Solar is our saviour, capacity charge our drain

Pakistan's power sector has been in crisis since 2004, when oil prices spiked by around 56% in a single year. The trend continued until 2008, when prices peaked at almost five times of their initial value in 2004. The country was then heavily dependent upon furnace oil for power generation. As a result, between 2004 and 2008, the annual energy import bill of Pakistan increased by around 2.5 times.

The government attempted to accommodate the impact on the power supply chain through subsidies. But the lack of required fiscal depth and the consequential delayed payments towards the independent power producers (IPPs) resulted in an acute crunch of working capital. This in turn gave birth to the venomous serpent we all know by the name of circular debt. The same pushed the country into the worst power crisis it has ever seen.

The new government in 2013, driven by highly ambitious growth targets and corresponding requirements of power on the grid, launched a new power policy and a massive plan for generation capacity augmentation. Consumption increased promisingly during the period but not as rapidly as capacity. The National Electric Power Regulatory Authority (Nepra)'s State of the Industry report of 2017 aptly forewarned about the fast-emerging monster of capacity charge due to the increasing gap between generation capacity and consumption.

As per the report, the capacity payments made in FY2015-16 and FY2016-17 were, respectively, Rs280 billion and Rs350 billion. In the same paragraph, it also tells us that for the value to remain at that of FY2015-16 in FY2018-19, the power sold was required to be 57% higher than its preceding year, ie 2017-18. However, the actual gain was even less than 2%.

Unfortunately, since 2019 till 2026, GDP growth has generally remained sluggish. The same in turn has continued to further increase the ratio of the capacity charge in the payments to the sellers. As a result, we have already paid around $40 billion in this respect during the period. This could, of course, have been largely avoided by incorporating informed and stringent qualifiers, for situations triggering capacity payments, in the "take or pay" clauses of the power purchase agreements (PPAs).

A major catalyst was the introduction of the Net Metering Regulations in September 2015, associated with solar power. Due to the economic benefits it offered, it virtually caused an exodus of users from the grid. For example, industrial power consumption from the grid was 29,885 gigawatt hours (GWh) in FY2020-21 and 29,114 GWh by 2024-25, despite a 7.5% increment in users in this category on the DISCO grid during the period.

To me, the magnitude of the impact solar ingress has caused in our economy is that out of its aggregate installed solar capacity, hardly 13% is integrated with the grid. After applying the commonly used capacity utilisation factor in the range of 18% to 22%, the estimated maximum net capacity of the off-grid system alone comes out to be above 10,000MW. The utilisation factor is primarily a function of a solar panel's efficiency, its exposure to sunlight hours and associated irradiance in each such hour. The above deduced capacity is already 42% of the average power demand which prevails on our grid in summers. Solar batteries are also improving this off-grid capacity further by keeping the power available from the same source even after sunset.

While the above transformation continues along with the augmentation of installed grid capacity, the utility bills of those on the grid continue to balloon with the impact of the increasing capacity charge. Yet the tariff structure still largely operates in the mode of power scarcity by charging higher per unit for higher consumption. Otherwise, widespread use of electricity for domestic and commercial cooking and heating may help a lot in this regard. Additionally, even partial diversion of the pertaining gas to industry can also reduce imports of expensive liquefied natural gas (LNG).

A highly encouraging development, though initiated under International Monetary Fund (IMF) pressure, is the effort which is under way since early last year to eliminate captive power and divert the associated load to the grid. This would, of course, also result in sparing around 280 million standard cubic feet per day (mmscfd) of processed gas for more efficient applications. Available data for the past fiscal year also indicates the effort is on the right track. However, its long-term success is largely conditional on the dependability of power supply to industrial units as per their stringent operational requirements.

The above measures can definitely go a long way in increasing the consumption of the grid's load and minimising capacity charge. However, I apprehend that the recent introduction of net-billing may not prove to be of much use. The fact that purchase of solar batteries in FY2025-26 increased by around 2.5 times compared with the preceding year rather indicates that even those partially on the grid now may soon be 100% off-grid.

This trend of opting for alternative avenues is visible in energy uses other than electricity too. For example, as per the Energy Yearbook 2025, the aggregate conventionally documented consumption of energy by the industrial sector experienced marked reduction of around 46% since 2020 till 2025. Solar ingress is not the only factor accounting for the entire gap. Higher utility costs have compelled industry to adopt alternative fuels like coal and wood too. As per a recent study, coal contributes 20% of the textile sector's energy mix. No wonder use of solid fuel boilers has increased considerably in recent years.

Similarly, the Energy Yearbook reports decline of 58% by volume in the use of coal since 2021 till 2025 in the brick-kilns industry. Probably, to accommodate economic factors, it is being used together with crop residues and in some cases even fuels like used tyres, lube oil, plastic and textile waste.

What is to be done

Based on the above, it is evident that we should be very cautious while intervening in solarisation. It has proven to be the biggest saviour for our economy. In addition to its contribution in savings in energy imports, the GDP it is annually shouldering is many times more. Secondly, the perennially open drain on the economy called capacity charge continues to widen. Therefore, there is a clear and urgent requirement for renegotiating the evidently pro-sellers' power purchase agreements and bringing the required balance to them.

Thirdly, we need to keep an eye on the changes in our energy fabric in the context of our carbon footprint and commitments to the United Nations regarding reduction in greenhouse gas (GHG) emissions.

THE WRITER IS A PETROLEUM ENGINEER AND AN OIL AND GAS MANAGEMENT PROFESSIONAL