Abstract
Mounting
financial stress in the energy sectors of developing economies is putting
pressure on national budgets, slowing investments, and disrupting energy
delivery, nowhere more visibly than in Pakistan, Iran, and India. This article compares
the energy sectors of these countries, and China, in terms of their power
generation mixes, energy monetization mechanisms, and their exposure to financial
stresses. Pakistan is facing chronic circular debt over PKR 2.396 trillion
(approximately 2.5% of its GDP), largely due to payables to IPPs/ GENCOs. Iran’s
power sector financial stresses are driven by massive energy subsidies. India,
while historically vulnerable, has made strides in managing similar issues,
while China, with its state-controlled system, largely avoids this problem.
This article specifically highlights sustainable solutions for Pakistan’s
energy sector.
Electricity
Market Dynamics & Commercial Arrangements
How
each country generates, distributes, sells, and buys electricity differs
depending upon each country’s power sector value chain. For electricity
generation, all four countries rely heavily on traditional fossil fuels working
at the same time to increase clean energy sources. For Iran natural gas is
dominant source with more than 75% share [2]. For
India and China, local coal is dominant with 66% and 59% share respectively [2]. In
contrast, there is no single fuel type dominant in Pakistan’s case. Its
generation portfolio represents predominantly a combination of hydel, gas,
coal, and nuclear in the rage of 18~28% share [1].
China
is leading in adding solar and wind power while Pakistan is increasing its use
of hydro and nuclear, along with solar and wind. Recently local Thar coal plants
have added stability to Pakistan’s energy mix (2640 MW) [1]. India
is also aggressively adding solar (75% of its total capacity addition for 2024)
and wind (total addition 60 GW during 2022~2025) [5].
Distribution
network is mostly handled by these countries through state owned companies. Except
India who is increasing private participation in distribution sector.
|
Distribution
Companies |
|||
|
Pakistan |
India |
China |
Iran |
|
·
DISCOs: State owned ·
K-Electric (Pvt) Ltd for Karachi |
·
DISCOMs: State owned, operate
as regional monopolies ·
Partial private participation |
·
State Grid Corporation of China (SGCC)
·
Southern Power Grid (CSG) |
·
Ministry of Energy (MoE): Tavanir |
|
Mechanism
for Purchase of Electricity |
||||
|
Pakistan |
India |
China |
Iran |
|
|
· CPPA-G
under Power Purchase Agreements (PPAs) with generators. · K-Electric
purchases from national grid and local IPPs. |
·
Long-term PPAs with generators ·
Purchases from Power Exchanges (IEX,
PXIL) through Day-Ahead, Real-Time, and Term-Ahead Markets. ·
Bilateral contracts with generators. |
·
Medium-to-Long-Term (MLT) contracts with
generators. ·
Provincial Spot Markets. ·
Purchases from Green Power Trading
Market. |
·
Centralized purchase by Tavanir from
state-owned generators. ·
Limited direct contracts. |
|
Pakistan
and Iran have central power purchase mechanisms through PPAs whereas China and
India have been able to move towards a more market-based approach by adding
power exchanges, direct contracting, spot markets and green power trading
markets. In the selling market, China and India again have advantage where open
access is available through direct contracts in addition to conventional sale
to residential and commercial consumers. Whereas Pakistan and Iran are still
struggling to move towards direct purchase by specific sector consumers.
|
Mechanism
for Selling Electricity to End-Consumers |
|||
|
Pakistan |
India |
China |
Iran |
|
· DISCOs/
K-Electric sell directly to consumers at NEPRA approved tariffs. |
·
DISCOMs sell to consumers at SERC approved
tariffs. ·
Open Access: Direct purchase option from
generators/ exchanges |
·
Grid companies (SGCC/CSG) sell at
regulated tariffs. ·
Large industrial/ commercial consumers
can engage in direct bilateral contracts or participate in provincial spot
market trading |
·
Regional distribution companies sell
directly to consumers at highly subsidized, government-determined tariffs. ·
Limited direct purchase options for
large consumers. |
Pricing
mechanisms are the backbone of energy market [3]. How
well the energy monetization model works, largely depends upon the price at
which the electricity is purchased and sold. Among the four nations, all have
state-regulated electricity pricing mechanisms. However, China and India have
been able to end the subsidies regime and charge the price to original
consumers instead of bearing the costs by governments. India is a stride
forward with establishment of energy exchanges where demand-supply play role in
price determination. In contrast Pakistan and Iran are burdened by significant
government subsidies leading to energy market liquidity problems resulting in
circular debt.
