By Amir Saeed
ISLAMABAD– High electricity tariffs in Pakistan, stemming from inefficiencies and policy gaps, destabilise the economy, necessitating reforms in Independent Power Producer (IPP) contracts, tariff structures, and power distribution.
Talking to this reporter, Uzma Aftab, a macroeconomic analyst at Policy Research and Advisory Council (PRAC), highlighted that Pakistan’s electricity tariffs are a critical factor influencing the nation’s economic stability.
According to her, the current elevated tariffs, despite a global decline in commodity prices, are due to structural inefficiencies, policy gaps, inadequate infrastructure, and regulatory shortcomings.
Structural Inefficiencies and Policy Gaps Contributing to High Tariffs
“A primary issue is the surplus of installed capacity caused by ineffective demand forecasting . ‘Take-or-Pay’ contracts with IPPs result in fixed capacity payments even when electricity demand is low, inflating costs,” she explained.
Pakistan Electricity Tariffs and Impact of IPP Contracts
Uzma highlighted that these capacity charges are predominantly indexed to the US dollar, rendering them highly susceptible to currency depreciation. “Furthermore, excessive reliance on imported fuel has driven power generation costs significantly higher compared to neighboring countries, by as much as 87-140%.”
Transmission and Distribution Losses and Regulatory Shortcomings
“The national grid suffers from inefficiencies due to poor infrastructure, inadequate maintenance, low recoveries, and power theft, with transmission and distribution (T&D) losses rising from 16.84% in FY23 to 18.31% in FY24, significantly exceeding the benchmark set by National Electric Regulatory Authority (Nepra), the power sector regulator,” she noted.
Impact of High Electricity Costs on Industrial Competitiveness
According to Uzma, high electricity costs increase production expenses, reducing the competitiveness of domestic industries in global markets.
“The country’s industrial sector pays nearly twice the electricity rates of China, India, and the United States, hindering its export potential.”
Effects on Household Budgets and Cost of Living
“Furthermore, the elevated electricity tariffs raise the cost of living by increasing production costs across sectors, which are eventually passed on to consumers through higher prices of goods and services,” she said.
She noted that the share of electricity in household budgets has tripled over the period 2018-24 for poor and middle-class consumers, further eroding their purchasing power.
Consequences of Unrationalized Tariffs and Mismanagement
She pointed out that the failure to rationalise tariffs will sustain the need for inefficient subsidies and exacerbate mismanagement of the distribution companies (Discos).
“This limits the government’s capacity to invest in key sectors such as education, healthcare, and infrastructure, affecting long-term economic stability.”
The Importance of Reasonable Tariffs for Economic Stability
Dr Anwar Shah, a development economic researcher at Quaid-i-Azam University, Islamabad, emphasised that electricity tariffs must be reasonable to ensure economic stability in the country.
“High electricity costs increase production costs, which in turn raise prices and create uncertainty that discourages investment.”
Factors Contributing to High Tariffs and Potential Solutions
According to Shah, several factors contribute to high tariffs, including long-term contracts with IPPs, payments to IPPs pegged to the US dollar, low bill recovery leading to circular debt, efforts to recover past losses in current bills, line losses and theft, and other infrastructural issues.
“To mitigate these issues and support economic stability, the government must renegotiate contracts with IPPs, potentially saving up to Rs300 billion annually and reducing electricity tariffs by Rs2-3 per unit,” Shah suggested.
“Rationalising power tariffs for industrial consumers to a regionally competitive level could increase power consumption in the textile sector, boost exports, and increase government revenue. The government should also address power theft and corruption within utility companies to improve sector efficiency and liquidity,” he further suggested.
Targeted Subsidies and Sustainable Energy Consumption
“Implementing targeted subsidies for low-income households and progressive tariff structures can protect vulnerable consumers and encourage energy conservation.
These measures, coupled with investments in energy-efficient technologies, are essential for fostering sustainable energy consumption and alleviating the financial burden on vulnerable populations,” said the development economic researcher.
