Pakistan Needs Power Capacity Optimization

September 28, 2026 (MLN): Pakistan’s power sector no longer faces simply a shortage of electricity. It now faces a more difficult question: how to get greater value from the generation capacity it already has.

A significant part of that capacity remains under-utilized, while consumers continue to bear high electricity costs and the country still considers additional generation investments.

What Pakistan needs now is a clear assessment of how much capacity is actually required, what is preventing existing capacity from being fully utilized and where the real bottlenecks lie.

Paying for Capacity, But Not Using It

According to Ministry of Energy documents, the federal government paid Rs. 2.935 trillion to independent power producers (IPPs) during the first 11 months of FY2025-26, covering July 2025 to May 2026. Billing for June was still incomplete when the figures were compiled.

The Ministry clarified that payments were made at rates approved by NEPRA or specified in agreements with power producers. [Ministry of Energy, Power Division]

The figure is substantial, but the real issue is not simply how much Pakistan pays power producers. It is whether the country’s generation capacity, contractual commitments, transmission network and electricity demand are properly aligned.

NEPRA’s Performance Evaluation Report for FY2024-25 provides an important indication of the problem. Thermal power plants operated at an overall utilization rate of 42.5% against reference capacity, while renewable energy plants averaged 36.6%. NEPRA reported total power purchase costs of Rs. 2,943.214 billion, excluding electricity imported from Iran.

Of this, 61% was Capacity Purchase Price and 39% Energy Purchase Price. The average Capacity Purchase Price was Rs. 14.3 per kWh, compared with Rs. 9.0 per kWh for Energy Purchase Price. NEPRA attributed the elevated capacity cost mainly to excessive installed capacity and low utilization of existing plants. [NEPRA, Performance Evaluation Report of Operational Power Plants FY2024-25]

These figures need to be understood carefully. Capacity payments are not simply payments for electricity that was never generated.

They are linked to fixed costs associated with committed generation capacity under contractual arrangements. Investors made those investments on the basis of contractual agreements, and legitimate contractual obligations cannot simply be ignored.

But contracts do not eliminate the economic question. When fixed costs are spread over a smaller volume of electricity because available capacity is under-utilized, the cost burden on each unit consumed becomes higher. That can feed into tariffs and weaken the competitiveness of businesses and industry.

Lower utilization is not caused by weak demand alone. NEPRA has identified reduced electricity demand, AT&C-based load shedding and other operational factors affecting thermal plant utilization.

Renewable utilization is also affected by the availability of natural resources and transmission constraints. The issue, therefore, is not simply excess generation; it is whether the entire power system is being planned and operated efficiently. [NEPRA, Performance Evaluation Report of Operational Power Plants FY2024-25]

This is why Pakistan’s power challenge cannot be reduced to IPPs alone. Generation, transmission, distribution, demand and contractual arrangements have to be considered together.

Transmission is particularly important. There is little economic benefit in having generation capacity available if electricity cannot reliably reach where it is needed.

The same applies to renewable energy. Adding generation does not automatically reduce system costs if the transmission network cannot efficiently evacuate and distribute that power.

From Planning to Capacity Discipline

Pakistan already has institutions responsible for many of these functions. NEPRA regulates the sector and monitors plant performance and costs. The Ministry of Energy provides policy direction, while the Independent System and Market Operator (ISMO) is responsible for system and market functions.

Pakistan has also moved towards an Integrated System Plan covering generation and transmission requirements for 2025–35.

The revised Indicative Generation Capacity Expansion Plan and transmission planning framework form part of the country’s formal capacity-planning process. [NEPRA; Ministry of Energy; ISMO]. The gap, therefore, is not the absence of planning. It is the need for a focused optimization exercise.

Pakistan should consider establishing a Power Capacity Optimization Task Force within the existing planning framework. Its purpose would not be to create another permanent layer of bureaucracy or duplicate the work of NEPRA, ISMO or the Ministry of Energy. Instead, it should use the data and findings of existing planning exercises and undertake a time-bound review focused specifically on getting greater economic value from capacity already available.

