ADBI Working Paper Series

UNDERSTANDING THE ENERGY

SECTOR REFORM IN PAKISTAN
AND ITS IMPLICATIONS

Ashar Awan, Faik Bilgili,

and Dil B. Rahut

No. 1473
August 2024

Asian Development Bank Institute

 Ashar Awan is an assistant professor at the Kashmir Institute of Economics, The
University of Azad Jammu and Kashmir. Faik Bilgili is dean and a professor of Economics
at Erciyes University. Dil B. Rahut is vice-chair of research at the Asian Development
Bank Institute.
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Suggested citation:

Awan, A., F. Bilgili, and D. B. Rahut. 2024. Understanding the Energy Sector Reform in
Pakistan and its Implications. ADBI Working Paper 1473. Tokyo: Asian Development Bank
Institute. Available: https://doi.org/10.56506/HNKA9727

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© 2024 Asian Development Bank Institute

ADBI Working Paper 1473 A. Awan et al.

Abstract

The power sector of Pakistan has undergone numerous reforms, in this context the present
study examines the impact of these reforms on efficacy and sustainability. The literature on
power sector reforms in developing countries is extensive and diverse, covering various
aspects and dimensions of the reform process and its outcomes. However, there is a lack of
comprehensive and systematic studies in the case of Pakistan dealing with extensive range
of reforms over a long period. This study fills this gap by providing a comprehensive and
systematic evaluation of Pakistan’s power sector reforms. The findings show that after the
reforms, installed generation capacity has increased and the energy mix has shifted to
expensive fossil fuels, however, there has been no substantial reduction in transmission and
distribution loses. Nominal electricity tariffs increased the least for residential sector creating
cross-sector subsidies at the cost of industrial sector. In addition, electricity consumption by
residential sector increased substantially, while the commercial, agriculture and industrial
sectors shows no significant increase in electricity consumption. The GDP share of the
manufacturing and industrial sector declined. The study recommends tariff restructuring to
protect poor households and ensuring the industrial sector remains competitive.

Keywords: power sector, reforms, Pakistan, energy poverty, SDG 7

JEL Classification: L94, P11, Q01, L51, Q40

ADBI Working Paper 1473 A. Awan et al.

Contents

1. INTRODUCTION ..........................................................................................................1

1.1 Historical Overview of the Energy Policy Reforms ...........................................2

2. LITERATURE REVIEW ................................................................................................6

2.1 The Rationale and Objectives of Power Sector Reforms .................................6

2.2 The Components and Models of Power Sector Reforms .................................7
2.3 The Outcomes and Impacts of Power Sector Reforms ....................................8
2.4 Drivers and Challenges of Power Sector Reforms ...........................................8

3. RESULTS AND DISCUSSION ...................................................................................10

3.1 Affordability Among Poor and Non-poor Households.....................................13

4. CONCLUSION ...........................................................................................................18

REFERENCES ......................................................................................................................20
ADBI Working Paper 1473 A. Awan et al.

1. INTRODUCTION
The power sector plays a key role in the socio-economic progress of a nation.
However, developing countries encounter problems in delivering reliable, cost-effective,
and sustainable electricity services to domestic users and industries. Several nations
have undertaken a series of power sector reforms since the 1990s to address these
challenges, aligning with the global trend of market-oriented policies. These reforms
typically involve the separation of vertically and horizontally integrated state-owned
utilities, the involvement of the private sector in power generation and distribution,
the establishment of independent regulatory bodies, and the introduction of
competition in power markets. The primary goals of these reforms are to enhance the
efficiency, quality, and financial viability of the power sector while ensuring improved
accessibility and affordability of electricity for disadvantaged and marginalized
communities. However, the outcomes and impacts of these reforms differ across
countries and contexts, depending on the design, implementation, and evaluation of
the reform process.
Pakistan, with its vast population of 240 million as of 2023 (UNFPA 2023) and a GDP
of $376 billion in 2022 (World Bank 2022), grapples with a pressing issue: a persistent
power crisis. Frequent power outages, substantial losses in transmission and
distribution, limited cost recovery, high subsidies, tariffs, and inadequate service quality
characterize this crisis. The detrimental impact of this power crisis reverberates
throughout the nation, impeding economic growth, undermining social well-being, and
posing threats to environmental sustainability. In an earnest endeavor to surmount this
crisis, Pakistan has embarked on a series of power sector reforms since the early
1990s, with valuable assistance and guidance from esteemed international institutions
like the World Bank and the International Monetary Fund (IMF).
The literature on power sector reforms in developing countries is extensive and
diverse, covering various aspects and dimensions of the reform process and its
outcomes. However, there is a lack of comprehensive and systematic studies on the
case of Pakistan, which has implemented a wide range of reforms over a long period.
Most existing studies on Pakistan’s power sector are either descriptive or focused on
specific issues or components of the sector, such as generation, distribution,
regulation, or pricing. Moreover, many of these studies are outdated or based on
limited data and methods. Therefore, there is a need for an updated and holistic
analysis of Pakistan’s power sector reforms and their impacts on various indicators of
the sector’s performance and development.
This study aims to fill this gap by providing a comprehensive and systematic evaluation
of Pakistan’s power sector reforms and their impacts on various outcomes, such as
generation capacity, efficiency, quality, reliability, affordability, accessibility,
sustainability, and governance. The study uses a mixed-methods approach, combining
quantitative and qualitative data and techniques to analyze the reform process and its
outcomes. The study also compares Pakistan’s experience with that of other
developing countries that have implemented similar reforms in their power sectors. The
study contributes to the literature on power sector reforms in developing countries by
providing an in-depth and up-to-date case study of Pakistan that can offer valuable
lessons and insights for other countries facing similar challenges and opportunities in
their power sectors.
Therefore, the main research question of this study is how power sector reforms in
Pakistan have affected the performance and development of the sector. Thus, the
study contributes to the existing literature in four ways. First, it analyzes the process

