Amir Saeed

Inefficient tariffs and cross-subsidies in Pakistan's power sector burden consumers and distort electricity demand, necessitating tariff rationalisation and governance reforms for a sustainable and efficient energy future.

Talking to WealthPK, Afia Malik, an energy expert at the Pakistan Institute of Development Economics (PIDE), said that the country’s power sector is entangled in a web of financial and operational challenges, primarily driven by an inefficient tariff structure and a poorly-managed policy framework. “The nation’s installed capacity of 45,000MW significantly outstrips the peak summer demand of 30,000MW and the even lower winter demand of just 17,000MW.

This stark difference results in considerable underutilisation of capacity, adding to the sector’s financial burden,” she noted. Afia highlighted that the lack of innovative seasonal tariffs to balance summer and winter demand further exacerbates the issue. “A key factor contributing to these challenges is the tariff design, characterised by widespread cross-subsidies across sectors and consumer categories.”

“Distribution companies often cross-subsidise one another, while the government steps in to provide subsidies to maintain uniform tariffs. However, the government’s limited fiscal space restricts its ability to sustain these subsidies,” she noted. “Compounding the problem, consumer-end tariffs are laden with taxes and surcharges, placing a significant financial burden on consumers and discouraging them from paying their bills on time,” the PIDE energy expert added.

She lamented that the existing tariff structure distorts electricity demand, leading many large factories, particularly in the textile industry, to adopt energy efficiency measures and invest in solar power to mitigate the impact of rising tariffs and the potential implications of the Carbon Border Adjustment Mechanism (CBAM). “This shift highlights the growing reliance on captive generation as industries seek to circumvent the challenges posed by the grid.

The governance structure of the power sector also plays a significant role in the sector’s inefficiencies,” Afia pointed out. Meanwhile, talking to WealthPK, Aatizaz Hussain, a development economic researcher at National Defence University (NDU), Islamabad, said that the Ministry of Energy formulates policies and strategies, while the National Electric Power Regulatory Authority (Nepra) is responsible for overseeing tariffs and licensing.

“However, Nepra often lacks the necessary power and capacity to effectively enforce the regulatory standards,” he added. Hussain strongly advocated for depoliticising the boards of state-owned energy entities and granting the distribution companies (Discos) greater financial and administrative independence. “Limiting the energy ministry’s role to oversight, rather than intervention, can streamline decision-making and enhance accountability.

Revising the tariff design is crucial to enhance efficiency and ensure the financial sustainability of the power sector,” he stressed. Hussain also emphasised that tariffs should accurately reflect the actual cost of supply for all consumer categories and geographical markets. “Redirecting subsidies through targeted programmes like the Benazir Income Support Programme can reduce the overall subsidy burden.”

“Additionally, promoting winter electricity consumption through innovative seasonal tariffs can help alleviate the capacity payments burden and reduce gas resource consumption. Addressing these multifaceted issues through comprehensive reforms is essential to revitalise the power sector and ensure a reliable and affordable energy supply for all,” the NDU development economic researcher said.

Credit: INP-WealthPk