Watt’s going on? Energy debt woes in Pakistan, Iran, India and China

Mounting financial stress in the energy sectors of developing economies is putting pressure on national budgets, slowing investments, and disrupting energy delivery, nowhere more visibly than in Pakistan, Iran, and India. I compare the energy sectors of these countries, and China, for their power generation mixes, energy monetization mechanisms, and their exposure to financial stresses.

Pakistan is facing chronic circular debt over PKR 2.396 trillion (about 2.5% of its GDP), largely because it owes independent power producers and GENCOs. Iran’s power sector financial stresses are driven by massive energy subsidies. India, while historically vulnerable, has made strides in managing similar issues, while China, with its state-controlled system, largely avoids this problem. But what are sustainable solutions for Pakistan’s energy sector?

Electricity market dynamics and commercial arrangements

How each country generates, distributes, sells, and buys electricity differs depending on each country’s power sector value chain. To generate electricity, all four countries heavily rely on traditional fossil fuels but are at the same time working to increase their clean energy sources.

In Iran, natural gas is dominant source (75% share), according to the US International Energy Agency International Energy Statistics & Rankings 2023. For India and China, local coal is dominant (66% and 59% shares respectively). In contrast, there is no single fuel type dominant in Pakistan. Its electricity is made from a mix of hydel, gas, coal, and nuclear in the range of 18~28% share (State of Industry Report 2024 by NEPRA). The chart below gives you a sense of this mix.

 

 

 

 

 

 

 

China is leading in adding solar and wind power and Pakistan is increasing its use of hydro and nuclear, along with solar and wind. Recently, Thar coal plants added stability to Pakistan’s energy mix (2640 MW). India is also aggressively adding solar (75% of its total capacity addition for 2024) and wind (total addition 60 GW during 2022~2025) (See Monthly IEX Stats Issue by www.tndindia.com).

These countries mostly distribute their electricity through state-owned companies, except India which is ramping up private participation.

Pakistan and Iran have central power purchase mechanisms through PPAs whereas China and India have been able to move towards a more market-based approach by adding power exchanges, direct contracting, spot markets and green power trading markets. In the selling market, China and India again have advantage where open access is available through direct contracts in addition to conventional sale to residential and commercial consumers. Whereas Pakistan and Iran are still struggling to move towards direct purchase by specific sector consumers.

Pricing mechanisms are the backbone of energy market³. How well the energy monetization model works, largely depends upon the price at which the electricity is purchased and sold. Among the four nations, all have state-regulated electricity pricing mechanisms. However, China and India have been able to end the subsidies regime and charge the price to original consumers instead of bearing the costs by governments. India is a stride forward with establishment of energy exchanges where demand-supply play role in price determination. In contrast Pakistan and Iran are burdened by significant government subsidies leading to energy market liquidity problems resulting in circular debt.

Comparing financial stresses in the Energy sector

Financial crisis is termed differently by countries under consideration. The crisis is termed as “Circular Debt” in Pakistan, “DISCOM Accumulated Losses” in India, “Outstanding Dues” in Iran. In China, neither terminology nor the problem like circular debt exists due to financial absorption by SOEs.

Pakistan's energy sector remains severely impacted by circular debt, with an upward trend since 2019-20. As of March 2025, it has escalated to PKR 2.396 trillion⁷, 2.1% of Pakistan’s GDP for FY2024-25. It consists of payables to IPPs/GENCOs: PKR 1.633 trillion [68% of total], debt parked in Power Holding Private Limited: PKR 0.683 trillion, and payables by GENCOs to fuel suppliers: PKR 79 billion ⁷.