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and components of power sector reforms in Pakistan since the 1990s. Second, this
study attempts to evaluate the impacts of power sector reforms on various indicators of
power sector performance and development, such as generation capacity, efficiency,
quality, reliability, affordability, accessibility, sustainability, and governance. For the
academic audience, this study contributes to the literature on power sector reforms in
developing countries by providing a comprehensive and systematic case study of
Pakistan, which has implemented a wide range of reforms over a long period of time.
Third, this research compares Pakistan’s experience with that of other developing
countries that have implemented similar reforms in their power sectors. For the policy
audience, this study provides valuable lessons and insights for improving the power
sector performance and development in Pakistan and other developing countries. This
study also identifies the challenges and opportunities for further reforms in the power
sector, as well as the best practices and pitfalls to avoid. Lastly, the study provides
policy recommendations and implications to improve the power sector performance
and development in Pakistan.
The rest of this study is organized as follows. Section 2 reviews the literature on power
sector reforms in developing countries, focusing on their objectives, components,
outcomes, and determinants. Section 3 evaluates the impact of power sector reforms
on various indicators of power sector performance and development in Pakistan.
Section 4 concludes the study with a summary of the main findings, limitations, and
directions for future research.

1.1 Historical Overview of the Energy Policy Reforms

1.1.1 The Pre-Reform Period (1947–1990)
At the time of its independence in 1947, Pakistan’s power sector was characterized
by its small size and underdevelopment. Recognizing the significance of power
sector development for the country’s economic and social progress, the government
undertook several measures to expand and enhance the sector, including investment
in large-scale hydropower projects such as the Mangla Dam (1967) and the Tarbela
Dam (1976) to increase generation capacity and reduce dependence on imported oil.
The Mangla Dam on Pakistan’s Jhelum River, initially designed for 1,000 MW and
completed in 1967 at a cost of US$ 1.5 billion, was expanded to 1,714 MW in
2009 through the Mangla Dam Raising Project, costing Rs. 96.853 billion and funded
by the World Bank and Asian Development Bank (Nation, 2016). The Tarbela Dam
on the Indus River, initially designed for 3,478 MW and completed in 1976 for
US$ 1.497 billion, was expanded to 4,888 MW in 2018 with World Bank and Water
and Power Development Authority (WAPDA) funding, and the ongoing Tarbela Fifth
Extension Hydropower Project aims to add 1,410 MW, financed by the World Bank
and the Asian Infrastructure Investment Bank (World Bank 2020). By 1980, hydropower
was responsible for over 70% of total electricity generation in Pakistan (Khan 2014).
With assistance from United States Agency for International Development (USAID) and
other donors, the Rural Electrification Program (REP) was launched in 1974, resulting
in over 80% of Pakistani villages gaining access to electricity by 1990 (Bacon and
Besant-Jones 2001).

1.1.2 The First Wave of Reforms (1990–2000)

During the early 1990s, the power sector in Pakistan faced a severe crisis marked
by a growing demand-supply gap, high transmission and distribution losses,
low-cost recovery, poor service quality, and mounting debts. The Gulf War in 1991
further exacerbated the situation by increasing oil prices and reducing the country’s

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foreign exchange earnings. Acknowledging the unsustainability and inefficiency of

the existing power sector model, the government embarked on a series of reforms
in collaboration with international institutions like the World Bank and the IMF. These
reforms included allowing private sector participation in power generation through
independent power producers (IPPs). Attractive incentives, including guaranteed power
purchase agreements, high tariffs, tax exemptions, and sovereign guarantees, were
offered to IPPs.1 Consequently, over 20 IPPs entered the market, adding approximately
6,000 MW of generation capacity by 2000 (Naqvi 2016; Ullah et al. 2017).
In 1998, the government established three generation companies (GENCOs), one
transmission company (NTDC), and eight distribution companies (DISCOs) under the
WAPDA framework. This structural change aimed to enhance efficiency, accountability,
and transparency by delineating the functions and responsibilities of different entities
(Jamil et al. 2022).
Pakistan established an independent regulator for the power sector, the National
Electric Power Regulatory Authority (NEPRA), in 1997. NEPRA assumed
responsibilities such as issuing licenses, setting tariffs, ensuring quality standards,
resolving disputes, and safeguarding consumer interests. The objective was to create a
level playing field, ensuring fair competition and regulation within the sector (Qazi et al.
2017). Table 1 shows a summary of structural, institutional, and policy reforms in the
power sector in Pakistan.

