There is a version of the history of Pakistan’s energy sector that reads as a financial tragedy. Billions of dollars were borrowed, capacity was created, rates were indexed, guarantees were issued…and the lights still went out.
That version is accurate, but incomplete. The deeper story is that of institutional political economy: a systematic misapplication of development finance theory to a sector whose problems were never about megawatts, but about institutions, incentives, and risk allocation.
Pakistan did not fall into an energy crisis; it made its way into one by design. The political economy of large infrastructure debt rewards the act of financing over the discipline of planning, while the coalition that benefits from expanding capacity (governments seeking greenfield opportunities, lenders deploying capital, and developers reaping guaranteed returns) has always been more cohesive and influential than the diffuse public ultimately left to pay the cost.
The economics of debt-financed electricity capacity are based on a coherent theoretical foundation: long-lived assets, predictable revenue streams, and financing tailored to the useful life of productive assets. Financing of textbook infrastructure. The problem is that Pakistan’s PPI model violated almost all the conditions that make that theory work. Purchase or payment contracts transferred demand risk from investors to consumers. Sovereign guarantees transferred the risk of default from lenders to the state. Indexed tariffs transferred currency and inflation risk from developers to electricity buyers.
At each step, the private sector retained the advantages while the public sector absorbed the disadvantages. This is not infrastructure financing. This is a structured transfer of fiscal responsibility couched in the language of private investment, and it persisted over two decades because the parties who designed the contracts were not the ones who paid for them.
Pakistan is paying for the right to use plants at rates that amount to almost full utilization, while the overall utilization of thermal plants was below 45%. Economic logic would be indefensible in any other sector. A government that contracted to pay a hotel 80% of room revenue, regardless of occupancy, would face an immediate public audit.
Pakistan’s power sector did precisely this across dozens of contracts over two decades, and the audit came only when the fiscal consequences became impossible to absorb. That delay is itself a finding of political economy: the costs were dispersed across millions of consumers and a stock of national circular debt, while the benefits were concentrated in project companies with direct access to the policymaking process.
Karot Hydropower came into operation with a debt of $1.358 million against a project cost of $1.698 million. Suki Kinari earned $1.28 billion versus $1.707 million. Punjab Thermal Power assumed a debt-equity ratio of 75:25 in its tariff structure. Coal plants followed the same financial philosophy. High leverage works when income is predictable.
In Pakistan’s power sector, revenues were contractually guaranteed but raised through a circular debt mechanism that by 2025 had metastasized into one of the largest contingent fiscal liabilities in the country’s history. Debt did not finance capacity. It financed the illusion of capacity while real liabilities accumulated within the public balance sheet at compound interest.
And don’t get me started on Neelam-Jhelum. A 969 MW hydroelectric project financed at approximately $2.7 billion through sovereign loans that cracked, flooded and stopped generating by 2022 due to geological faults that would have arisen with proper prefeasibility work. Today it is perhaps the most expensive idle asset in Pakistan’s public infrastructure portfolio, and still carries debt service obligations that Wapda and, ultimately, the electricity consumer must absorb. Neelam-Jhelum is not an anomaly in Pakistan’s energy sector. It is the model taken to its logical conclusion.
The RLNG fleet crystallizes the broader argument. Pakistan borrowed to build Bhikki, Haveli Bahadur Shah, Balloki and Punjab Thermal Power, totaling nearly 4,900 MW of combined RLNG capacity, to address gas shortages caused by depleting national reserves. The solution replaced one dependence on imports with another, priced in dollars, routed through the Strait of Hormuz and exposed to precisely the kind of geopolitical disruption that materialized when the conflict between the United States and Iran closed LNG shipping routes in 2026.
About 6,000 MW of RLNG capacity was producing around 500 MW at the peak of the outage. Debt service continued. Capacity payments continued. The plants sat down. This is not a scenario that requires exotic models; appears in the first chapter of any energy security curriculum. Pakistan borrowed billions to build a fuel import machine and called it energy security. The political economy explanation is simple: the decision makers who approved the contracts assumed none of the risks of fuel supply, while the consumers who assumed all the risk had no seat at the negotiating table.
The argument for abolishing debt-based capacity addition is not ideological. It is empirical. The model has been tested through two investment cycles, the thermal development of the 1990s under the 1994 Electricity Policy and the RLNG and Hydel expansion after 2014, and has produced the same result twice: stranded liabilities, circular debt accumulation, tariff escalation and new load shedding. Repeating it a third time would not be a political failure. It would be a political choice made with full knowledge of the consequences, which is considerably worse.
What should replace it is a framework built on three organizing principles: network modernization, decentralization and capacity rationalization.
Grid modernization means investing in the transmission and distribution infrastructure that determines whether existing generation, its more than 40,000 MW, can actually reach consumers with acceptable quality and cost. Pakistan’s transmission system suffers from significant technical losses, operates with limited real-time visibility, and cannot support high penetrations of variable renewable energy without stability risks.
A dollar invested in smart metering, advanced distribution management and real-time system monitoring generates returns across all generation sources simultaneously, without creating a new capacity payment obligation. This is a categorically different economics from adding another imported fuel plant behind another sovereign guarantee. It also produces a different political economy: the beneficiaries are dispersed consumers rather than concentrated developers, which is precisely why it receives less institutional enthusiasm than it deserves.
Decentralization recognizes what the 2026 crisis empirically demonstrated. Pakistan’s more than 19,000 MW of people-funded solar, built without state financing or sovereign guarantees, provided more resilient service during the geopolitical disruption than several billion dollars of centralized RLNG capacity. Distributed generation financed from private balance sheets does not accumulate in the public fiscal balance, does not require foreign currency for capacity payments and does not transit the Strait of Hormuz.
A regulatory framework that accelerates distributed solar, battery storage integration, time-of-use pricing, and virtual power plant aggregation is not abandoning infrastructure investment. It is reorienting it toward a model that allocates risk efficiently, where those who invest bear the risk and those who benefit pay the cost. The fact that it simultaneously dismantles the political economy of the centralized extraction of capacity rents is a feature, not a complication.
Capacity rationalization honestly addresses existing stock. Pakistan cannot abandon the signed PPAs without triggering sovereign credit consequences. But rationalization can be achieved through commercial renegotiation, fuel switching where technically feasible, conversion of baseload thermal assets to flexible peak operations, and structured early retirement of plants whose capacity payments exceed any plausible economic value of continued operation. The resistance will come from the same coalition that benefited from the original contracts. Identifying that coalition and designing the negotiation strategy accordingly is a task of both political economy and financial engineering.
The economy has already delivered its verdict. Centralized debt-financed capacity, priced through capacity payments, guaranteed by the sovereign and fueled by imports, is not a development strategy. It is a strategy of accumulation of liabilities with a generational component, sustained by a political economy that consistently privatizes profits and socializes losses.
Pakistan borrowed its way into darkness. The way out goes through the network, through the rooftops and through the disciplined withdrawal of the obligations left by the old model.
The writer has a PhD in energy economics and works as a researcher at the Sustainable Development Policy Institute (SDPI).
Disclaimer: The views expressed in this article are those of the writer and do not necessarily reflect the editorial policy of PakGazette.tv.
Originally published in The News
