Explainer: Why do Pakistanis’ electricity bills keep going up?

Did you know that it costs only around PKR 10 to generate one unit of electricity in Pakistan but consumers have to pay PKR 60-70?

This is because in addition to the cost of electricity generation, they have to pay a slew of other charges and taxes. While electricity bills give a breakdown, it’s not enough to explain to the common man why his bill has skyrocketed and how they’re connected.

Nukta breaks down what constitutes Pakistanis’ electricity bills and which (broad) policies and actions of successive governments have led to such high electricity expenses.

While we will go into more detail about each, it is primarily because of:

• Setting up expensive power plants that generate electricity through imported fuel
• Paying these power plants rent in dollars
• Signing take or pay agreements, that is, paying the plants full charges whether all their electricity is bought from the government or not
• And not improving the transmission and distribution system alongside setting up power plants

Imported fuel

It’s common knowledge that electricity generated from water, air, the sun or nuclear energy is cheaper compared to that generated from oil, gas and coal since these are mostly imported and Pakistan has to pay for them in US dollars.

Consequently, whenever the rupee’s value declines, imports become more expensive and the cost of electricity generation rises. Similarly, whenever the prices of fuels rise in the international market, the cost of importing them and using them to generate electricity also increases.

This results in a Fuel Adjustment Charge. For instance, if the electricity supplied in July was generated mainly through imported fuel, the actual cost would be greater than what consumers were charged in bills for that month. The difference in the amount charged and the actual cost of electricity generation — the FCA — will then be charged in September bills.

Dollar-based rent and capacity charges

The second problem can be traced back to when Pakistan’s capacity to generate electricity was inadequate.

In the early 1990s, Pakistan faced a severe energy crisis, leading to widespread load-shedding across the country. The demand for electricity was growing rapidly due to factors such as urbanization, industrialization, and population growth. At that time, the public sector was unable to meet the country’s energy needs. In an attempt to attract major investment in the energy sector, the government was compelled to offer dollar-based returns to Independent Power Producers (IPPs) due to pressing economic conditions and the necessity of attracting foreign investment.

With limited domestic capital available to develop new power plants, Pakistan sought foreign investors, many of whom required returns in a stable currency like the US dollar to offset the currency risk. As part of its attempt to attract foreign investment, Pakistan also agreed to pay for the plants’ full generation capacity irrespective of whether it purchased the full capacity or not.

For instance, if a plant produced 1,000 megawatts of electricity but the government only purchased 500 MW, it would still pay for the entire 1,000 MW nonetheless.

These are called capacity charges.

In recent years, the government has been making these payments to some plants that it has not purchased even one megawatt from. Moreover, new power plants have been set up in the last three years, resulting in capacity charges increasing by nearly three times.

There is yet another factor — if the government purchases less electricity from a plant than it has the capacity to produce, the per unit cost of electricity also rises.

The fluctuation in the USD-PKR exchange rate and the variation in the amount of electricity that the government purchases from a plant in a specific period is accounted for every three months and included in bills as Quarterly Adjustment Charges.

This raises the question as to why the government isn’t purchasing all the electricity that plants generate, especially considering electricity demand can rise up to 27,000MW in summers and the country already has the capacity to generate 31,500MW.

It’s because the country’s transmission and distribution system can only handle 21,000MW.

Weak transmission and distribution system

Had governments invested properly in the transmission and distribution system, they would have been able to buy and distribute all the generated electricity, earn more revenue and pay less per unit. This would have resulted in lower capacity charges for consumers.

However, governments have consistently failed to upgrade the system, allocating only PKR 5 billion in fiscal year 2024-25 as well.

Other factors

These four reasons, however, don’t explain all the charges that show up in Pakistanis’ electricity bills, especially the Additional Surcharge (PHL).

To understand this, let’s go back to the capacity charges. Since the government was bound to pay these in dollars and they were rising while the rupee was weakening and the country wasn’t earning enough, the government deferred paying them in full.

On the other hand, despite rising production costs, successive governments did not raise the tariff at the right times since it would affect their political capital. Consequently, non-payments continued to rise and have reached PKR 2,600 billion so far. This is called circular debt.

The circular debt in the energy sector arises when revenues from consumers fall short of covering the costs of electricity production and distribution. The energy chain involves power producers generating electricity and selling it to the Central Power Purchasing Agency (CPPA), which then sells it to Power Distribution Companies (DISCOs) for distribution to consumers.

Key causes of circular debt include poor sector planning, delays in tariff setting, inadequate revenue collection, and high transmission and distribution (T&D) losses. These inefficiencies create a cycle where power producers, CPPA, and DISCOs struggle with financial deficits, forcing the government to inject subsidies, and increasing the fiscal burden.

To deal with the rising circular debt, the government formed Power Holding Limited (PHL) in June 2009. It then paid off some of the debt and transferred the rest to PHL in 2013. At present, the amount parked in PHL is around PKR 765 billion.

The government collects money for the interest to be paid on this amount through the additional surcharge. In addition, it charges 18% general sales tax and 1.5% electricity duty.

Another factor that affects Pakistanis’ electricity bills is the subsidies governments keep offering. At present, the federal government is subsidizing the tariff for those using 200 units or less per month.

Official data shows the per unit cost of electricity generation and transmission is PKR 35.50, after which taxes and the duty are added to it. However, the government is providing a rate between PKR 3.95-14.16 per unit to those consuming up to 200 units a month.

The government has not taken the entire burden for the subsidy on itself despite the impression it wants to give. For the subsidy given last year, around 44% or PKR 345 billion was financed by hiking bills of residential consumers using more than 300 units and commercial and industrial customers.

If the government was to remove this subsidy, the bills for those using 101-200 units per month would increase by three times from PKR 3,384 to PKR 8,485.

On the other hand, the bills of those using 700 units or more would decrease by around 25% from PKR 40,855 to PKR 29,696.

So, what’s the solution? While hiking the electricity tariff is a great start, subsidies need to be removed.

The PKR 5 billion allocated for improving the transmission and distribution system needs to be drastically increased and the upgradation carried out as swiftly as possible.

Moreover, the agreements with power plants need to be revised to terms easier for the government and only plants that can produce cheap electricity should be set up.