Table 1: Summary of Reforms in the Power Sector in Pakistan

Structural Institutions Policy
Vertical unbundling (1992) PPIB (1994) Power policy 1994
Introduction of IPPs (1994) NEPRA (1997) Hydro policy 1995
Single-buyer model (1998) NTDC (1998) Power policy 1998
DISCOs (1998) PCRET (2001) Power policy 2002
Privatization of KESC (2005) AEDB (2005) Power policy 2006
Invitation for whole competition (2005) CPPA (2015) Renewable energy policy 2006
NEECA (2016)
Note: NTDC = National Transmission and Distribution Corporation, responsible for transmission and distribution of
power; AEDB = Alternative Energy Development Board, responsible for alternate and renewable energy development;
KESC = Karachi Electric Supply Corporation, a private company providing power in Karachi; NEECA = National
Energy Efficiency and Conservation Authority, responsible for the promotion of alternative and renewable energy;
PCRET = Pakistan Council of Renewable Energy Technology, responsible for research and development in renewable
energy; CPPA = Central Power Purchasing Agency; PPIB = Pakistan Power Infrastructure Board, responsible for
investor facilitation in energy sector.

1.1.3 The Second Wave of Reforms (2000–2010)

The power sector in Pakistan encountered another crisis in the late 2000s,
characterized by a widening demand-supply gap, high transmission and distribution
losses, low-cost recovery, poor service quality, and mounting debts. The global
financial crisis in 2008 further worsened the situation by diminishing foreign investment
and aid flow to the country. Recognizing the inadequacy and incompleteness of
previous reforms, the government initiated a second wave of reforms with the support
and guidance of international institutions such as the World Bank and the IMF. These
reforms include privatizing certain state-owned entities in the power sector, including

1
See Table 1 for IPPs’ name, capacity and commission dates. Otherwise, see List of IPP's (cppa.gov.pk).
All IPPs use high-speed diesel, furnace oil, and gas for electricity production (Dailytimes, 2023).

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KESC, several GENCOs, 2 and DISCOs. The government sold KESC, Karachi’s
primary utility, to a private consortium in 2005. Additionally, the privatization process for
some GENCOs and DISCOs was initiated in 2007, aiming to attract private investment
and enhance sector performance and profitability (Naveed et al. 2022).
In addition, during the first decade of the current century, Pakistan introduced
competition in power generation through a single-buyer model. In 2009, the
government established the Central Power Purchasing Agency (CPPA), a state-owned
entity responsible for purchasing power from generators and selling it to distributors
through competitive bidding or contracts. This measure aimed to reduce costs and
prices while fostering quality and innovation in the sector (Bacon and Besant-Jones
2001; Khan 2014).
In 2002, the government adopted a multi-year tariff determination mechanism. NEPRA
was entrusted with setting tariffs based on cost recovery principles and performance
benchmarks. Furthermore, subsidies for various consumer groups, particularly
domestic and agricultural consumers, were reduced, while targeted subsidies for
low-income consumers were introduced through lifeline tariffs (Naveed and Azhar
2022). An overview of the reforms implemented in Pakistan is depicted in Figure 1. The
graphical representation illustrates a noteworthy trend: private sector involvement has
exhibited limited growth since 1990. While regulatory measures and restructuring
initiatives have been introduced, it is notable that there has been no increase in
competition within the sector.

Figure 1: Progress of Reforms in Pakistan

Note: PSP = private sector participation.

Source: Authors’ own illustration using data from ESMAP.

1.1.4 The Current Situation and Future Prospects (2010–present)

The power sector in Pakistan continues to grapple with a significant crisis during
the 2010s, characterized by an ongoing demand-supply gap, high transmission and
distribution losses, low-cost recovery, poor service quality, and mounting debts.
Political instability, security threats, natural disasters, and environmental challenges

2
GENCOs are government entities responsible for power generation, operated by WAPDA (Masroor
et al., 2021).

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exacerbate the situation. Recognizing the unsustainability and inefficiency of the

existing power sector model, the government aims to pursue a new vision and strategy
for the sector, with guidance from international institutions like the World Bank and the
IMF. Figure 2 shows the timeline of reforms implemented in Pakistan’s energy sector.

Figure 2: Energy Sector’s Institutional Development Timeline

Source: Authors’ illustration.

The government has introduced various policies and incentives, such as feed-in tariffs,
net metering, tax exemptions, and carbon credits, to encourage the development
and deployment of renewable and low-carbon energy sources. The objective was
to diversify the energy mix, reduce reliance on imported oil and gas, and mitigate
greenhouse gas emissions and climate change impacts. Furthermore, the government
of Pakistan aimed to enhance regional cooperation and integration in the power sector,
exemplified by initiatives like the Central Asia-South Asia Electricity Transmission and
Trade Project (CASA-1000) and the Turkmenistan-Afghanistan-Pakistan-India (TAPI)
pipeline. The government actively participated in regional agreements and initiatives to
promote cross-border trade and the exchange of electricity and gas. The goal was to
improve supply security and reliability, reduce costs and prices, and foster regional
economic and social development (Rahman et al. 2011; Wolf 2020).
An independent Power Division under the Ministry of Energy in 2017 was established
to improve the governance and accountability of power sector entities. The government
has implemented various measures to strengthen institutional capacity, transparency,
and oversight of power sector entities. These measures include enhancing the
autonomy and effectiveness of NEPRA; streamlining the functions and responsibilities
of WAPDA, CPPA, GENCOs, NTDC, DISCOs, KESC, and other entities; and
implementing performance-based contracts and incentives for managers and
employees (Bacon and Besant-Jones 2001; Khan 2014; World Bank 2020). Figure 3
illustrates the overview of the power sector in Pakistan.

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Figure 3: Overview of the Power Sector in Pakistan

Source: Authors’ illustration.

