The energy quagmire

Pakistan’s energy sector, which was once hailed as a beacon of progress, now stands as a testament to the perils of short-term policymaking and a lack of cohesive strategy.

What began as a series of well-intentioned but disjointed decisions has spiralled into a complex web of inefficiencies, financial losses, and systemic dysfunction. The patchwork of policies in the energy sector is coming back to haunt us, exposing the fragility of a system built on quick fixes rather than sustainable solutions.

The consequences are dire: expensive imported gas lies unused, local gas production is stifled, circular debt mounts, and industries struggle to survive under the weight of unaffordable energy costs. This is the story of how Pakistan’s energy sector became a cautionary tale—and what can be done to fix it.

The rise of captive power plants and the natural gas dilemma

In the early 2000s, Pakistan faced a crippling electricity shortage. To address this, the government encouraged industries to set up captive power plants, which were designed to run on natural gas.

At the time, this seemed like a prudent move. Natural gas was relatively cheap and abundantly available, making it an attractive fuel source for power generation. Industries embraced the policy, and captive power plants proliferated, providing a temporary reprieve from the energy crisis.

However, this solution was built on shaky foundations. As demand for natural gas grew, domestic production failed to keep pace. Instead of incentivizing local exploration and production (E&P) companies to scale up output, the government turned to imports. Liquefied Natural Gas (LNG) from Qatar and other sources became the new lifeline for Pakistan’s energy needs. This decision marked the beginning of a downward spiral.

The LNG gamble: a costly misstep

The import of LNG was projected as a game-changer. LNG-based power plants were established to bridge the electricity gap. But this strategy was flawed from the outset.

The price of LNG was ring-fenced, and it was bizarrely classified as a petroleum product to avoid affecting the price of indigenous gas. This move was intended to placate gas-producing provinces, ensuring their consumers received usual prices for their locally produced gas. However, it created a distorted market where imported LNG and local gas operated under different pricing mechanisms.

The consequences of this policy soon became apparent. LNG-based power plants, despite their high costs, were placed low on the merit order—a system that prioritizes cheaper energy sources.

As a result, these plants often remain idle, rendering the imported LNG redundant. Yet, Pakistan is bound by “take or pay” contracts, which require the country to pay for LNG regardless of whether it is used.

This has led to an intriguing situation where expensive LNG is imported but not consumed, while local gas production is curtailed to accommodate the surplus.

The domino effect: circular debt and distribution woes

The mismanagement of LNG imports has exacerbated Pakistan’s energy sector woes. In recent years, the government has diverted expensive LNG to domestic household consumers during winter months.

While this has provided temporary relief to households, it has come at a significant cost. The gas distribution companies, unable to recover the full cost of LNG from consumers, have accumulated massive debts.

These companies, in turn, are unable to pay the state-owned Pakistan State Oil (PSO), which is responsible for importing LNG. PSO’s balance sheet has taken a severe hit, and the circular debt in the gas sector has ballooned to alarming levels.

Compounding the problem is our failure to implement a weighted average cost of gas (WACOG) formula, despite passing a law to this effect three years ago. The WACOG formula would average the cost of local and imported gas, creating a uniform price for all consumers.

Its implementation would provide much-needed clarity and stability to the energy market. Yet, bureaucratic inertia and political resistance have stalled progress, leaving the sector in disarray.

The E&P conundrum: a fractured system

The fallout from these policies has also impacted local E&P companies. Delayed payments for locally produced gas have strained their finances, prompting them to lobby for greater autonomy. Recently, the government allowed E&P companies to sell 35% of their new gas directly to private entities, bypassing state-owned distribution companies.

While this decision has been welcomed by E&P companies, it has sparked outrage among distribution companies. These companies fear losing their bulk industrial clients, who may opt to purchase gas directly from E&P companies at potentially lower rates. This shift could further destabilize an already fragile system.

The captive power plant crisis

The government’s attempt to wean captive power producers off local gas has added another layer of complexity. By sharply increasing gas prices for these units, we have left industries in a bind. Captive power producers now face a stark choice: rely on expensive and unreliable grid electricity or absorb the exorbitant cost of gas.

Many are calling for permission to buy gas directly from E&P companies or import LNG independently. However, such a move would further fragment the energy market, undermining the role of distribution companies and exacerbating the sector’s inefficiencies.

A path forward: the case for WACOG

The current state of Pakistan’s energy sector is a textbook example of how patchwork policies can lead to systemic collapse. The only viable solution is the immediate implementation of the WACOG formula. By averaging the cost of local and imported gas, WACOG would create a uniform price for all consumers, eliminating the distortions that have plagued the sector.

This approach would also provide a clear framework for targeted subsidies, allowing the government to offer relief to vulnerable consumer segments without destabilizing the entire system.

The benefits of WACOG are manifold. It would reduce the circular debt burden on gas distribution companies, ensure timely payments to E&P companies, and provide a stable pricing mechanism for industries. Moreover, it would align Pakistan’s energy policies with global best practices, fostering investor confidence and paving the way for long-term growth.

Pakistan’s energy crisis is a stark reminder of the dangers of short-term thinking. The patchwork of policies that once seemed expedient has now created a labyrinth of inefficiencies and financial losses. The solution lies in embracing a holistic approach that prioritizes sustainability over quick fixes.

The implementation of WACOG is not just a policy recommendation; it is a necessity. Without it, the energy sector will continue to lurch from one crisis to another with devastating consequences for the economy and the people of Pakistan. The time for action is now.

The government must demonstrate the political will to implement WACOG and address the structural issues that have brought the energy sector to its knees. Only then can Pakistan hope to break free from the energy quagmire and build a brighter, more sustainable future.

Copyright Business Recorder, 2025