Why Is Pakistan Paying for Unused Electricity?
15,000 megawatts of permanently unused capacity, paid for every day, costs Pakistan approximately Rs. 700 billion per year
By Asad Baig · Lahore · April 2026 · Approx. 4-min read
The fact that should be impossible
Pakistan has built power generation capacity totalling 45,605 megawatts. Pakistan's peak national demand is approximately 28,000 to 30,000 megawatts.
Pakistan pays for all 45,605 megawatts every single day.
The 15,000-plus megawatts of permanently unused capacity costs roughly Rs. 700 billion per year on its own. That is more than what Pakistan spends on health and education combined for an entire year.
This article explains how this situation came to exist, why it is structural rather than temporary, and what would have to change for Pakistani consumers to stop paying for electricity nobody is using.
How we built more capacity than we needed
Pakistan in the 1990s and 2000s suffered from chronic load shedding. Eight to ten hours a day in major cities. Sixteen to twenty hours a day in some periods. The political pressure to add generation capacity was enormous.
The 1994 Power Policy added the first wave of IPPs. The 2002 Power Policy added more. The 2006 renewable framework added wind, solar, and bagasse plants. The 2014-2018 CPEC programme added approximately 6,000 MW of Chinese-financed coal and other generation.
Each wave was justified by the load shedding of the period. Each wave was added on top of existing capacity rather than replacing aging plants. Each wave came with capacity payment obligations regardless of whether the new generation was actually needed.
By approximately 2018, Pakistan had crossed the threshold from capacity shortage to capacity surplus. By 2026, the surplus had reached 15,000 MW or more on most days. The capacity payments continued, because the contracts required them.
I have written about how each wave was added at The 1994 Power Policy, The 2002 and 2006 Repeats, and The CPEC Power Contracts.
What "paying for unused capacity" actually looks like
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.
Read that again. Two plants. Forty-six billion rupees. Zero electricity.
Forty-one other plants in Pakistan operated at four to twenty-five percent of nominal capacity that year. They received their full capacity payments anyway.
This is the take-or-pay structure operating at the level of specific plants. The plants are paid for being available, not for actually producing. When demand is below capacity, the plants idle and the payments continue. When the contracts were signed in 1994 (and in subsequent years), this structure was sold as protection for investors. Today it is the protection that has hollowed out Pakistani household budgets and industrial competitiveness.
Why we cannot just stop paying
The natural question is why the Pakistani government does not simply stop paying for capacity it does not use.
The answer is contractual. The take-or-pay clauses in the IPP contracts are legally binding. If Pakistan unilaterally stops paying, the IPPs sue in international arbitration. The damages awards include the missed capacity payments plus interest. The cost of unilateral cancellation is typically larger than the cost of continued payment under the contract.
This is what makes the IPP system so resistant to reform. The contracts were structured, deliberately, to make exit prohibitively expensive. The political will to confront this trade-off has not existed across multiple Pakistani governments.
I have written about this at What Is a Take-or-Pay Contract?.
What would have to change
Three structural reforms could reduce the cost of unused capacity.
One. Convert take-or-pay to take-and-pay. The plant continues to operate. The plant has the right to be dispatched. But the plant is paid only for electricity actually delivered. This is the standard structure in most competitive electricity markets. The current PML-N government has implemented this for five plants since October 2024. Extending it to all IPPs would be the single most consequential reform available.
Two. Conduct forensic audits of capital costs. Many capacity payments are calculated as a percentage of capital costs. Capital costs have been systematically over-stated, per the 2020 Power Sector Inquiry Report. Forensic audits could establish the actual costs and reduce the capacity payment basis accordingly. I have written about this at The Capital Cost Trick.
Three. Renegotiate CPEC IPP terms. Approximately 36 percent of total Pakistani capacity payments flow to Chinese state-owned enterprises under CPEC. Renegotiation requires head-of-state engagement, not technical-level discussions. It has not been seriously attempted. I have written about this at The CPEC Power Contracts.
THE COST OF UNUSED CAPACITY
15,000+ MW of permanently unused capacity costs Pakistani consumers approximately Rs. 700 billion per year. This is roughly the federal health budget. Pakistan is paying it because the take-or-pay contracts signed in 1994 and subsequent years require it, regardless of whether the capacity is actually needed.
What you should take away
Three things.
Pakistan has 15,000+ MW of permanently unused capacity, costing approximately Rs. 700 billion per year. This is paid because the take-or-pay contracts require it.
The unused capacity is structural, not temporary. Each wave of IPP additions was added on top of existing capacity rather than replacing it. Pakistan has progressively over-built relative to demand.
Reform requires confronting take-or-pay contracts. The political will to do so has not existed across multiple Pakistani governments. Five domestic IPPs have been terminated under Shehbaz Sharif. The other 95+ continue paying for capacity that is not used.
Now you know why Pakistan pays for unused electricity. Pass it on.
Thank you for reading.
, Asad Baig, Lahore, April 2026
Frequently asked questions
How much unused power generation capacity does Pakistan have? Approximately 15,000-plus megawatts on most days. Pakistan has 45,605 MW installed capacity against peak demand of 28,000-30,000 MW.
How much does the unused capacity cost? Approximately Rs. 700 billion per year in capacity payments. This is for capacity that is built and contractually paid for but not actually used to generate electricity.
Why does Pakistan keep paying for unused capacity? The take-or-pay contracts signed under the 1994 Power Policy and subsequent power policies require capacity payments regardless of whether the plants generate electricity. Unilateral cancellation triggers international arbitration with damages typically larger than the continued payments.
Sources and notes
- Power Sector Inquiry Report 2020 (ARY News mirror)
- IEEFA Reports on Pakistan Power Sector by Haneea Isaad (2024-2025)
- NEPRA State of Industry Reports 2015-2024 (nepra.org.pk)
- CPPA-G Annual Reports (cppa.gov.pk)
Related reading from Asad Baig
The pillar this answers under
Sibling long-tail explainers
- What Is Capacity Payment in Pakistan?
- What Are IPPs in Pakistan?
- Why Are Electricity Bills So High in Pakistan in 2026?
Asad Baig