2. LITERATURE REVIEW
This literature review aims to provide a systematic overview of the existing knowledge
on power sector reforms and identify the gaps and limitations that this study seeks
to address. The literature review covers both theoretical and empirical studies on
power sector reforms in developing countries. The literature review is organized into
four thematic sections, namely: (i) the rationale and objectives of power sector reforms;
(ii) the components and models of power sector reforms; (iii) the outcomes and impacts
of power sector reforms; and (iv) the drivers and challenges of power sector reforms

2.1 The Rationale and Objectives of Power Sector Reforms

The main rationale for power sector reforms in developing countries was the poor
performance of state-owned utilities (SOEs) that dominated the sector before the
reforms. SOEs were often inefficient, unaccountable, corrupt, and politically influenced
(Ullah et al. 2017; Urpelainen and Yang 2019). They suffered from low productivity,
high costs, poor quality, frequent outages, low coverage, high losses, low tariffs, high
subsidies, and huge debts (Estache et al. 2002). These problems resulted in fiscal
pressure on the government budget, economic losses for consumers and producers,
social dissatisfaction among citizens, and environmental degradation due to reliance on
fossil fuels (Sen and Jamasb et al. 2012; Khan 2014; World Bank 2019).

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The main objectives of power sector reforms in developing countries were to improve
the efficiency, quality, and financial viability of the sector by introducing market
mechanisms, private participation, regulation, and competition (Martins et al. 2020).
These objectives were based on the assumptions that (i) market forces would allocate
resources more efficiently than state intervention; (ii) private actors would manage
utilities more effectively than public bureaucrats; (iii) regulation would protect
consumers’ interests and ensure fair competition; and (iv) competition would lower
costs and prices and increase quality and innovation (Erdogdu 2014; Gore et al. 2019;
Sharma et al. 2005).
However, these objectives were driven not only by economic considerations but also
by political and ideological factors. Power sector reforms in developing countries
were influenced by the global trend of market-oriented policies that emerged in the
1980s and 1990s as part of the Washington Consensus. These policies were promoted
by international institutions such as the World Bank and the IMF as conditionalities
for providing loans or aid to developing countries. These institutions argued that
market-oriented policies would enhance economic growth, reduce poverty, and
promote good governance in developing countries (Gratwick and Eberhard 2008; Lee
and Usman 2018; Nepal and Jamasb 2012a).
However, these policies were not universally accepted or implemented by developing
countries. Power sector reforms in developing countries varied across regions and
contexts depending on their level of development, political system, institutional
capacity, social preferences, and external influences. Some regions, such as Latin
America and Eastern Europe, were more receptive and responsive to market-oriented
policies than others, such as Africa and Asia (Erdogdu 2011; Letova et al. 2018;
Nakano and Managi 2008; Urpelainen et al. 2018).

2.2 The Components and Models of Power Sector Reforms

The main components of power sector reforms in developing countries are four
structural reforms that aim to change the organization and governance of the sector.
These reforms are: (1) regulation, which involves creating an independent agency
to oversee and regulate the sector; (2) restructuring, which involves unbundling the
SOEs into separate entities for generation, transmission, and distribution; (3) private
sector participation, which involves allowing private actors to invest in and operate
power utilities; and (4) competition, which involves introducing market mechanisms
to determine prices and allocate resources in the sector (Ahmed and Bhatti 2019;
Nagayama 2010).
However, these reforms are not implemented in a uniform or sequential manner by
developing countries. Rather, they are adapted and combined to form different models
of power sector reforms that suit different contexts and objectives. The literature
identifies three main models of power sector reforms that developing countries have
adopted: (1) the single-buyer model, which involves a state-owned entity purchasing
power from generators and selling it to distributors; (2) the wholesale market model,
which involves a competitive market where generators sell power to distributors
through auctions or contracts; and (3) the retail market model, which involves a
competitive market where generators sell power directly to consumers or through
intermediaries (Qazi and Jahanzaib 2018).
The choice and adoption of these models depend on various factors, such as the
size and structure of the power sector, the level of development and demand, the
availability and diversity of resources, the political and institutional environment, and
external influences. Some regions, such as Latin America and Eastern Europe, have

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adopted more advanced and competitive models than others, such as Africa and
Asia (Ahmed and Bhatti 2019; Janet Ruiz-Mendoza and Sheinbaum-Pardo 2010;
Nagayama 2010; Urpelainen and Yang 2017).

2.3 The Outcomes and Impacts of Power Sector Reforms

This section evaluates how reforms have affected various indicators of power sector
performance and development, such as generation capacity, efficiency, quality,
reliability, affordability, accessibility, sustainability, and governance (Foster and Rana
2019b). The literature on the outcomes and impacts of power sector reforms in
developing countries can be classified into three groups. The first includes implications
for power generation (Sen and Jamasb 2012), generation efficiency (Meng et al. 2016),
transmission and distribution losses (Nagayama 2010), capacity utilization (Zhang et al.
2008), etc. The second group analyzed the impact of reforms such as liberalization,
unbundling, and independent regulators on cross-price subsidies (Erdogdu 2011), price
reduction (Nagayama 2009; Swadley and Yücel 2011; Zarnikau and Whitworth 2006),
and electricity access (Bensch 2019). The third group analyzed the effect of reforms in
the power sector on households; this group analyzed the impact of change in welfare
and affordability as a result of market-oriented reforms such as privatization, subsidies,
and tariff reforms (Khalid and Salman 2019; Miniaci et al. 2014).
The variation in the outcomes and impacts of power sector reforms in developing
countries depends on various factors, such as the design, implementation, and
evaluation of the reforms (Nagayama 2009). The design of the reform refers to the
choice and combination of the components and models of the reform that suit the
specific context and objectives of each country (Li et al. 2017). Implementation of
the reforms refers to the process and pace of carrying out the reforms and overcoming
the technical, institutional, and political challenges (Kundu and Mishra 2011).
Evaluation of the reforms refers to the methods and criteria for measuring and
assessing the outcomes and impacts of the reforms (Sen and Jamasb 2012).
The literature also shows that the outcomes and impacts of power sector reforms in
developing countries vary across regions and contexts. Some regions, such as Latin
America and Eastern Europe, have achieved better outcomes and impacts than others,
such as Africa and Asia (Machado et al. 2016). This variation reflects differences in the
level of development, political system, institutional capacity, social preferences, and
external influences that affect the design, implementation, and evaluation of power
sector reforms in each region (Sen and Jamasb 2012).

