Energy and transition economics 2026-04-26 10 minute read

Pakistan Electricity Circular Debt and the IPP Renegotiation Endgame Through 2026

Capacity payments to 47 GW of contracted thermal plants now consume nearly four fifths of consumer bills, the circular debt stock sits at PKR 2.6 trillion after the FY24 drawdown, and the IMF Extended Fund Facility makes resolution a binding condition for Pakistan's macro stabilization.

Pakistan's circular debt, the unpaid arrears running from distribution companies through CPPA-G to independent power producers, fuel suppliers, and the Petroleum Division, peaked at PKR 5.3 trillion in June 2023 before easing to PKR 2.635 trillion as of June 2024 under the Power Division's Circular Debt Management Plan. The September 2024 IMF Extended Fund Facility, a 37 month, USD 7 billion arrangement, hardwires capacity payment renegotiation, distribution privatization, tariff rationalization, and net metering reform as structural benchmarks. The Hassan Asghar task force has secured revised terms with ten IPPs across 2024 and 2025, including five 1994 and 2002 policy plants converted from take or pay to take and pay or terminated, with claimed savings of PKR 1.4 trillion over remaining contract life. Capacity payments still totaled PKR 2.1 trillion in FY24, residential tariffs have risen by PKR 5.72 per kWh cumulatively, and Chinese CPEC IPPs holding PKR 1.4 trillion of receivables remain the binding constraint. This brief evaluates whether the program can break the loop before the next IMF tranche review.

The flow of unpaid bills and the FY24 drawdown #

Circular debt in Pakistan is the cumulative arrears that accumulate when end consumer tariffs determined by NEPRA, the National Electric Power Regulatory Authority, fall short of the cost of service that distribution companies must remit upstream to the Central Power Purchasing Agency, CPPA-G, and through it to independent power producers, gas utilities, and the Petroleum Division. The Power Division's Circular Debt Management Plan, updated for FY25, reports the stock at PKR 2.635 trillion as of June 30, 2024, against PKR 2.31 trillion in June 2022 and a peak of PKR 5.3 trillion recorded in June 2023 after the FY23 fuel cost adjustment shock. Converted at the State Bank of Pakistan reference rate of PKR 278 per USD on the same date, the June 2024 stock equals roughly USD 9.5 billion, or 2.5 percent of FY24 nominal GDP of PKR 106 trillion as reported in the Pakistan Economic Survey 2023 to 2024.

The drawdown across FY24 was driven by three levers identified in the IMF Article IV staff report of April 2024 and the September 2024 EFF request. Base tariff increases of PKR 7.50 per kWh on July 1, 2023 and PKR 5.72 per kWh on July 14, 2024 lifted the average residential tariff above PKR 35 per kWh on the protected slab and above PKR 48 per kWh on the unprotected slab, restoring full cost recovery on schedule for the first time since FY18 according to NEPRA's State of Industry Report 2024. Fuel cost adjustments, levied monthly under the NEPRA Tariff Rules 1998 amendments, transferred PKR 426 billion of variable cost variance directly to consumers. Subsidy releases by the Finance Division of PKR 976 billion in FY24, against a budgeted PKR 894 billion, cleared part of the stock owed to IPPs but left the FY25 subsidy budget at PKR 1.19 trillion, equal to 1.0 percent of GDP.

Capacity payments and the take or pay overhang #

Pakistan's installed thermal and hydro capacity stood at 46,605 MW as of June 2024 per CPPA-G's State of Industry Report 2024, against system peak demand of 22,150 MW recorded on July 2, 2024, a reserve margin above 100 percent that has no peer in comparable South Asian systems. The mismatch reflects the legacy of the 1994 IPP Policy, the 2002 Power Generation Policy, and the China Pakistan Economic Corridor energy framework agreed in 2014 and 2015, all of which contracted capacity at sovereign guaranteed dollar denominated tariffs on take or pay terms with thirty year tenors. Capacity payments under these power purchase agreements, the fixed component owed irrespective of dispatch, totaled PKR 2.1 trillion in FY24 according to the Power Division's submissions to the Senate Standing Committee on Energy in November 2024, equal to roughly 78 percent of total payments to generators and roughly the same share of the average residential bill.

