The energy sector of Pakistan has always been kind of a problem child for the country. And electricity has never come at a cheap cost. We may not be living through the 2010’s heavy load shedding era anymore but we are still not out of the belly of the beast. Now we have a new problem: expanded electricity generation capacity, which seemingly sounds like a positive development, but one that has thrown Pakistan into a financial crisis.
Why? Well, because the demand for electricity has not kept up with the rising generation capacity.
While some who can afford solar panels may have found a loophole to generate their own electricity, it is partly the cause of this current crisis.
The unprecedented growth in rooftop solar adoption and a surge in net-metered connections, the solar boom represents both a disruption and an opportunity, with wide-ranging implications.
Renewables First’s Pakistan Electricity Review 2025 reveals that the sector has undergone significant transformation over the past two decades, yet, it continues to grapple with challenges that threaten its sustainability and the broader economy.
Pakistan’s energy mix
To get a better idea of the argument at hand, we must first understand what country’s the energy mix and electricity generation capacity currently looks like.
The journey of Pakistan’s power sector can be seen as one full of struggle interwoven with sporadic bursts of ambition. For some context, after the liberalisation attempts of the late 1990s and early 2000s, where Independent Power Producers (IPPs) entered the market, Pakistan’s electricity supply largely remained tethered to fossil fuels. Thermal generation, predominantly reliant on imported furnace oil and later RLNG, shaped a fragile energy security landscape. The chronic supply-demand mismatch culminated in a notorious energy crisis during the late 2000s, marked by daily load-shedding across urban and rural Pakistan.
In response, national and bilateral efforts, including the China-Pakistan Economic Corridor (CPEC), injected substantial investments into coal, hydel, and nuclear power from 2015 onward. However, this expansion was heavily tilted toward projects that incurred high capacity payments, necessitating government-backed guarantees even when actual power demand fell short.
According to the Pakistan Electricity Review 2025, Pakistan’s installed generation capacity has reached 46.2 gigawatts (GW) in fiscal year 2024, representing modest growth driven by the addition of three new solar plants.
However, the dependable capacity, what the system can reliably deliver, has declined to 41 GW, highlighting a growing reliability gap. This discrepancy highlights the challenges of aging infrastructure and seasonal variability in certain generation sources.
The current generation mix characterises a sector in transition. Hydel power has emerged as the leading contributor, generating 40 terawatt-hours (TWh) and claiming a 29% share of total production. This represents a significant increase from previous years, driven by enhanced output from the country’s major dams, Tarbela and Mangla. The strong showing of hydropower offers a financial bright spot, as these government-owned facilities provide electricity at considerably lower costs than most alternatives.
RLNG-based generation follows closely behind hydropower, contributing 31 TWh to the mix. This significant reliance on imported RLNG is a strategic outcome of declining domestic natural gas reserves. While RLNG offers environmental advantages over coal and oil, it is also at the mercy of international price volatility and foreign exchange risks.
Coal and nuclear power have gained prominence in recent years, reflecting investments made under the China-Pakistan Economic Corridor (CPEC) and other initiatives. However, these technologies have contributed substantially to the rising capacity payment burden due to their high capital costs and take-or-pay contractual structures.
What is shocking, however, is the fact that the contribution of modern renewables; wind, solar, and bagasse, is surprisingly limited. Collectively accounting for just 5% of generation despite years of policy support and declining technology costs. This underperformance relative to targets set in the Alternative and Renewable Energy (ARE) Policy 2019 highlights the barriers that have impeded utility-scale renewable deployment.
The sector is also plagued by transmission and distribution challenges.
While generation capacity has expanded substantially, Pakistan’s transmission and distribution infrastructure has failed to keep pace. Despite adding 878 kilometers of transmission lines and 1,270 MVA of transformation capacity in FY24, the system remains critically stressed, particularly during peak demand periods.
The most significant constraint exists in the north-south transmission corridor, where overloaded 500kV lines limit the ability to evacuate power from generation-rich southern regions to demand centers in the north. This geographical mismatch forces system operators to dispatch costlier plants located closer to demand centers while leaving cheaper options in the south underutilized, consequently, driving up system-wide costs.
In the distribution segment, Pakistan’s nine distribution companies (DISCOs) continue to struggle with high technical and commercial losses. Electricity sales through DISCOs declined by 2.8% year-over-year in FY24, marking the second consecutive year of negative growth despite modest GDP expansion of 2.4%. This divergence between economic activity and electricity consumption through official channels points to a certain revolution we mentioned at the beginning of this article; increasing self-generation and possibly growing informal connections.
