What Is Capacity Payment in Pakistan? A Beginner's Guide
The single concept that explains why your electricity bill is so high, in five minutes, with no jargon
By Asad Baig · Lahore · April 2026 · Approx. 5-min read
The two-sentence answer
A capacity payment is money that the Pakistani government pays a power plant owner for the existence of the plant, regardless of whether the plant produces any electricity. It is the largest single component of your monthly electricity bill, accounting for approximately 40 percent of every rupee you pay.
If you understand that, you understand why bills are high. The rest of this article fills in the details.
The taxi-driver analogy
The cleanest way to explain capacity payment is the analogy I use in my book The People's Bill.
Imagine you sign a contract with a taxi driver. The contract says you must pay him Rs. 5,000 a day, every day, for the next thirty years, whether you take a ride or not. If you call him for a ride, you pay extra for the petrol. But the Rs. 5,000 is fixed. It is for "being available."
Now imagine you signed this contract when you owned three businesses and travelled a lot. Then your businesses closed. You are sitting at home. You do not need a taxi. The driver does not drive anywhere. He just sits in his car. You still pay him Rs. 5,000 a day. Every day. For thirty years.
That is a capacity payment.
Pakistan has signed about a hundred such contracts with private power plant owners. Together, they cost Pakistani consumers approximately Rs. 2 trillion a year. That is more than our entire defence budget.
Why the system was designed this way
Capacity payments did not appear in Pakistan by accident. They were a deliberate provision in the 1994 Power Policy contracts, repeated in the 2002 policy, the 2006 renewable framework, and the 2014-2018 CPEC contracts.
The original justification was investor protection. Foreign investors said they would not put up the capital to build power plants in Pakistan unless they were guaranteed payment regardless of demand. The Pakistani government accepted this argument. The contracts were signed. The capacity payment structure became the foundation of Pakistan's power sector.
The argument had some merit in 1994, when Pakistan was desperate for power generation capacity. The argument is harder to defend in 2026, when Pakistan has built so much capacity that 15,000 megawatts of it sits unused on most days, while consumers continue paying for all of it.
I have written about the broader structure at Capacity Payments in Pakistan: Why Your Bill Is So High.
What capacity payment looks like on your bill
Capacity payments do not appear as a separate line item on most Pakistani electricity bills. They are folded into the per-unit tariff that you pay for every kilowatt-hour you consume, plus the fixed charges that appear on the bill for grid connection.
Roughly speaking, of every 100 rupees you pay on your electricity bill:
- Approximately 40 rupees are capacity payments to IPPs
- Approximately 25 rupees are fuel costs
- Approximately 20 rupees are transmission and distribution losses, including theft
- Approximately 15 rupees are taxes, surcharges, and DISCO operating costs
The 40 rupees is the largest single component. It is what you are paying for the existence of plants, not for the electricity those plants produce.
WHAT THIS LOOKS LIKE IN PRACTICE
If your monthly electricity bill is Rs. 30,000, approximately Rs. 12,000 of that is your share of capacity payments. The Rs. 12,000 funds the contractual right of certain power plants to exist, regardless of whether they generate electricity for you or anyone else.
The HUBCO and KAPCO example
If the abstract concept is hard to grasp, the concrete example is easier.
In FY2023-24, two specific power plants in Pakistan, HUBCO and KAPCO, received approximately Rs. 46 billion from the Pakistani government in capacity payments. In that same year, those two plants produced exactly zero units of electricity.
The figure was confirmed publicly by Gohar Ejaz, the former federal minister, in July 2024. Forty-one other plants in Pakistan operated at four to twenty-five percent of capacity that year. They received their full capacity payments anyway.
This is what the system produces in practice. Plants are paid for their existence. Whether they produce or not is contractually irrelevant.
What you should take away
Three things.
Capacity payment is money paid for plant existence, not plant output. This is the single most important thing to understand about Pakistani electricity bills.
Capacity payments are approximately 40 percent of every rupee on your bill. The largest single component.
Eliminating capacity payments would reduce average household bills by approximately 60 percent. From Rs. 48 per unit to Rs. 19 per unit, according to International Growth Centre estimates (June 2025).
Now you know what a capacity payment is. Pass it on.
Thank you for reading.
, Asad Baig, Lahore, April 2026
Frequently asked questions
What is a capacity payment in simple words? A capacity payment is money paid to a power plant owner whether or not the plant produces any electricity. In Pakistan, it makes up roughly 40 percent of every electricity bill. Plants are paid for their existence, not for their output.
How much does Pakistan pay in capacity payments per year? Approximately Rs. 2 trillion as of FY2025 estimates, more than the federal defence budget.
Why does Pakistan have capacity payments? The 1994 Power Policy and its successors included take-or-pay provisions that require the government to pay power plant owners a fixed capacity charge regardless of whether the plant produces electricity. The provisions were sold as necessary to attract foreign investment.
Sources and notes
- Power Sector Inquiry Report 2020 (ARY News mirror)
- IEEFA Reports on Pakistan Power Sector by Haneea Isaad (2024-2025)
- International Growth Centre, Sustainable Pakistan Growth Brief (June 2025)
- Gohar Ejaz public data release (July 2024)
Related reading from Asad Baig
The pillar this answers under
Sibling long-tail explainers
- What Are IPPs in Pakistan? A Plain-English Explainer
- Why Are Electricity Bills So High in Pakistan in 2026?
- Why Is Pakistan Paying for Unused Electricity?
- How to Read Your Pakistani Electricity Bill, Line by Line
Asad Baig