Circular debt is the money trap that’s choking Pakistan’s whole energy sector. It is like everyone owes everyone but nobody gets paid fully. It is the main hindrance due to which energy reforms and Renewables Energy (RE) Policy could not work fully. The below table shows how circular debt issue is blocking solutions to energy problems:
| High tariffs | DISCOs lose money on theft and non-recovery. To cover losses, govt./NEPRA keeps raising tariffs for honest users. So even with cheap solar at PKR 5.5/kWh, the bill stays high because consumers are paying for others too. |
| Load-shedding/outages | Power plants & IPPs aren’t paid on time, so they can’t buy fuel or maintain plants. Result: plants shut down even when demand exists. Cheapest plants sit idle while expensive ones run. |
| Slow RE adoption | Investors are scared. If govt./DISCOs delay payments to IPPs, who will fund new 1,845MW wind or 680MW solar projects? Financing for renewable energy needs “bankable” payments. Circular debt is killing that trust. |
| Grid upgrades + storage | DISCOs are broke, so there’s no money for smart meters, transmission upgrades, or storage that variable RE like solar/wind needs. |
| Subsidies vs reality | Govt. gives subsidies to keep tariffs low for some users. But when subsidies aren’t released on time, they add to circular debt. IMF/EFF programs then force tariff hikes to cut the debt, which hurts consumers. |
Pakistan’s Renewable Energy policy wants 60% RE by 2030 but rooftop solar boomed because tariffs got too high. As people went off-grid, DISCOs sold less units but still had fixed costs of wires, staff, plants. This resulted in less sales and more losses for DISCOs hence more circular debt. The government then slashed net metering rates to protect DISCO finances, which slows solar growth. So circular debt punishes both sides: keeps tariffs high, but also makes government throttle the very renewable energy that could lower costs. Government and IMF are pushing DISCO privatization, smart meters on loss-making feeders, cutting theft, and reducing losses. The idea is to fix collection and losses, break the debt loop, free up cash for fuel, maintenance, and new RE/storage.
Capacity payments are the other half of the circular debt story. They are the main reason the debt keeps growing even when consumers use less electricity. Pakistan signed contracts with IPPs – Independent Power Producers – back when there was load-shedding for long hours. The government committed capacity and energy payments to these IPPs so even if demand drops or solar takes over, government still pays the plant to stay “on standby”. The government also signed tons of coal/LNG plants to end blackouts. Total capacity now exceeds demand so many plants sit idle. The government is paying approx. Rs1.3 trillion per year in capacity payments. On the other hand, DISCOs don’t collect enough due to solar boom but they still have to pay IPPs their full capacity payment. This results in debt piling up causing the government to borrow more which adds to interest expense.
In 2024-25 government reopened deals with 18 IPPs to cut capacity payments and change dollar indexation to PKR. Resultantly, it saved approx. Rs1.1 trillion in long-term. The government is also shifting new contracts to “Take and Pay’ instead of ‘Take or Pay’ so it pays only when it actually buys electricity. It also plans to close old, inefficient furnace oil plants so capacity payments stop. The need of the hour is to fix the circular debt issue because renewable energy makes power cheaper but consumers don’t feel it in their bills because fixed capacity costs and old debt eat up the savings.