The Task Force should examine, plant by plant, how much generation capacity exists, how much is actually being utilized, why some plants remain under-utilized, where transmission and distribution constraints are limiting dispatch, and what contractual or commercial changes could improve the economics of the system. It should also establish how much additional capacity Pakistan genuinely needs after taking existing available capacity and transmission constraints into account.

This would build on steps the government has already taken. The Power Division reported that unnecessary power projects with a combined capacity of 9,500 MW were cancelled in 2025, while negotiations with IPPs eliminated a cumulative Rs. 3.4 trillion financial burden on consumers and the national exchequer. The Power Division also reported tariff reductions resulting from the IPP negotiations. [Ministry of Energy, Power Division, Performance Report 2025]

The lesson should now be institutionalized. Existing IPP agreements should be examined wherever legally and commercially feasible, with the objective of better aligning costs with availability, reliability, performance and actual system requirements. This should not mean undermining legitimate investor rights. Public-sector generation should face the same economic test.

Where plants are reliable and economically justified, they should continue to support the system. Where capacity remains persistently under-utilized, the reasons should be identified and commercially viable options considered, including restructuring, conversion, changes in operating arrangements or retirement where justified.

Before Building More, Use What We Have

Future capacity decisions should also pass a simple test: Is the additional capacity genuinely needed, when will it be needed, can the transmission system support it, and is it the least-cost option? Pakistan’s IMF programme points in the same direction.

The government committed to carefully reviewing the need for additional generation capacity and not entering into further capacity commitments without the necessary transmission infrastructure and full utilization of existing capacity at peak times. [IMF, First Review under the Extended Fund Facility]

This does not mean Pakistan should stop investing in electricity generation. Economic growth, industrial expansion and the transition towards cleaner energy will eventually require additional capacity. But new investment should follow demonstrated demand rather than create long-term fixed costs ahead of need.

The demand side is equally important. More competitive electricity prices, reliable supply and better distribution performance can encourage industry, agriculture and businesses to use more electricity productively. If productive consumers reduce their grid consumption because electricity is too expensive or unreliable, the fixed costs of the system do not disappear. They have to be recovered from a smaller volume of electricity.

The emerging competitive electricity market could also help. The transition towards the Competitive Trading and Bilateral Contract Market is intended to give bulk consumers greater choice in sourcing electricity, while the system is being introduced in a phased manner. Greater competition, if implemented transparently and supported by adequate grid capacity, could improve procurement discipline and give productive consumers more options. [ISMO; NEPRA; IMF]

The proposed Task Force should therefore produce more than another government report. Within a defined period, it should publish a Power Capacity Optimization Plan setting out existing capacity, utilization levels, transmission constraints, economically justified capacity requirements and a timetable for addressing the gaps.

The results should be measurable. Consumers should be able to see how much generation capacity is available, how much is being utilized, what it costs and why any new capacity is being proposed.

Pakistan has spent years focusing on how to produce more electricity. The challenge has now changed. The country needs to make better economic use of the capacity it already has before committing consumers to more long-term costs.

That is not an argument against private investment or legitimate contractual returns. It is an argument for better planning, stronger transparency and greater discipline in capacity decisions.

Pakistan already has the institutions, data and planning mechanisms needed to begin this exercise. What is needed now is to bring them together around one practical objective: use existing capacity better, remove the constraints that prevent its utilization, encourage productive electricity demand and add new capacity only when the need is clearly demonstrated.

A focused Power Capacity Optimization Task Force could turn that objective into a measurable programme of action. For Pakistan’s power sector, the next priority should not simply be adding more capacity, but getting more value from what the country is already paying for.

 About Author:

The writer, Shahid Anwar, is an Economic Analyst and former Secretary General of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

He also served as Senior Director Research at the Institute of Cost and Management Accountants of Pakistan (ICMAP), with 36 years of experience in business, trade and economic affairs. He provides advisory support on trade, investment and business partnerships.

Disclaimer:

The above analysis/article is for informational and educational purposes only.

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