2.4 Drivers and Challenges of Power Sector Reforms

In the 1990s, the idea of reforms in the power sector came with a wider Washington
Consensus. Mainly, the idea was based on growing dissatisfaction with state-owned
utilities (Bacon and Besant-Jones 2001). In response to Washington Consensus
policies, developing countries started reforms to restructure utilities, their privatization,
and the creation of regulators to achieve competition in the power sector (World Bank
2019). The reform package’s perception was that government-monopolized utilities are
less efficient than privately managed utilities (Khan 2014).
The literature on the determinants and challenges of power sector reforms in
developing countries is rich and diverse, covering various aspects and dimensions
of the reform process (Ullah 2013). The earlier literature on the determinants of
reforms can be categorized into three distinct groups. The first deals with the political
economy of power sector reforms, meaning the role and influence of various actors

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and interests in shaping the reform agenda and outcomes (Amin and Djankov 2014;
Singh and Brock 2015). The actors include politicians, bureaucrats, regulators, utilities,
consumers, civil society, donors, and investors (Kathuria 2021), while the interests
include economic, social, environmental, ideological, and institutional factors (Ullah
2015). The literature shows that power sector reforms are often subject to political
interference, resistance, capture, and reversal by different actors and interests that
may have conflicting or divergent objectives and incentives (Nepal and Jamasb 2012).
The second group concentrates on the institutional capacity that influenced power
sector reforms (Qazi et al. 2017). This refers to the ability and readiness of various
institutions and organizations to design, implement, and evaluate power sector reforms.
The institutions include ministries, agencies, utilities, regulators, courts, and markets
(Khan 2014), while the organizations include formal and informal rules, norms, values,
and practices that govern the behavior and interaction of different actors in the sector
(Estache et al. 2002). The literature shows that power sector reforms often face
institutional constraints, gaps, weaknesses, and failures that may affect the quality and
effectiveness of the reform process and outcomes (Nepal and Jamasb 2012).
Thirdly, external factors play a crucial role in shaping power sector reforms (Sharma
et al. 2004). These factors encompass global trends, regional dynamics, technological
advancements, environmental changes, and the role of international institutions
(Bhattacharyya 2007). Additional factors include market pressures, competition,
cooperation, learning, and diffusion of best practices and lessons learned from other
countries and regions (Ahmed and Bhatti 2019; Den Hertog 2010; Foster and Rana
2019a). Drawing upon the insights gleaned from the extensive literature review,
Figure 4 elucidates the anticipated outcomes stemming from the instituted reforms.
These expectations include a spectrum of objectives within the power sector reforms,
encompassing reductions in tariff rates and transmission and distribution (T&D)
losses, easing the fiscal burden on public finances, enhanced affordability and
accessibility, enhanced capacity and operational efficiency, and a positive stimulus for
economic development.

Figure 4: Expectations from Reforms in the Power Sector

Source: Authors’ own illustration.

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3. RESULTS AND DISCUSSION

In this study, an attempt has been made to study how far reforms in Pakistan’s power
sector were successful in improving the electricity sector’s desired outcomes. To this
end, we employed descriptive analysis of data from various sources, including annual
NEPRA, NTDC, and WAPDA reports and online data sources such as International
Energy Agency (IEA), the World Bank, and the Pakistan Bureau of Statistics. Since no
continuous data are available for reforms, we relied on non-regression methods such
as descriptive statistics and graphical analysis.
Since the study undertook a descriptive analysis of data compiled from various national
and international publications, this section presents an evaluation of the reforms with
the help of tabulations and charts. Figure 5 shows the relationship between economic
growth, measured through GDP per capita in real terms and the human development
index (HDI) and electricity consumption per capita in Pakistan during 1990–2018. We
observe a fascinating trend: as GDP per capita rises, so does electricity consumption
per capita. This positive correlation indicates that as Pakistan experiences economic
growth, its citizens consume more electricity, reflecting improved living standards
and increased industrial and commercial activities. Several key moments stand out
throughout the period, highlighting the consequences of power sector reforms. For
instance, when the government implemented measures to enhance the efficiency of
electricity generation and distribution, we observe a notable boost in both GDP per
capita and electricity consumption per capita. Conversely, periods of stagnation or
decline in the graph may point to challenges faced by the power sector, such as
insufficient infrastructure investments or ineffective policies. An increase in electricity
consumption could be indicative of greater economic activity and advancements
in various sectors, leading to higher GDP. The rise in GDP per capita and electricity
consumption also suggests that living standards and access to basic facilities such as
electricity have vastly improved, resulting in a rising HDI score. Since electricity is used
in time-saving home appliances, education, health, and social activities, it is likely that
with the rise of electricity consumption per capita during three decades of reforms in
the power sector, the HDI is both directly and indirectly improved.

