Executive Summary
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 of 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 the 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].
The distribution network is mostly handled by these countries through state-owned companies. Except India which is increasing private participation in the 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 an advantage where open access is available through direct contracts in addition to conventional sales 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 the 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 subsidy regime and charge the price to original consumers instead of bearing the costs by governments. India is a stride forward with the establishment of energy exchanges where demand and supply play a 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 the Energy Sector
Financial crisis is termed differently by the countries under consideration. The crisis is termed as “Circular Debt” in Pakistan, “DISCOM Accumulated Losses” in India, and “Outstanding Dues” in Iran. In China, neither terminology nor the problems like circular debt exist 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.
Historically (2016 ~ 2021), India has suffered from substantial Aggregate Technical & Commercial (AT&C) losses (22~24% of the total energy input into the distribution system) [12]. World Bank’s US$952 million injection in the distribution sector, since 2016, has helped India to start overcoming distribution inefficiencies through various initiatives [11].
The Average Cost of Supply to Average Revenue Realized (ACS-ARR) gap has shown improvement, narrowing to INR 0.21 per kWh in FY2023-24 from INR 0.45 per kWh in FY2022-23. AT&C losses indicator has improved to 16% in 2025 [10]. Ongoing Revamped Distribution Sector Scheme (RDSS) project has facilitated the installation of 14.7 million smart meters in 2024-25 [12].
However, the aggregate accumulated deficit of DISCOMs still stands at US$83.3 billion [11]. The pace of reforms and ground-level improvements in reducing losses remains critical to improving the financial viability of India’s distribution sector.
China, the largest energy producer in the 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 being recovery through billing. Thus, it prevents 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 market-driven model for the 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 the 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 takeover 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:
⦁ Fair Prices and Cost Recovery:
Electricity prices must cover the real cost of power. This also requires better targeting of 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.
⦁ 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. The World Bank funding program should be implemented forthwith to improve power lines and equipment to reduce technical losses.
⦁ 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.
⦁ 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.
⦁ Increase Local Energy Sources:
Investment in large hydro projects and local renewable energy (solar, wind) is inevitable to manage the 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.
About the Author:
Mr. Sajid Hussain is a Fellow Chartered Management Accountant, having 12 years of power sector experience, currently leading the finance team at a government. owned power plant.