Similarly, Iran's energy sector faces a profound challenge rooted in its massive, unfunded energy subsidies (US$ 127 billion per year as per April 2025 reports), which are 37% of its GDP (US$341 billion), the highest globally¹⁰. Breakup of these subsidies includes Petroleum Product subsidies up to US$ 60 billion annually, by far the largest component. This is due to extremely low domestic pump prices compared to international benchmarks, stimulating overconsumption and widespread smuggling. Natural Gas subsidies account for a significant portion, US$ 30 billion annually. The gas is used extensively in residential, industrial, and power sectors at highly subsidized rates. Electricity subsidies are estimated at US$ 15 billion annually, where tariffs for consumers fall far short of generation and distribution costs.

Historically (2016 ~ 2021), India has suffered from substantial Aggregate Technical & Commercial losses (22~24% of the total energy input into the distribution system)¹². World Bank’s US$952 million injection in the distribution sector, since 2016, has helped India to start overcoming distribution inefficiencies through various initiatives¹¹.

The Average Cost of Supply to Average Revenue Realized gap has improved, narrowing to INR 0.21 per kWh in FY2023-24 from INR 0.45 per kWh in FY2022-23. AT&C losses indicator has improved to 16% in 2025¹⁰. Ongoing Revamped Distribution Sector Scheme project has facilitated the installation of 14.7 million smart meters in 2024-25¹². However, the aggregate accumulated deficit of DISCOMs still stands at US$ 83.3 billion¹¹. The pace of reforms and ground-level improvements in reducing losses remains critical to improving the financial viability of India’s distribution sector.

China, the largest energy producer in world², manages its energy sector financial balances through distinct mechanisms that generally prevent the accumulation of “circular debt”. Financial strains appear as profit fluctuations within State-Owned Enterprises (SOEs), strategic budgetary allocations, and the management of legacy subsidy arrears for renewable energy.

For 2024-25, the State Grid Corporation of China (SGCC), the world’s largest utility, increased its capital expenditures to RMB 650 billion (~US$ 89 billion), primarily for upgrading infrastructure to integrate a rapidly expanding renewable energy fleet. While this investment puts pressure on SGCC’s leverage, its strong access to domestic financing (with a total credit line of around RMB 4 trillion as of end-2024 at an average cost of 3%) and strategic significance ensures financial sustainability, supported by an “extraordinary government support”.

Direct financial subsidies for new onshore wind and solar projects have largely ended as of 2021, with new projects after June 1, 2025, transitioning to market-based pricing and a “Contracts for Difference” (CfD) like mechanism to manage revenue volatility, as opposed to guaranteed fixed tariffs.

Overall, China’s financial approach focuses on strategic investment and controlled market reforms within a state-managed framework to prevent systemic debt issues, rather than struggling with unfinanced arrears.

Why China and India are (mostly) out of circular debt?

Unlike Pakistan, China and India have largely managed to avoid or significantly reduce the problem of circular debt in their energy sectors. This is due to a mix of strong government controls, proactive reforms, and different market structures.

China’s approach: strong state control and direct management

China’s energy sector is dominated by large, state-owned companies. This structure allows for a different way of handling financial imbalances:

• Financial absorption: When financial gaps appear, SASAC & SGCC absorb the losses or receive direct financial support from the central government. For example, in 2025, SGCC invested RMB 650 billion (US $ 90 billion) for grid up-gradation. The cost is absorbed by the SGCC instead of recovery through billing. Thus, preventing the “circular” chain of unpaid bills from forming and growing.
• Market reforms to reduce imbalances: While state-controlled, China is increasingly using market rules. By setting up spot markets and promoting direct contracts, they aim to make pricing more realistic and efficient. This reduces the gaps between costs and revenues that can lead to debt.
• Transparent subsidies: Subsidies are typically budgeted for and paid out from central funds. They are not left as unpaid bills that burden energy companies. China has started moving away from subsidized pricing to market driven model for renewable energy sector effectively reducing the amount of subsidy up to 2.75 billion yuan (2022).