Figure 5: Relationship Between GDP and Electricity Consumption

Source: Authors’ own illustration.

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To evaluate the success of the reform process in Pakistan, we analyze the change
in installed generation capacity from 1980 to 2016, as shown in Figure 6. There was an
increase in the growth rate of installed generation capacity after the reform period
started in 1992. With various reforms from 1993 to 1998, an acceleration in installed
generation capacity can be observed. There was a sharp rise in installed generation
capacity after the year 2015.

Figure 6: Installed Generation Capacity of Electricity in Pakistan

Source: Authors’ own illustration.

One of the most highly used indicators in the literature evaluating reforms in developed
and developing countries is T&D losses. Unfortunately, T&D losses in Pakistan are still
very high, even after several years of reform implementation, as shown in Figure 7.
Even after two decades of reforms implemented in the power sector in Pakistan,
transmission and distribution losses in the power sector are high. The power sector
in Pakistan has seen huge losses in T&D, which burden the utility’s efficiency and
efficacy. T&D refers to the electric power lost during the process of transmitting and
distributing electricity from the sources of supply to the points of consumption (WDI
2023). This includes unpaid electricity, theft, uncharged electricity, and technical line
losses. Another technical reason for these losses is the distance between the power
generation site and the end-users. With the long distance between distribution
networks and the generation plants, technical and unavoidable losses increase
manyfold. However, in the case of Pakistan, electricity theft, unmetered connections,
and non-payments by both commercial and residential customers are a reason behind
the high T&D losses. Reforms are expected to bring down the T&D losses as their
main promise is based on efficiency and de-politicization of the power sector.
Figure 8 shows that hydropower generation increased by 104.5% during 1990–2015.
There was no significant increase in coal-fired power projects during this period;
however, the share of oil-based electricity has increased in the last two decades due to
private power producers mainly using oil for power production. Pakistan is a nuclear
power and produces electricity from nuclear sources. The generation capacity of
nuclear-based power has also slowly increased.

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ADBI Working Paper 1473 A. Awan et al.

Figure 7: Transmission and Distribution Losses

Source: Authors’ own illustration.

Figure 8: Electricity Generation by Source in Gwh

Source: Authors’ own illustration.

Figure 9 shows the trend in value addition by various sectors of the economy of
Pakistan. The contribution of different sectors to GDP is worth noting, as shown in
Figure 10, in relation to the electricity consumption by various sectors. The services
sector is Pakistan’s highest GDP-contributing sector; however, it ranks after the
industrial sector in electricity consumption. Similarly, the agriculture sector’s share
in GDP has remained around 10%–15%; however, its share in total electricity
consumption is the lowest among all sectors. The importance of the services sector in
GDP and the low share of the agriculture sector in GDP calls for further in-depth
analysis of their contribution to labor and other economic sectors to formulate policies
related to sector-wise subsidy distribution from the public sector budget.

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ADBI Working Paper 1473 A. Awan et al.

Figure 9: Electricity Consumption by Sector

Source: Authors’ own illustration.

Figure 10: Percentage Share in GDP by Sector

Source: Authors’ own illustration.

3.1 Affordability Among Poor and Non-poor Households

Figure 11 shows that over time, the percentage tariff increase for various consumption
slabs increased; however, the percentage increase is higher among high consumption
groups compared to lower ones. The literature review shows that deregulation in
the power sector reduces power tariffs (Necoechea-Porras et al. 2021). However, the
literature argues that a reduction in the electricity prices in response to reforms is
possible in the long run but not in the short run (Nagayama 2010).

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ADBI Working Paper 1473 A. Awan et al.

Figure 11: Percentage Increase in Tariff for Various Consumer Slabs

Source: Authors’ calculation using data from NEPRA.

In addition, Figure 12 shows the increase in electricity tariff for commercial sector is
higher than residential sector. The disparity in tariff rates across customer types may
be indicative of cross-sector subsidies, where revenues generated from one type of
sector are used to subsidize the prices of another sector.

Figure 12: Electricity Tariff in Paisa/KWh

Source: Authors’ calculation using data from NEPRA.

Figure 13 shows the trend for normalized electricity tariffs. With the help of the
consumer price index, we normalize the average tariff charged to residential
customers. Data on tariffs are collected from various annual reports by NEPRA. During
the reform implementation period, tariffs showed a sharp increase from PKR 6 to PKR
8.5; however, in the long run, the per-unit price of electricity in average and real terms
was reduced to PKR 6. However, from this analysis, one thing is clear: the promise

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ADBI Working Paper 1473 A. Awan et al.

of reforms to bring tariffs down, particularly for residential customers, has not been
fulfilled in Pakistan.

Figure 13: Average Normalized Tariff for Residential Customers

Source: Authors’ calculation using data from NEPRA.

Figure 14 shows the trend in the regulator quality of the power sector in Pakistan. The
data source is ESMAP, obtained through reports available on its website. The graphs
show that after 2006, the regulatory quality of institutions related to the power sector,
transmission, distribution, and generation improved. However, there has been no
further improvement in the regulatory quality of power sector-related institutions since
2006. It is worth mentioning here that the regulatory body of Pakistan is NEPRA, which
is mainly responsible for the regulation of generation, transmission, and distribution.

Figure 14: Trend in Regulator Quality of Pakistan

Source: Authors’ calculation using data from NEPRA.