The composition of the capacity payment stack illustrates the renegotiation perimeter. Government owned GENCOs and the WAPDA hydel fleet account for PKR 290 billion of the FY24 figure on a quasi tariff basis. The 1994 and 2002 Policy IPPs, including Hubco, Kapco, AES Lalpir, AES Pakgen, Saif Power, Sapphire, Halmore, Engro Powergen Qadirpur, and Atlas Power, account for PKR 460 billion. CPEC plants, including Sahiwal Coal, Port Qasim Coal, Hub Power Generation Limited Hub II, China Hub Coal, Engro Powergen Thar, and Thar Energy Limited, account for PKR 720 billion, of which PKR 1.4 trillion of cumulative receivables to Chinese sponsors remained outstanding as of December 2024 per the Asian Development Bank Pakistan Energy Sector Assessment 2024. Renewables, nuclear, and bagasse cogeneration account for the residual.

Capacity payment stack, FY24	PKR billion	Share of total
1994 and 2002 Policy IPPs (Hubco, Kapco, AES, Saif, Engro, Atlas)	460	21.9 percent
CPEC IPPs (Sahiwal, Port Qasim, Hub II, Engro Thar, Thar Energy)	720	34.3 percent
GENCOs and WAPDA hydel	290	13.8 percent
Nuclear (Karachi K2 K3, Chashma units)	230	11.0 percent
Renewables, bagasse, residual	180	8.6 percent
K-Electric and bilateral imports	220	10.4 percent
Total capacity payments FY24	2,100	100 percent

Power Division submissions to the Senate Standing Committee on Energy, November 2024; CPPA-G State of Industry Report 2024; ADB Pakistan Energy Sector Assessment 2024.

The Hassan Asghar task force and the ten plant outcome #

Prime Minister Shehbaz Sharif constituted the Task Force on Energy Sector Reforms in July 2024 under Muhammad Ali, with retired Brigadier Hassan Asghar leading the IPP renegotiation track in coordination with the Power Division. The task force's terms of reference, approved by the Cabinet Committee on Energy on August 1, 2024, authorized renegotiation of capacity charges, indexation, return on equity, and dispatch profile across the 1994 and 2002 Policy fleet, with conversion from take or pay to take and pay where economically feasible and termination where not. Five 1994 Policy plants, identified in the Power Division press release of October 31, 2024, were terminated outright, including HUBCO Narowal, Saba Power, Rousch Power, Atlas Power, and Liberty Power Tech, retiring 1,766 MW of contracted capacity ahead of contractual end dates.

Five additional plants signed revised PPAs in November and December 2024, including Hub Power Company on its base plant, Kot Addu Power Company, Lalpir, Pakgen, and Saif Power, with capacity charges cut by 30 to 40 percent, return on equity recalibrated from a USD denominated 15 to 17 percent band to a hybrid PKR USD structure with a cap, and excess profit clawback for past years estimated at PKR 35 billion by the Power Division. The aggregate ex ante saving claimed by the task force in its January 2025 update to the IMF mission was PKR 1.4 trillion across the residual contract life of the ten plants. The IMF First Review staff report in March 2025 endorsed the figure subject to audit, while flagging that CPEC IPPs had not entered the renegotiation perimeter and that the two stage tariff rebasing required to translate the saving into bills had not been notified by NEPRA.

Distribution losses, recovery, and DISCO privatization #

The downstream binding constraint is the nine government owned distribution companies, the DISCOs, which collectively serve roughly 33 million connections outside the K-Electric license area. NEPRA's State of Industry Report 2024 records aggregate transmission and distribution losses of 16.45 percent for FY24, against an allowed benchmark of 13.41 percent, and a billing recovery rate of 87.6 percent against a target of 100 percent. The combined loss and recovery shortfall translates into roughly PKR 589 billion of annual leakage that is either absorbed in tariff increases for paying consumers, added to the circular debt flow, or covered by Finance Division subsidy releases.

Performance is heavily skewed. IESCO Islamabad, GEPCO Gujranwala, FESCO Faisalabad, and LESCO Lahore operate inside the NEPRA loss benchmark with recovery above 95 percent. PESCO Peshawar, HESCO Hyderabad, SEPCO Sukkur, and QESCO Quetta show losses between 25 and 40 percent and recovery between 60 and 80 percent, with QESCO recovery falling to 32 percent in FY24 under the agricultural tube well subsidy regime. The Privatization Commission's October 2024 transaction structure, endorsed by the IMF EFF, sequences IESCO, FESCO, and GEPCO as long term concessions ahead of HESCO and PESCO management contracts, with an end 2026 target for first concession award. K-Electric, the only privatized vertically integrated utility, serves 3.7 million customers in Karachi with FY24 losses of 15.3 percent and recovery of 96.5 percent per its KSE 100 listed audited statements, providing the operational benchmark.

