Pakistan Plans Major Electricity Distribution Reforms

Pakistan's Privatisation Commission has proposed a major restructuring of the country's electricity distribution system, including separating network management from power supply services, reallocating existing power generation contracts and capacity-payment liabilities to private suppliers, and introducing performance-linked regulation before distribution companies (DISCOs) are privatised, according to a report by Business Recorder.

The proposals are outlined in a policy document titled Post-Privatisation Regime for Power Distribution Companies. It envisions dividing the distribution sector into four distinct functions: Distribution Network Operators (DNOs), Competitive Suppliers (CSs), Suppliers of Last Resort (SoLR), and separately operated ancillary businesses.

The commission maintains that transferring ownership to private investors alone will not address the electricity sector's deeper challenges, including circular debt, expensive tariffs, weakening grid consumption, capacity payments and operational shortcomings.

Electricity networks and supply businesses to operate separately

Under the proposed model, DNOs would continue managing physical distribution infrastructure as regulated monopolies overseen by the National Electric Power Regulatory Authority (NEPRA). Meanwhile, licensed private suppliers would gradually compete in electricity purchasing, billing, revenue collection and customer services.

A central element of the plan involves transferring existing power purchase agreements and related capacity-payment responsibilities from the Central Power Purchasing Agency-Guarantee (CPPA-G) to competitive suppliers, alongside the customer portfolios associated with those obligations.

According to the commission, this arrangement would make suppliers accountable for electricity procurement expenses and commercial risks. Existing generation contracts, however, would continue to be honoured throughout the transition.

Consumers currently benefiting from protected tariffs would retain their regulated price safeguards. Existing cross-subsidies would also remain in place to avoid creating additional fiscal burdens and ensure that suppliers continue serving subsidised customers.

Backup suppliers and stronger consumer protections

The proposed framework would establish a Supplier of Last Resort in every distribution region. These providers would maintain electricity supply if a competitive supplier failed financially, withdrew from the market or became unable to continue operations.

Distribution companies would also have to grant licensed suppliers fair and equal access to their networks and essential distribution services, preventing discriminatory treatment between market participants.

The commission has further proposed moving away from the existing asset-based regulatory approach towards a performance-driven framework. Under this system, utility returns and penalties would be linked to measurable outcomes such as supply reliability, billing accuracy, complaint handling and the time required to provide new connections.

Citing NEPRA's State of Industry Report 2025, the policy paper highlighted that electricity-related consumer complaints reached 5.7 million in FY2025. It also reported that 106,895 consumers who had paid for new connections were still waiting for electricity service. Together, those pending connections represented more than 1,021 megawatts of unserved demand.

Solar adoption and declining grid demand pose financial risks

The commission identified falling electricity consumption from the national grid as another significant threat to the sector's financial stability. It noted that consumers who pay higher tariffs are increasingly turning to rooftop solar and other forms of self-generation.

As grid consumption declines, the sector must recover fixed operating expenses and capacity payments from a shrinking pool of electricity sales. This can push per-unit tariffs higher, potentially encouraging even more customers to reduce their reliance on the grid.

The paper also questioned whether the existing protected-consumer subsidy structure could be misused. Out of approximately 34.3 million domestic electricity consumers, only 2.2% were enrolled in Time-of-Use tariffs.

The commission recommended investigating whether some households were using multiple electricity connections to remain below subsidised consumption limits and retain access to lower rates.

Regulatory certainty needed to attract private investment

To improve investor confidence, the commission called for stronger regulatory independence, predictable multi-year tariff arrangements and a clearer division of commercial responsibilities and risks among sector participants.

It recommended introducing reforms gradually, with essential regulatory rules and operating arrangements established before DISCO ownership is transferred. The aim is to give prospective investors greater clarity about future revenues, financial obligations and required capital expenditure.

However, the policy paper acknowledged that some underlying datasets and planning tools were unavailable during its preparation. As a result, assumptions concerning capacity allocation, tariff effects and the transition process will need additional verification before the proposed reforms can be implemented.