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ADBI Working Paper 1473 A. Awan et al.

Figure 15 shows the percentage of households facing an affordability problem in

households in various regions (urban and rural and province-wise) during the last
two decades. It shows strong heterogeneity in the affordability problem faced by
households across Pakistan. The graph also shows that some regions improved but
some worsened over time. This signifies the importance of evaluating reforms from
a regional perspective. Local and regional policies for electricity access and
consumption should focus on such an affordability analysis to guide future reforms in
the power sector.

Figure 15: Percentage of Households Facing an Electricity Affordability Problem

Source: Authors’ estimation using HIES surveys 1998–2019.

Table 2 shows the time trend of various reform measures and the electricity sector
output indicators. The top 12 rows show various output indicators related to the
electricity sector, while the last three rows show qualitative and quantitative indicators
of reforms and their scores.
We start our discussion with output indicators in the electricity sector. Access to
electricity is the first indicator of output or success in the electricity sector. For detailed
analysis, we use disaggregated data for urban and rural areas. Table 2 shows that
the electricity access rate in urban areas was about 93 in 1998. It is interesting to note
that 1998 was the year when two major reforms, unbundling and the power sector
regulator, were introduced in Pakistan. Therefore, we see a sharp rise in urban
electrification, reaching nearly 100% in 2018. From 1998 to 2002, major reforms were
implemented in Pakistan, including vertical unbundling of the utility.

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 Table 2: Major Power Sector Indicators and Reforms Timeline
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Access to electricity – urban 92 96
Access to electricity – rural 62 69
Affordability – urban 12.2 25 40 39
Affordability – rural 5.4 23 33 32
Private sector participation 3.4 3.8 3.7 3.0 3.1 3.1 3.8 4.4 4.6 5.1 5.3 5.3 5.3 5.2 4.9
Average domestic tariff 0.7 0.8 0.8 0.8 1.0 1.1 1.4 1.6 1.9 2.3 2.3 2.6 3.2 3.3 4.3
Average tariff to all sectors 1.3 1.4 1.6 1.7 2.0 2.2 2.91 3.1 3.6 4.1 4.0 4.1 4.3 4.5 4.8
ADBI Working Paper 1473

Subsidy (allocated) 20 25 49 50
Circular debt billion PKR
Generation capacity MW 6,409 7,023 7,463 8,122 9,651 10,563 11,063 12,956 13,683 13,800 14,,444 15,534 15,819 15,819 17,367
T&D losses 20.7 19.9 22.2 22.8 22.8 22.8 23.4 24.6 30.4 26.7 24.3 26.1 26.5 25.2 24.6
Electricity consumption KW per capita 277 297 334 335 345 345 359 363 344 356 37.2 378 385 410 429
Regulatory quality (perception) –0.51 –0.48 –0.76 –0.78 –0.71 –0.91
Regulatory reforms First IPPs Competition Regulation Restructuring Restructuring
reform allowed started started |unbundlling|+ and
approved |NEPRA| PEPCO + deregulation
NTDC of WAPDA

17
Reforms score by ESMAP 3 4 4 3 3 9 10 42 62 63 63 63 69 69 69
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Access to electricity – urban 96 97 98 98 98 98 96 98 98 99 98 98
Access to electricity – rural 78 80 81 86 87 88 88 90 89 90 85 87
Affordability – urban 38 33 38 42 35 35
Affordability – rural 28 23 24 28 20 25 34
Private sector participation 7.0 7.0 7.0 7.1 7.4 7.8 8.2 8.2 8.2 8.3 8.3
Average domestic tariff 3.4 3.5 3.8 4.6 5.4 6.6 7.3 8.4 8.7 9.5 10.2 10.5 10.7 11.1
Average tariff to all sectors 4.4 5.3 5.2 6.0 7.4 8.7 10.0 11.3 12.6 14.7 15.5 14.3 13.9 14.6
Subsidy (allocated) 50 50 100 150 109 178 346 464 264 156 185 117 102 81
Circular debt billion PKR 84 111 161 145 23.5 365 537 450 450 600 600 620 1,100
Generation capacity MW 17,395 17,395 17,526 17,827 18,022 18,892 20,986 20,499 20,850 22,104 22,849 23,247 28,072 32,525
T&D losses 24.0 22.3 19.6 21.2 19.9 16.2 16.9 17.0 16.3 17.1
Electricity consumption KW per capita 463 487 481 443 459 465 455 450 482 471
Regulatory quality (perception) –0.64 –0.48 –0.53 –0.60 –0.58 –0.60 –0.63 –0.72 –0.70 –0.68 –0.63 –0.64 –0.59
Regulatory reforms K-Electric Exemption Competitive
privatized from bidding +
income tax reduction of
subsidies
Reforms score by ESMAP 71 71 71 71 71 72 72 72 72 72 72
A. Awan et al.
ADBI Working Paper 1473 A. Awan et al.

