Power sector sitting on ticking time bomb

Business Recorder

19-07-2025

'The off-grid solar revolution' and 'the surplus-grid capacity crisis' constitute a ticking time bomb for Pakistan's power sector. Pakistan is witnessing a silent but powerful transformation in its energy consumption patterns. In an environment plagued by high electricity tariffs, inconsistent power supply, and policy unpredictability, both industrial and agricultural sectors are increasingly turning to solar power solutions - discreetly or overtly.
This off-grid shift, while rational for individual consumers, is rapidly morphing into a systemic crisis for Pakistan's already fragile power sector, particularly the national grid – which now finds itself caught in a spiral of under-utilization, rising capacity payments, and financial instability.
Driven by prohibitively high electricity prices (now exceeding Rs. 60/unit in many regions), heavy fuel cost adjustments, unreliable power delivery, and the government's inability to offer competitive industrial rates, Pakistan's manufacturers and large-scale farmers have found an obvious solution: solarized operations. Otherwise, the choice to go solar – once seen as a solution – may inadvertently accelerate the collapse of a system still vital to national stability and economic growth.
In agriculture, solar-powered tube wells are now replacing conventional grid-connected pumping systems. In cities like Lahore, Faisalabad, Sialkot, and Karachi, textile and export-oriented industries are installing private solar systems and microgrids at record levels. This is no longer a fringe movement; Pakistan imported over USD 1.3 billion worth of solar equipment in FY2024 alone.
But while solar provides independence and predictability for users, it simultaneously erodes demand for grid electricity. This undermines the financial viability of the national power system, which is burdened by massive capacity expansion projects undertaken during CPEC years – based on projections that no longer match market realities.
Paradoxically, Pakistan today has excess installed power generation capacity, roughly 43,000 MW, while peak demand hovers between 28,000–30,000 MW in summer and drops drastically in winter. Yet the grid remains in financial agony. Why?
The problem lies in Pakistan's power purchase agreements (PPAs), which obligate the government to make capacity payments to independent power producers (IPPs) regardless of whether electricity is consumed or not. These payments – now exceeding Rs 2 trillion annually – are fixed costs passed on to consumers through tariffs.
With demand shrinking due to solarization and theft or inefficiency still rampant, fewer units are being sold to recover the ballooning capacity payments. This raises the per-unit cost even further, triggering more defections from the grid. It's a vicious cycle: higher costs drive lower consumption which, in turn, raises costs again.
For the private sector, going solar is a logical economic decision. Industries save money, reduce carbon footprints, and hedge against grid unreliability. Farmers avoid diesel costs and reduce irrigation risks. But when entire subsectors defect from the grid, the burden of the system falls disproportionately on domestic and low-income consumers – many of whom cannot afford off-grid alternatives.
This is exacerbating inequality in access and increasing the pressure on the government to provide subsidies, which it cannot sustainably finance. The state is now stuck in a policy trap: it must either allow power tariffs to spiral, prompting more defections, or absorb the costs through unsustainable borrowing and fiscal deficits.
What's unfolding is a classic 'death spiral' scenario. The grid's fixed costs, especially in the form of dollar-denominated IPP contracts and imported fuel linkages, are now being recovered from a shrinking user base. As industries and agriculture reduce their dependency, it becomes harder to justify and sustain grid-scale infrastructure investments.
Ironically, if this continues unchecked, Pakistan's grid could become a relic – a stranded, expensive infrastructure incapable of serving even its core users. The long-term consequences could include: de-industrialization for those unable to afford off-grid alternatives, grid defunding leading to power outages and infrastructure degradation and
Increase in circular debt, as revenue shortfalls balloon.
Despite the scale of the crisis, policymaking remains reactive and fragmented. The government has neither embraced solar as a formal part of the energy ecosystem nor has it devised a strategy to manage the transition - not to forget that 'to go solar', once seen as an ultimate solution, was advocated and incentivised by the government of the day.
Pakistan lacks a net metering and feed-in tariff reform strategy that aligns distributed solar with grid health. Moreover, attempts to restrict solar imports or tax solar panels are short-sighted and only increase informal installations like mushrooming in the agricultural sector and slums of the cities. Much of it is out of the reach of the government.
The solar revolution in Pakistan is irreversible – and greater national and public interest demands that it should be welcomed. A managed transition is essential. If not, the collapse of the national grid under the weight of underutilization and rising costs could create a national power disaster that will certainly affect every citizen and sector.
Pakistan needs an integrated energy transition roadmap, balancing grid and off-grid development. Policymakers must urgently move beyond tariff adjustments and subsidy mantra. They must restructure how Pakistan produces, distributes, and consumes power in the 21st century.
Copyright Business Recorder, 2025