Pakistan’s solar boom

Pakistan has experienced an exciting and unexpected energy transition story, driven by high energy prices and the availability of cheap solar PV from China. Up to 30 GW of solar has appeared across the country in a highly distributed manner, enabling people to access reliable, low-cost, and low-carbon power. This phenomenon has reduced the national fossil fuel import bill by $12bn since the recent Middle East energy crisis. However, the power sector is facing fiscal and structural stresses that pre-date recent energy crises, making the next phase of its transition critical for wider system transformation.

Why Pakistan’s power market is at a turning point

The national power market remains heavily shaped by a single-buyer model and long-term take-or-pay contracts. System planning was designed for a predictable, centralised electricity system, but this model has struggled to adapt as Pakistan moved from shortage to surplus capacity. In practice, shortages still occur due to affordability constraints, fuel availability, transmission bottlenecks, and high system losses.

The forces rapidly reshaping the system

Three primary forces are reshaping the energy landscape. Firstly, circular debt and the capacity payment ‘trap’ have reached levels that constrain fiscal space and investor confidence. By March 2025, circular debt was approximately Rs1.689 trillion (≈$6.04 billion), despite government injections and commercial borrowing. Secondly, a significant coal build-out under the China Pakistan Economic Corridor (CPEC) added approximately 8,500 MW of generation capacity. While these assets ended acute shortages, they introduced long-lived fixed costs through imported coal exposure and long-term contractual obligations. Thirdly, rapid behind-the-meter solar expansion is mounting pressure on the grid. Solar generation rose from less than 2% of the energy mix in 2020 to 24% in the first five months of 2025, becoming the largest source of generation for the first time. In FY2025 alone, the government was set to pay Rs2.14 trillion in capacity charges, including Rs1.069 trillion for state-owned plants and Rs707 billion for CPEC projects.

Reinvest, shrink or reinvent the grid?

Pakistan faces three broad strategic choices regarding its grid model. It can double down on a centralised national grid through deep reform and investment, actively pivot towards distributed power and mini-grids, or build a hybrid model. This decision involves a governance and political economy debate about how power should be produced, paid for, and controlled.

Five challenges facing Pakistan’s energy transition

The report identifies five top challenges that need addressing. Circular debt and fixed obligations continue to distort policy choices. Transmission constraints remain, particularly regarding the north-south corridor and the Matiari-Lahore ±660 kV High Voltage Direct Current line. Bottom-up energy transitions are outpacing institutions, with a shift from net metering to net billing potentially accelerating storage adoption. System operability is challenged in a high-inverter environment, raising issues like inertia, frequency response, and voltage control. Finally, the country must navigate a young coal fleet (5-10 years old) that is underutilised but still carries Chinese debt and requires high capacity payments.

Three strategic pathways for Pakistan’s power system

The report explores three pathways:
Pathway 1 involves doubling down on a centralised national grid, reinforcing the single-buyer model while investing in transmission expansion.
Pathway 2 treats distributed energy as the new normal, accelerating mini-grids, batteries, and virtual power plants (VPPs).
Pathway 3, the recommended strategic hybrid approach, involves modernising the backbone grid while decentralising the edges. This pathway turns distributed energy into a system asset through aggregation, pricing reform, and an ancillary services framework. It also creates an explicit coal transition plan using negotiated refinancing and targeted early retirement pilots to avoid compromising energy security.

Reforms are needed across all pathways

Essential reforms are required regardless of the chosen pathway. Pakistan needs to design a fair way to pay for network infrastructure through tariff reform that separates energy, capacity, and network charges. Mechanisms must be built to value flexibility and stability services through aggregation models. A clear coal transition rulebook is required to classify and rank plants for retirement, define valuation methods, and establish institutional ownership. Finally, grid planning must be aligned with Pakistan’s climate ambitions for major emissions reductions and higher renewable shares.

A pragmatic proposition

A strategic hybrid approach offers the best chance to preserve national cohesion and industrial reliability while harnessing the speed and affordability of distributed solar. Resilience cannot be retrofitted in moments of stress; it must be designed into the system. The report calls on development banks and philanthropic institutions to support the transition as a strategic investment in long-term energy security and fiscal resilience.