
from November 2003 to February 2007. During the same period
Below cost recovery tariffs that have encouraged inefficient
the price of furnace oil – approximately a third of the fuel mix in
consumption and local politicians’ populist ‘‘free power’’ cam-
power generation – almost doubled, causing a significant increase
paigns have further aggravated the demand–supply gap.
in the cost of electricity generation. The cost of service was
Almost 70 percent of T&D losses occur in the distribution
further elevated because of the high commercial and technical
segment of the supply chain and a significant portion of these
losses and other operating inefficiencies of DISCOs. As a result the
distribution losses are due to electricity theft (Malik, 2012). Thus
gap between the cost of service and retail price increased over
Pakistan’s power sector is a leaking bucket with large holes. While
time.
a number of policy working groups have focused on these holes
Due to fiscal constraints, the government has been unable to
and proposed appropriate remedial measures, to date there has
provide (on time or in full) to DISCOs the required tariff differ-
been very little progress in bringing down the huge system
entiated subsidy to cover the widening gap between the cost of
losses.19 Part of the problem is that the holes are deliberately
service and retail price. This caused considerable financial
created and the resulting leaks generate economic rents for
instability in the sector. The DISCOs were unable to meet their
vested interests that have successfully undermined the modest
obligations to power producers, who in turn could not make
efforts by government to fix the problem.
payments to fuel suppliers. The problem of inter-corporate
All of the above factors that have contributed to the shortfall in
circular debt gravely affected the power generation capacity
electricity supply and consequently to loadshedding are funda-
available in the country. Thus the tariff policy, circular debt and
mentally due to the electricity system’s weak governance struc-
power crisis are closely interlinked.
ture. Indeed, the blame game that has followed most recent
In addition to imposing an unsustainable fiscal burden, elec-
blackouts is clearly symptomatic of such governance failure—the
tricity subsidies have been very poorly targeted. Low-income
lack of accountability, coordination and communication.20
lifeline customers and the rural poor capture a tiny portion of
One of the fundamental weaknesses of the sector’s governance
the subsidy. Moreover, the current structure of electricity tariffs
structure is the fact that no single public institution or member of
contains significant elements of cross-subsidization from indus-
the industry has responsibility for system-wide planning and
trial and commercial customers to domestic customers. These
implementation. There are more than 20 organizations involved
cross-subsidies conflict with the efficient use of limited resources
in the power sector, including WAPDA, PEPCO, GENCOs, DISCOs,
to support economic progress, and social equity. In view of the
NEPRA, the Private Power & Infrastructure Board, the Thar Coal
power sector’s dire financial condition and the inability of
and Energy Board, the Infrastructure Project and Development
government to absorb the losses caused in large part by its
Facility, the Alternative Energy Development Board, the Pakistan
intervention in the setting of tariffs, it is imperative to rationalize
Council of Renewable Energy Technologies, the National Engi-
the pricing of electricity.
neering and Science Commission, the Solar Energy Center, and the
The highest policy priority in the electricity sector should be to
provincial power and irrigation departments with responsibility
rebalance the structure of tariffs and realign prices with under-
for hydropower (under 50 MW) and off-grid renewable projects
lying costs, in part to restore revenue adequacy and generate
(Sheikh, 2010; Malik, 2012). This institutional fragmentation and
internal funds for capital investment and in part to eliminate
the consequent splintering of planning and development respon-
poorly-targeted and inequitable subsidies that have created an
sibilities have inhibited the formulation of a coherent and
unsustainable fiscal burden.
comprehensive energy policy, and ultimately contributed to the
sector’s failure to meet the power needs of a modernized and
10.5. A market structure dominated by a monolithic state entity no
growing economy.
longer serves the public interest
Reducing line and theft losses to levels comparable to other
countries is an indispensable precondition for resolving the huge
To address Pakistan’s crippling power shortages, investment
demand and supply imbalance. The first step towards this goal is
decisions urgently need to be made with respect to new generating
requiring accurate estimates of electricity losses and demanding
capacity. These decisions will entail critical choices among alternate
greater accountability from all members of the industry and
electricity generation technologies. And they will have profound
policymakers as well as public disclosure of the efforts being
macroeconomic, energy cost, and environmental implications. The
undertaken to close the demand–supply gap. Resolving the
emerging international experience raises significant doubt as to how
country’s power crisis will also require reforming the sector’s
a market structure heavily dominated by a vertically-integrated,
highly fragmented governance structure.
state-owned utility can support economically efficient new genera-
tion and other investment decisions—both with respect to size and
19
One of the proposals of the government’s April 19, 2010 Energy Summit the choice of technology. It is increasingly argued by electricity
was to reduce distribution losses by 2 percent within six months. During that sector experts that with workable markets, private participants
period, rather than decreasing, distribution losses actually increased. investing their own funds can better balance risks and rewards
20
The DISCOs have been complaining that PEPCO has not provided them with
proper loadshedding management plans. On the other hand, the DISCOs them-
than central planners. Investment driven by market incentives
selves have failed to control their inefficiencies, minimize power theft, and rather than bureaucratic preference tends to serve the public
overcome their technical constraints (e.g., overloading of transformers). interest better. How this international experience can be applied
 I.N. Kessides / Energy Policy 55 (2013) 271–285
to the unique circumstances of Pakistan needs to be assessed
further.