However, rural electrification did not rise despite various reforms implemented in
Pakistan’s power sector. Similarly, the electricity affordability problem remained a
financial burden on rural households. Since a reduction in power tariffs is a major
expectation from the reform process, one can anticipate that electricity affordability has
improved after two decades. However, the opposite is the case, particularly for rural
households whose ability to afford electricity has reduced in the last two decades.
Since the reforms were introduced in the early 1990s, private sector participation
has increased from 3.4% to 8.2%, while the average electricity tariff rose sharply in
this period. The average cost per unit for electricity for the residential customer has
risen from PKR 0.7 to PKR 11.14. Similarly, the average unit price of electricity in
all residential, commercial, and industrial sectors has increased from PKR 1.3 to
PKR 14.5. In addition, the subsidy allocated to the power sector nearly tripled during
2002–2018. As a policy, a reduction in subsidies was set as an aim by the government
in 2013. However, subsidies, which international aid organization demand from
Pakistan to remove, is a lifeline for poor residential customers who are the primary
beneficiaries of such subsidies. Moreover, circular debt has crippled Pakistan’s power
sector causing frequent power outages, and is a threat to the future sustainability of
the power sector in the country. On the positive side, generation capacity increased
from 6,409 to 32,552 MW from 1990 to 2018. In addition, T&D losses have improved
(reduced) from 20% to 16%. Electricity consumption has increased from 277 to
485 KW per capita. Similarly, the perceived regulatory quality has improved from –0.48
to –0.70.

4. CONCLUSION
Electricity affordability is still a challenge to governments in developing countries.
Reforms in the power sector aimed to improve affordability by reducing electricity
supply tariffs. Earlier literature analyzed the claim of reforms to improve affordability
from macro data sets. The present study attempted to investigate data from various
reports and online sources, revealing new insights into power sector reforms and future
strategies to ensure sustainable development in Pakistan.
The results based on descriptive analysis show that electricity consumption per capita
and GDP growth were observed in Pakistan from 1990 to 2018. Also, a sharp rise in
installed generation capacity was observed after the introduction of various reforms in
Pakistan’s power sector. However, there is no significant improvement in the country’s
T&D losses in the power sector. Indeed, the average 20% T&D losses when the
reforms were introduced in the country are still at the same level. On the other hand,
energy generation in the country has seen a sharp addition of power generation from
hydro, oil, and natural gas.
Despite implementation of various reforms in the power sector, the industrial sector
has not shown a significant increase in electricity consumption. Without a significant
rise in electricity consumption in the industry sector, the country cannot move toward
improving its citizens’ living standards and raising the per capita income. The
residential sector is the only sector showing a significant rise in electricity consumption.
This increase indicates that residential customers are the primary beneficiaries of the
various power reforms. They might receive a cross-sector subsidy, consuming cheap
electricity at the expense of industrial customers. Our findings also revealed that
the manufacturing and industry sectors’ share in GDP declined during the reform
implementation period. This raises further concerns about the success of reforms and
questions about how these reforms were implemented. The only sector that showed an
increased share in GDP was the services sector, which includes commercial banks.

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ADBI Working Paper 1473 A. Awan et al.

Historical data analysis on tariff rises showed that industrial and commercial customers
faced more price increases than domestic/residential customers. The energy
generation mix that changed because of various policies adopted in Pakistan made
electricity very expensive, particularly for the commercial sector. The share of
hydropower reduced from 42% to 25% during 1994–2020 (Jamil et al. 2022). As the
share of hydropower reduces in the country’s power generation mix, expensive power
is produced from fossil fuels. The rise of fossil fuel-based electricity also adds a fiscal
burden and weakens local currency by depreciation/devaluation.
This study mainly focused on residential customers to see their welfare benefits as
a result of the reform process and to guide policymakers in the future framework
of reforms in the power sector. The results showed that when regulatory quality is
low (1998–2007), the average normalized tariff was high compared to years when
regulatory quality was better.
Our results are engaging because they present empirical evidence of the affordability
problem among the poorest households. Electricity is less affordable to the poorest
income group in our sample, which shows that the government needs to restructure the
tariff, keeping the lowest income group in view. Furthermore, the study found that
higher electricity consumption is associated with improvement in the HDI besides the
direct welfare benefits of electricity price reduction.
Based on the results and findings of the present study, some policy guidelines are
suggested. Private sector participation should be encouraged in the power sector in
Pakistan. The financial and operational capacity building of distribution companies
should be improved. On the one hand, strong regulations should be introduced to
improve managerial failures and operational mismanagement in the power sector. On
the other hand, to implement the reforms, the regulatory body should be given more
independence to enforce compliance with regulations. It is essential to retire, or at least
reduce the consumption of, coal-based energy to achieve the carbon neutrality target in
Pakistan. The transition toward solar and wind-based renewable energy is a viable
solution to reduce dependence on imported fuel-based electricity and achieve the
country’s environmental goals.
As suggested elsewhere (Kessides et al. 2009), it is important to distinguish between
various kinds of affordability problem, such as distinguishing between households that
are living in areas that have no access to electricity, households that voluntarily choose
not to get access due to other sources of power such as solar, and households that
cannot afford connection charges. However, due to data limitations, this study did not
consider and distinguish between the various kinds of household.
The impact of tariff reforms on affordability depends on the change in tariff relative to
the change in household income (Fankhauser and Tepic 2007); therefore, a more
sensitive affordability analysis is required. Our data limitation in respect of home
appliances, debt, regional inflation, etc. might make this study vulnerable to less robust
results. Due to data limitations, the study could not highlight the impact of reforms on
public finance.
Future studies may consider including measures for obsolete technologies that some
poor households are using, causing overconsumption of electricity. Such households
must be distinguished from others that are using energy-conserving home appliances.
Furthermore, future research may consider the presence of certain innovations that
give rise to more electricity consumption. Future research may consider the fuel-cost
equivalence scale as proposed by Hills (2012). Future research may also consider the
impact of reforms on electricity output per employee, job creation, and/or subsidies
provided to the power sector.

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