Circular debt and tariff path	Jun 2022	Jun 2023	Jun 2024	Target Jun 2026
Stock, PKR trillion	2.31	5.30	2.64	1.95
Stock, USD billion at period rate	11.3	18.5	9.5	6.7
Average residential tariff, PKR per kWh	24.13	29.85	35.50	37.20
Capacity payments, PKR trillion	1.30	1.85	2.10	1.45
T and D losses, percent	17.13	16.94	16.45	13.50
Recovery rate, percent	90.40	88.20	87.60	94.00

NEPRA State of Industry Report 2024; CPPA-G monthly settlements; Power Division Circular Debt Management Plan FY25; IMF EFF First Review March 2025.

Net metering, solar arbitrage, and the cross subsidy squeeze #

Rooftop solar net metering, regulated under the NEPRA Alternative and Renewable Energy Distributed Generation Regulations 2015, expanded from 321 MW of registered capacity in June 2022 to 3,800 MW in September 2024 according to NEPRA monthly bulletins. Utility scale solar additions through CPPA-G procurement raised total solar capacity above 13 GW including off grid systems, with the Pakistan Solar Energy Association estimating an additional 5 to 7 GW of unregistered behind the meter systems installed in response to the FY24 tariff increases.

On September 13, 2024 the Cabinet Committee on Energy approved a NEPRA recommendation to revise net metering buyback from a unitary tariff equal to the weighted average national tariff to a gross metering structure with import and export priced separately, with export valued at the marginal cost of generation rather than the full retail tariff. The September 2024 framework caps registrations at 1.5 kW to 12 kW for residential and 25 kW to 1 MW for commercial, requires interconnection studies above 25 kW, and exempts existing installations under a five year grandfathering clause. The State Bank of Pakistan's Financial Stability Review for H1 2024 flagged that solar self generation by industrial consumers, who pay the highest cross subsidy loaded tariffs, is the single largest medium term risk to DISCO recovery, with industrial sales falling 8 percent year on year in FY24 even as system demand rose.

What 2026 will test: tranche releases, protests, and CPEC #

The IMF EFF program review schedule places the Second Review in May 2025, the Third in November 2025, the Fourth in May 2026, and the Fifth in November 2026, each conditioned on a structural benchmark on circular debt that combines a flow ceiling, a stock target, and quarterly evidence of capacity payment renegotiation. The Fund's USD 7 billion envelope is disbursed in eight tranches, of which roughly USD 3 billion will have been released by mid 2026 against an external financing requirement of USD 25 billion per year reported by the State Bank of Pakistan in its Annual Report FY24, leaving Saudi rollover, Chinese SAFE deposits of USD 4 billion, and World Bank Country Partnership Framework support of USD 20 billion over ten years as the binding gap fillers.

Three risks dominate. First, residential affordability has triggered jamaat e Islami led protests in Karachi, Punjab, and Khyber Pakhtunkhwa from August 2024 onward, with the Lahore High Court suspending fuel cost adjustment recoveries on October 11, 2024 before reinstating them under appeal, a precedent that constrains the rebasing path. Second, industrial competitiveness has eroded sharply, with the All Pakistan Textile Mills Association reporting power costs above USD 0.16 per kWh against USD 0.08 to 0.10 in Bangladesh and Vietnam, contributing to the 14 percent textile export decline in calendar 2024 reported by the Pakistan Bureau of Statistics. Third, the CPEC IPP receivables of PKR 1.4 trillion remain outside the renegotiation perimeter, with a Chinese delegation visit in October 2024 concluding without a concessional restructuring offer and with sponsor letters from Sahiwal and Port Qasim warning of force majeure invocation if arrears are not cleared by mid 2026. Resolution is plausible but conditional on simultaneous progress on all three fronts, none of which is yet locked in.

Sources #

Cite this brief

@misc{hossen2026pakistancirculardebt2026,
  author = {Hossen, Md Deluair},
  title  = {Pakistan Electricity Circular Debt and the IPP Renegotiation Endgame Through 2026},
  year   = {2026},
  url    = {https://deluair.com/consultancy/insights/pakistan-circular-debt-2026},
  note   = {Deluair Consultancy briefs}
}

Hossen, M. D. (2026). Pakistan Electricity Circular Debt and the IPP Renegotiation Endgame Through 2026. Deluair Consultancy briefs. https://deluair.com/consultancy/insights/pakistan-circular-debt-2026

Hossen, Md Deluair. "Pakistan Electricity Circular Debt and the IPP Renegotiation Endgame Through 2026." Deluair Consultancy briefs, 2026-04-26. https://deluair.com/consultancy/insights/pakistan-circular-debt-2026.

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