The long-term viability of the electricity supply industry calls for
major structural reorganization and rebalancing of the roles of the
public and private sectors. It is essential to radically shift away from
a predominantly state controlled industry to one where the govern-
ment maintains a strategic presence and exercises its regulatory
function, while the private sector plays a leading role in operating
the sector and managing its development.
The role and centrality of WAPDA/PEPCO, as well as their
structure of ownership, need to be reassessed also because the
power sector is confronted with grave and potentially debilitating
problems of operating performance. The long-term sustainability
of the power sector is at stake.
11. Need for radical decentralized solutions
Incremental reforms have been successfully implemented in
countries with mature electricity systems supported by well-
functioning institutional arrangements. However, an incremental
approach to electricity reform may not be the right prescription
for a country like Pakistan that is facing a severe power crisis:
acute electricity shortages and very extensive loadshedding, poor
operating efficiency, high transmission and distribution losses,
and a massive circular debt. In the face of such severe perfor-
mance problems and the serious crisis of governance in the
electricity sector, far-reaching reforms based on radical structural
options may constitute a sensible, even conservative response to
Pakistan’s electricity problem.
The centralized electricity supply model – where electricity is
mainly produced at large generation facilities and shipped
through a countrywide network of transmission and distribution
grids to the end consumers – has traditionally offered important
economies of scale/scope and, by and large, high reliability.
However, the performance of the centralized electricity system
is very sensitive to the quality of the sector’s institutional
governance. Attempts at reforming large public utilities in the
context of centralized electricity systems have largely failed.
These efforts either did not bring the desired results or the
improvements were not sustained. Very few governments, if
indeed any, were able to introduce and maintain the large
number of complex and demanding policy measures needed for
efficient performance of large public electric utilities. It became
evident to policymakers throughout the world that the long-term
solution to the problems of poor service delivery, lackluster
operating performance, and damaging political interference in
the electricity sector may require bypassing the flaws of the
centralized electricity system and focusing instead on comple-
mentary decentralized generation techniques. Moreover, addres-
sing the energy marginalization of rural areas may require an
alternative to centralized energy delivery.
In recent years the quest for energy efficiency, concerns over fossil
fuel depletion and fluctuating prices, and climate change have caused
a paradigm shift towards decentralized market structures. Indeed,
there has been a resurgence of interest in distributed generation
(DG)—i.e., energy produced on or very near the site of use from
relatively small and modular generating units. In several developing
and transition countries, DG is already accounting for a significant
share of total electricity generated. Classic forms of DG include
combined heat and power (CHP) and industrial gas turbines. More
recently, the definition has expanded to include renewable
technologies—solar, wind power, small hydro, biomass, landfill gas
to energy, and waste to energy
DG technologies are especially well-suited for off-grid remote
applications in rural areas where consumption is low and the
283
distance to the nearest distribution center is high. These technol-
ogies can be effectively deployed to improve reliability and thus
protect households and industries against the risk of costly
voltage fluctuations and power outages. This is especially relevant
in Pakistan, where power swings and blackouts can be very
extreme. Moreover, it is becoming increasingly clear that in
addition to reducing the losses incurred in transmitting centrally-
generated electricity to the point of use, community-based DG
systems can lead to greater individual sensitivity to energy
scarcity issues and might be more effective in dealing with
Pakistan’s problem of extensive power theft. Thus, by driving a
change in social attitudes and a more efficient use of energy
resources, DG could make a valuable contribution to energy
efficiency and security, and carbon savings.
A key part of responding to Pakistan’s enormous electricity
challenge and reducing the country’s huge demand–supply gap is
to investigate to what extent DG and other decentralized market
arrangements could complement, and in the longer term poten-
tially offer an alternative to, the country’s centralized electricity
system.