Comparing Financial
Stresses in Energy Sector
Financial
crisis is termed differently by countries under consideration. The crisis is
termed as “Circular Debt” in Pakistan, “DISCOM Accumulated Losses” in India,
“Outstanding Dues” in Iran. In China, neither terminology nor the problem like
circular debt exists due to financial absorption by SOEs.
Pakistan's energy sector remains severely impacted by circular debt, with an upward trend since 2019-20. As of March 2025, it has escalated to PKR 2.396 trillion [7], 2.1% of Pakistan’s GDP for FY2024-25.
It consists of payables to IPPs/GENCOs: PKR 1.633 trillion [68% of total], debt
parked in Power Holding Private Limited (PHPL): PKR 0.683 trillion, and payables
by GENCOs to fuel suppliers: PKR 79 billion [7].
Similarly,
Iran's energy sector faces a profound challenge rooted in its massive, unfunded
energy subsidies (US$ 127 billion per year as per April 2025 reports), which
are 37% of its GDP (US$341 billion), the highest globally [10]. Breakup
of these subsidies includes Petroleum Product subsidies up to US$ 60 billion
annually, by far the largest component. This is due to extremely low domestic
pump prices compared to international benchmarks, stimulating overconsumption
and widespread smuggling. Natural Gas subsidies account for a significant
portion, US$ 30 billion annually. The gas is used extensively in residential,
industrial, and power sectors at highly subsidized rates. Electricity subsidies
are estimated at US$ 15 billion annually, where tariffs for consumers fall far
short of generation and distribution costs.
China,
the largest energy producer in world [2], manages its energy
sector financial balances through distinct mechanisms that generally prevent
the accumulation of “circular debt”. Financial strains appear as profit
fluctuations within State-Owned Enterprises (SOEs), strategic budgetary
allocations, and the management of legacy subsidy arrears for renewable energy.
For 2024-25, the State Grid Corporation of China (SGCC), the world’s largest
utility, increased its capital expenditures to RMB 650 billion (approximately
US$ 89 billion), primarily for upgrading infrastructure to integrate a rapidly
expanding renewable energy fleet. While this investment puts pressure on SGCC’s
leverage, its strong access to domestic financing (with a total credit line of
around RMB 4 trillion as of end-2024 at an average cost of 3%) and strategic significance
ensures financial sustainability, supported by an “extraordinary government
support”. Direct financial subsidies for new onshore wind and solar projects
have largely ended as of 2021, with new projects after June 1, 2025,
transitioning to market-based pricing and a “Contracts for Difference” (CfD)
like mechanism to manage revenue volatility, as opposed to guaranteed fixed
tariffs.
Overall,
China’s financial approach focuses on strategic investment and controlled
market reforms within a state-managed framework to prevent systemic debt
issues, rather than struggling with unfinanced arrears.
Why China and
India Are (Mostly) Out of Circular Debt?
Unlike
Pakistan, China and India have largely managed to avoid or significantly reduce
the problem of circular debt in their energy sectors. This is due to a mix of
strong government controls, proactive reforms, and different market structures.
China’s Approach:
Strong State Control and Direct Management
China’s
energy sector is dominated by large, state-owned companies (SOEs). This
structure allows for a different way of handling financial imbalances:
·
Financial Absorption: When
financial gaps appear, SASAC & SGCC absorb the losses or receive direct
financial support from the central government. For example, in 2025, SGCC
invested RMB 650 billion (US $ 90 billion) for grid up-gradation. The cost is
absorbed by the SGCC instead of recovery through billing. Thus, preventing the “circular”
chain of unpaid bills from forming and growing.
·
Market Reforms to Reduce Imbalances: While
state-controlled, China is increasingly using market rules. By setting up spot
markets and promoting direct contracts, they aim to make pricing more realistic
and efficient. This reduces the gaps between costs and revenues that can lead
to debt.
·
Transparent Subsidies: Subsidies
are typically budgeted for and paid out from central funds. They are not left
as unpaid bills that burden energy companies. China has started moving away
from subsidized pricing to market driven model for renewable energy sector
effectively reducing the amount of subsidy up to 2.75 billion yuan (2022).