The solar revolution has emerged as a grassroots response to systemic dysfunction, economic pressures, and technological opportunity. What had started as an elite investment among a few wealthy households and industries has, by 2025, evolved into a significant reconfiguration of Pakistan’s energy demand landscape.
A sea of solar panels
The year 2024 will likely be remembered as the inflection point when solar energy in Pakistan transitioned from the margins to the mainstream.
In a massive surge, solar panel imports leapt by 227% year-on-year to reach 16 GW capacity, dwarfing previous records, said the Pakistan Electricity Review 2025. This massive influx, largely sourced from China, reflects an unprecedented scale of adoption. The net-metered solar capacity, which stood at just 1.3 GW in FY23, soared to 2.5 GW by FY24 and further to 4.9 GW by March 2025. Rooftop solar, once considered a novelty, became a practical necessity for households and businesses eager to escape the clutches of high tariffs and unreliable supply. Data shows around 95% of net-metering installations were below 25 kW, signaling that residential and small commercial consumers are the primary drivers of this transition.
Lahore Electric Supply Company (LESCO) alone added a record 1.3 GW of rooftop solar connections by the first nine months of FY25. Other DISCOs, including MEPCO and FESCO, reported similar, albeit smaller, surges. The cumulative impact was palpable, especially in high solar output months such as April and May, daytime grid demand fell notably compared to the same months in the previous year. The combined effect was clear; during sunny months like April and May, daytime electricity demand on the grid dropped noticeably compared to the same time last year.
The implications of this solar revolution are profound. On the positive side, distributed solar has empowered consumers, improved energy access, and insulated many households and businesses from volatile grid prices. During daylight hours, rooftop solar owners now experience energy independence, substantially reducing their reliance on the grid and their exposure to expensive tariffs. For industries, captive solar generation has enhanced competitiveness by slashing operational costs.
Rooftop solar is also indirectly supporting Pakistan’s climate objectives. Even though the share of renewables in overall generation remains quite low due to utility-scale inertia, rooftop solar has helped offset carbon-intensive RLNG and furnace oil generation, particularly during peak sun hours.
However, this increased access for the consumer has not come without a cost. The disruption caused by this transition has also exposed some systemic vulnerabilities of the electricity infrastructure of the country.
Grid operators now grapple with altered peak load profiles, requiring investments in flexible generation, energy storage, and dynamic load management. Financial stress on DISCOs has intensified, with reduced grid sales and mounting receivables threatening their liquidity and operational sustainability.
According to the Renewables First’s second Electricity Review, without reforms that align DISCO revenue models with a decentralised generation reality, the financial health of the broader power sector will deteriorate further.
In a panel discussion during the launch of the Pakistan Electricity Review 2025, Earnst Kuneman, project manager at Agora Energiewende, said, “Rooftop solar can be aggregated and used as part of a virtual power plant. In fact, there’s significant potential here. VPPs essentially integrate distributed renewable resources by aggregating them to function as a single, dispatchable unit, rather than as isolated systems scattered across the grid.”
He added, “To maximize their effectiveness, VPPs are typically paired with battery storage, which enhances their dispatchability. However, for VPPs to contribute meaningfully to grid operations, they must be able to sell their services, such as frequency response and ramping, back to the grid. Crucially, these flexibility services must be properly compensated.”
He argued that this compensation can be facilitated either through short-term and ancillary service markets or, in the absence of such markets, through utility-run programs that specifically procure and remunerate these services.
“Infrastructure-wise, VPPs require smart grids, smart inverters that allow remote control of assets, and access to real-time distribution-level data. These elements enable aggregators and utilities to monitor, coordinate, and respond dynamically to grid needs,” Kuneman finished.
Then there is regulatory uncertainty. Debates over revising net-metering tariffs and compensation mechanisms for exported solar energy risk undermining consumer and investor confidence. Meanwhile, the deluge of low-cost solar panels raises concerns about quality assurance, warranty standards, and the long-term performance of installations.
“Battery energy storage systems (BESS) are critical to enabling distributed energy resources, especially solar PV. With declining technology costs, solar paired with storage can now compete with conventional power generation ,and in many cases, make solar nearly dispatchable. This makes BESS essential not only for enhancing the reliability of solar, but also for preventing grid overloads. That said, location remains a key factor in realising these benefits,” Kuneman added.
Beyond system-level impacts, the social dimension is significant. Solar has accentuated the energy divide: those who can afford the upfront investment in solar enjoy lower energy bills and greater resilience; those who cannot, remain tethered to an increasingly expensive and unreliable grid.