It is still too early to provide a definitive assessment of the
experience with DG technologies in developing countries. India
and China have aggressively promoted their deployment with
relative success. In other countries, technical, regulatory, and
financial barriers continue to impede their development. Still,
abundant evidence is emerging on the economic and social benefits
of distributed generation in a variety of countries. Biomass and
solar DG have facilitated community-based development projects
as well as income generating activities at the household level, and
increased employment in a number of Indian and Nepalese
villages (Hiremath et al., 2009). One of the important benefits of
the aggressive development of DG in Cuba – by the end of 2007,
over half of the country’s generating capacity was distributed –
has been the increased resistance of electricity generation to
natural disasters (Lovins, 2010).
11.1. Privatizing distribution is an especially important step for
rapid action
The logical place to address revenue shortfalls is at the
distribution end, which collects revenue from customers. The
best way to start and sustain pricing and related reform is to
separate the local/regional distribution monopolies from the rest
of the industry, privatize them, and subject them to price or
revenue cap regulation—with an explicit commitment from the
government that it will refrain from interfering in the tariff
determination process.
The government’s announced plan to privatize the electricity
distribution companies should be accorded the highest policy
priority and its timetable be accelerated.
11.2. An effective energy efficiency policy
Population growth, industrialization, and rising incomes in Paki-
stan are stimulating substantial energy demand. A number of energy
sources and technological options exist for addressing this demand—
though with major environmental, social, and economic tradeoffs.
Improvements in energy efficiency represent an important option
for restraining the increase in per-capita energy consumption
that would bring substantial benefits to the nation’s economy.
The energy efficiency option remains largely unexploited in Pakistan
(Malik, 2008).
A vigorous advocacy campaign could enhance the public’s
awareness of the importance and substantial social benefits of
energy efficiency. There is a need for a strategy to launch a
284 I.N. Kessides / Energy Policy 55 (2013) 271–285
sustainable long-term national energy efficiency program and
most importantly, design effective incentive mechanisms.
11.3. Regional market integration
In Pakistan and elsewhere in the South Asian region, limited
investment resources and institutional deficiencies have resulted
in supply-constrained energy systems. Significant differences and
complementarities exist in the energy resource endowments and
energy consumption needs of the region. Thus there is consider-
able scope for regional cooperation and trade in the power sector.
In recent years, the governments of the region have become
increasingly aware of this potential and the win–win opportu-
nities it offers.
The regionalization of electricity markets in South Asia is likely
to yield significant benefits that go beyond exploiting important
complementaries in primary energy resource endowments.
Regional market integration could assist the governments of the
region in overcoming institutional constraints and increase their
capacity to make credible policy commitments; facilitate the
introduction of competition into historically monopolized elec-
tricity markets; improve the efficiency of electricity supply
industries by allowing them to grow without respecting economic-
ally artificial national boundaries; and ultimately increase sectoral
investment.
Once considered outlandish, the idea of a single, regionally
unified electricity market in South Asia needs serious consideration.
12. Limits of the standard template for reform
The full implementation of the standard reform model21 –
especially the establishment of effective regulation, vertical and/
or horizontal unbundling, and the introduction of wholesale and
retail competition – has several commitment-to-reform, legal,
financial infrastructure, and other institutional pre-requisites that
are not present in Pakistan and in most developing countries.
Thus in recent years, increasing doubts have been expressed
about the applicability of the standard template to the unique
circumstances of many of these countries. A new hybrid model
has emerged with IPPs playing an important role alongside the
state-owned electric utilities.
IPPs have been an important source of new investment in
Pakistan. Their introduction has led to a major increase in
generating capacity. Moreover, many of these IPPs have exhibited
superior technical performance relative to the state-owned uti-
lities. However, as the experience from Pakistan clearly indicates,
the success of IPP schemes is contingent upon a coherent policy
framework that pays explicit attention to planning, procurement,
and contracting issues—i.e., effective governance. There is greater
potential for successful outcomes, both for investors and the host
countries, when effective regulatory governance (characterized by
coherence, independence, accountability, transparency, predict-
ability, and capacity) is put in place, preferably before the IPPs are
negotiated. An effective regulatory oversight can lead to reduction
in specific capital costs (capital costs per unit of installed IPP
capacity) as well as to improved operating efficiencies. Pakistan’s
experience highlights the detrimental consequences of the lack of
21
This refers to the new paradigm that has emerged in recent years for the
organizational restructuring of the electricity industry. The reform steps have
included some of the following: corporatization and commercialization; creation
of (independent) regulatory agencies; vertical and horizontal restructuring;
establishment of regulatory rules to promote efficient access to the transmission
network; privatization; independent power producers; designation of an inde-
pendent system operator; unbundling of retail tariffs; and creation of markets and
trading arrangements for voluntary energy and ancillary services.
credible regulatory and political commitment for the viability of
IPP investments. This experience is highly relevant for other
developing countries that have similar governance problems in
the electricity sector.
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