India’s Approach:
Proactive Reforms and Market Development
India has taken
strong steps to tackle financial stress issues in energy sector:
·
Dedicated Reform Programs: The
Indian government has launched major schemes, such as the Ujwal DISCOM
Assurance Yojana (UDAY: Nov-2015, 75% DISCOMs debt take over and rigorous
operational efficiency reforms: smart metering, better billing/collection
systems) and the newer Revamped Distribution Sector Scheme (RDSS). These
programs help state-owned distribution companies (DISCOMs) manage their old
debt, improve their operations, and reduce losses from 24% to 16% in 5 years.
·
Market Discipline through Open Access: India
allows large electricity users to bypass local DISCOMs and buy power directly
from generators or through power exchanges (2024-25: 121 billion units traded
on IEX, 19% YoY increase) [6]. This encourages
DISCOMs to be competitive and efficient to retain customers. By end of 2023,
India has traded up to 10GW through Open Access contracts including all modes i.e.
day-ahead market (DAM), real time market (RTM), term ahead market (TAM), and
renewable energy certificates (RECs) [5].
In
essence, China uses its strong state control to absorb financial shocks, and
India actively implements reforms to prevent and resolve the buildup of debt
through financial restructuring and market liberalization.
Sustainable
Solutions for Pakistan’s Circular Debt
Taking lessons
from China and India, solving Pakistan's circular debt needs many actions including
but not limited to:
1. Fair
Prices and Cost Recovery:
Electricity
prices must cover the real cost of power. This also requires better targeting
government subsidies. The regulator (NEPRA) must approve new prices quickly to
avoid delays that add to the debt. Importantly, over-indexation of tariffs adds
to debt which should be instantly reviewed. Revisiting expensive PPAs with
independent power producers (IPPs) to get better terms, especially concerning
capacity payments for unused power, is inevitable.
2. Reduce
Losses and Theft:
DISCOs
should launch strong campaigns against theft, use smart meters, and enforce
laws strictly. Billing should be made more efficient and collection from all
users, including government departments should be ensured. World Bank funding
program should be implemented forthwith to improve power lines and equipment to
reduce technical losses.
3. Improve
Management and Governance:
DISCOs
should be made more efficient and accountable through privatization or bringing
in private management. Political influence in operational and financial
decisions should be banned. The government must pay its own electricity bills
and release promised subsidies to power companies on time. A clear plan to pay
off the existing circular debt should be developed, perhaps by selling
government assets or through special loans. However, simply adding surcharges
to consumer bills indefinitely should be avoided.
4. Market
Reforms:
Shifting
to a Competitive Trading Bilateral Contract Market (CTBCM) should be speed up where
distributors can directly negotiate prices with power plants. This introduces
competition and efficiency.
5. Increase
Local Energy Sources:
Investment
in large hydro projects and local renewable energy (solar, wind) is inevitable
to manage basket price. This will also reduce reliance on imported, expensive
fuels like LNG and imported coal, which are major drivers of the debt.
Conclusion
Circular
debt is a complex problem, but sustainable solutions are possible. For
Pakistan, success hinges on decisive government actions to reform pricing,
combat losses, improve governance, and move towards a more competitive and
transparent energy market. Learning from India’s reform efforts and China’s
strong state management, Pakistan and Iran should work towards a financially
healthy and reliable energy sector.
References
1. State
of Industry Report 2024 by NEPRA
2. U.S.
International Energy Agency: International Energy Statistics & Rankings
2023
3. “Quagmire
of Circular Debt: Insights and Solutions” by National Institute of Public
Policy, June 2024.
4. Energy
purchase data report issued by CPPA, April 2025 (www.cppa-g.gov.pk)
5. “Monthly
IEX Stats Issue” by www.tndindia.com
6. IEX
Electricity Trade Volume published by “The Economic Times” (www.m.economictimes.com)
7. Pakistan
Circular Debt Report March 2025 issued by Power Division, Ministry of energy (www.power.gov.pk/reports)
8. Indian
Energy Exchange (IEX) & Power Exchange India Limited (PXIL): Market
reports, trading data. (Information on India's electricity trading mechanisms)
9. Accumulated
deficit of DISCOMS published by The Hindu Business Line, March 22, 2025.
10.
Power Line magazine December 2024 Issue.
11.
World Bank report: Reinvigorating India’s Electricity Distribution for
Access,
Reliability, and
Digitalization, published on 10 July 2025.
12. 12th
Annual Integrated Ranking Report issued by Power Finance Corporation, Ministry
of Power, India.