The middle class and the solar divide
The implications of widespread solar panel installations have not only impacted DISCOs. A certain social class, that always bears the brunt of any economic event, is once again taking the hit.
According to a recent report by Reuters, the solar revolution may have transformed Pakistan’s energy narrative, its benefits have been unevenly distributed. The reality for a significant portion of the urban middle class is far more sobering. Unable to afford the high upfront costs associated with rooftop solar installations, many middle-income families find themselves trapped between rising grid tariffs and inaccessible alternatives.
For these households, electricity has become an escalating financial burden. Average monthly bills, particularly during peak summer months, now consume a significant portion of household incomes. Unlike the affluent, who have transitioned to solar, or the low-income groups who receive government subsidies, the middle class faces the brunt of the energy transition without the cushioning of either.
This energy exclusion is particularly harsh because it coincides with broader economic challenges. Inflation, stagnant wage growth, and a lack of affordable credit options for solar installations. Although various financial institutions and banks have introduced solar financing schemes, they require high collateral, lengthy approval processes, and unfavorable interest rates, terms often remain inaccessible for many.
The economic pressure extends beyond electricity bills. Industries passing on higher energy costs to consumers have led to increased prices for goods and services, tightening the squeeze on middle-class households. Educational institutions, healthcare providers, and small businesses, many still reliant on expensive grid power, have raised their prices, indirectly impacting household budgets.
Socially, this growing disparity is breeding resentment and a sense of marginalisation. The aspiration to go solar is strong among the middle class. In the absence of targeted subsidies, tax incentives, or innovative community solar models, a large swath of the middle-income population risks being left behind in Pakistan’s clean energy transition.
Financial crisis and circular debt
This energy crisis has fanned the fire of another age-old problem of the country. Our circular debt.
Circular debt has hit Rs 2.4 trillion, almost a quarter of all the tax revenue the government collects in a year.
The crisis is largely fueled by soaring capacity payments, which rose 46% year-on-year to Rs 1.9 trillion in FY24. New generation plants, built during stagnant demand, now operate below optimal levels, obligating the government to make massive payments for underutilised assets.
Rising energy purchase prices, reaching Rs 1,113 billion, compounded the strain, primarily driven by costly RLNG imports exacerbated by currency depreciation. Meanwhile, inefficiencies across transmission and distribution systems drained an additional Rs 588 billion, including Rs 276 billion from technical losses and Rs 312 billion from billing and collection failures. Efforts such as the Circular Debt Management Plan 2025 aim to cap the debt at Rs 2.429 trillion but fiscal constraints and political resistance may become a hindrance.
Escalating tariffs, necessary to cover fixed costs, have fueled inflation and eroded industrial competitiveness, particularly in energy-intensive sectors like textiles, cement, and steel. Many businesses, responding to grid unreliability and high costs, have invested in captive solar and gas-fired generation, with solar now meeting up to 40% of daytime needs for some industries.
During the panel discussion, when asked which key focus areas must the government prioritise, when upgrading their grids to accommodate the growing uptake of solar PV, Dinita Setyawati, Senior Electricity Policy Analyst at Ember, responded, “First, there’s a strong need for smart grid modernisation that means upgrading existing infrastructure with digital tools and smart technologies to make the grid more efficient, responsive, and capable of handling distributed energy sources like solar. At the same time, governments need to consider strategic grid expansions to physically connect new renewable energy generation, particularly variable renewable energy like solar and wind to areas of growing demand.”
She highlighted that it is equally important to enhance system flexibility and resilience so that grids can better respond to the inherent variability of renewables. “In our context, regional integration also plays a major role; building power systems that can share resources and trade electricity across borders helps improve efficiency and sustainability. Alongside that, market and regulatory reforms are essential. There is a need for creating open, transparent, and competitive power markets at the regional level that will support integration and innovation.”
Setyawati added that none of this is possible without sustainable finance and investment. “Long-term funding must be secured for both grid upgrades and new infrastructure. I also echo Ernst’s earlier point that infrastructure development should shift away from purely large-scale, costly grid projects toward more efficient, distributed energy resources. This is key to maximising the region’s renewable energy potential.”
Pakistan’s solar revolution is transforming its energy landscape, offering hope for a decentralised, sustainable future. Yet, it also exposes new challenges around grid stability, financial strain, and growing social inequities. To realise the full potential of this shift, Pakistan must move beyond rising adoption numbers toward real reforms, ensuring equitable access, strengthening infrastructure, and protecting the financial health of its power sector.
Renewables First’s review stresses for broader sector reforms, as well. Accelerating utility-scale renewables, reinforcing the transmission network, reforming costly capacity payment structures, and improving distribution company governance are essential.