India’s approach: proactive reforms and market development

India has taken strong steps to tackle financial stress issues in energy sector:

• Dedicated reform programs: The Indian government has launched major schemes, such as the Ujwal DISCOM Assurance Yojana (UDAY: Nov-2015, 75% DISCOMs debt take over and rigorous operational efficiency reforms: smart metering, better billing/collection systems) and the newer Revamped Distribution Sector Scheme. These programs help state-owned distribution companies manage their old debt, improve their operations, and reduce losses from 24% to 16% in 5 years.
• Market discipline through open access: India allows large electricity users to bypass local DISCOMs and buy power directly from generators or through power exchanges (2024-25: 121 billion units traded on IEX, 19% YoY increase)⁶. This encourages DISCOMs to be competitive and efficient to retain customers. By end of 2023, India has traded up to 10GW through Open Access contracts including all modes i.e. day-ahead market, real time market, term ahead market, and renewable energy certificates⁵.

In essence, China uses its strong state control to absorb financial shocks, and India actively implements reforms to prevent and resolve the buildup of debt through financial restructuring and market liberalization.

Sustainable solutions for Pakistan’s circular debt

Taking lessons from China and India, solving Pakistan's circular debt needs many actions including but not limited to:

1. Fair prices and cost recovery:

Electricity prices must cover the real cost of power. This also requires better targeting government subsidies. The regulator (NEPRA) must approve new prices quickly to avoid delays that add to the debt. Importantly, over-indexation of tariffs adds to debt which should be instantly reviewed. Revisiting expensive PPAs with independent power producers to get better terms, especially concerning capacity payments for unused power, is inevitable.

2. Reduce losses and theft:

DISCOs should launch strong campaigns against theft, use smart meters, and enforce laws strictly. Billing should be made more efficient and collection from all users, including government departments should be ensured. World Bank funding program should be implemented forthwith to improve power lines and equipment to reduce technical losses.

3. Improve management and governance:

DISCOs should be made more efficient and accountable through privatization or bringing in private management. Political influence in operational and financial decisions should be banned. The government must pay its own electricity bills and release promised subsidies to power companies on time. A clear plan to pay off the existing circular debt should be developed, perhaps by selling government assets or through special loans. However, simply adding surcharges to consumer bills indefinitely should be avoided.

4. Market reforms:

Shifting to a Competitive Trading Bilateral Contract Market should be speed up where distributors can directly negotiate prices with power plants. This introduces competition and efficiency.

5. Increase local energy sources:

Investment in large hydro projects and local renewable energy (solar, wind) is inevitable to manage basket price. This will also reduce reliance on imported, expensive fuels like LNG and imported coal, which are major drivers of the debt.

Circular debt is a complex problem, but sustainable solutions are possible. For Pakistan, success hinges on decisive government actions to reform pricing, combat losses, improve governance, and move towards a more competitive and transparent energy market. Learning from India’s reform efforts and China’s strong state management, Pakistan and Iran should work towards a financially healthy and reliable energy sector.

For further reading:

1. State of Industry Report 2024 by NEPRA
2. U.S. International Energy Agency: International Energy Statistics & Rankings 2023
3. “Quagmire of Circular Debt: Insights and Solutions” by National Institute of Public Policy, June 2024.
4. Energy purchase data report issued by CPPA, April 2025 (www.cppa-g.gov.pk)
5. “Monthly IEX Stats Issue” by www.tndindia.com
6. IEX Electricity Trade Volume published by “The Economic Times” (www.m.economictimes.com)
7. Pakistan Circular Debt Report March 2025 issued by Power Division, Ministry of energy (www.power.gov.pk/reports)
8. Indian Energy Exchange (IEX) & Power Exchange India Limited (PXIL): Market reports, trading data. (Information on India's electricity trading mechanisms)
9. Accumulated deficit of DISCOMS published by The Hindu Business Line, March 22, 2025.
10. Power Line magazine December 2024 Issue.
11. World Bank report: Reinvigorating India’s Electricity Distribution for Access, Reliability, and Digitalization, published on 10 July 2025.
12. 12th Annual Integrated Ranking Report issued by Power Finance Corporation, Ministry of Power, India.