Pakistan’s power sector is a study in contradictions: real progress shadowed by unresolved structural problems, and genuine potential left largely untapped. Over the past decade, coal-fired power plants (CFPPs) developed under the China-Pakistan Economic Corridor (CPEC) account for 90 percent of Pakistan’s installed coal capacity, and has added 6,600 MW of generation capacity, strengthening national energy security and easing chronic shortages.
However, as Pakistan’s fiscal space contracts and distributed renewable energy adoption expands, these assets face growing risk of becoming stranded assets. What once solved an energy crisis is now a dual liability: environmentally, it works against Pakistan’s own decarbonization commitments, including its target of sourcing 60 percent of energy from renewables; economically, it has become a fiscal burden the country can no longer absorb.
New research from the Boston University Global Development Policy Center and the Sustainable Development Policy Institute (SDPI), argues that early retirement and repurposing of these plants is no longer merely a technical or environmental question, it is an economic necessity for Pakistan’s fiscal survival.
The Fiscal Strain
Several converging challenges underscore the urgency of this transition. First, imported-coal CFPPs i.e. plants reliant on coal shipped from Indonesia and South Africa, distinct from Pakistan’s domestic Tharparkar region coal plants, carry heavy fiscal burdens through high capacity payments indexed to foreign exchange and exposure to volatile fuel markets. Three of Pakistan’s seven Chinese-financed coal plants, representing roughly 3,960 MW, fall into this category. Second, steep declines in Chinese-manufactured solar prices have accelerated rooftop solar adoption across Pakistan’s industrial and residential sectors, eroding grid demand and leaving coal assets underutilized. Fixed capacity payments, now recovered over fewer units of electricity, are driving up per-unit costs, and because these payments are dollar-indexed, consumers are effectively paying to keep idle capacity online, further draining scarce foreign exchange.
This is already translating into higher tariffs that undermine industrial competitiveness and constrain exports, making rising per-unit costs both a barrier to global market participation and a driver of inflation.
Repurposing for Grid Stability
The study proposes a fundamental shift in how Pakistan approaches coal retirement, from “decommissioning” to repurposing. This is necessitated by grid realities: as variable renewable energy grows, the system faces intensifying risks to frequency and voltage stability, particularly during periods of rapid distributed solar uptake.
Grid inertia emerges as a high-value repurposing strategy. Unlike synchronous thermal generators, inverter-based renewables lack physical inertia; repurposing CFPPs provides the mechanical momentum needed to ride out grid disturbances. By converting existing turbines at load-center plants into synchronous condensers, Pakistan can provide grid stability services at a fraction of the cost of new infrastructure, under $100 million per site. Paired with battery energy storage systems (BESS), these sites become primary stabilizers of a modern, renewables-ready grid.
Sequencing the Transition
The transition must follow a carefully phased approach distinguishing two “generations” of coal. A poorly sequenced transition risks not only financial disruption but social backlash in regions where coal has become central to local employment.
First-generation plants i.e. primarily imported coal, commissioned in 2017-2019 under fast-tracked national power policy, carry the highest foreign exchange risk and fiscal burden, relying on coal shipped continuously from Indonesia and South Africa. These are the primary candidates for immediate retirement. Second-generation, Tharparkar-based plants are newer and insulated from import shocks by domestic lignite; despite higher carbon intensity, they anchor a regional mining ecosystem and require a longer-term trajectory focused on hybridization after 2035, to safeguard Tharparkar’s social development.
Socio-economic Impacts of the Transition
Managing the impact on workers and communities is indispensable to a credible retirement plan. Using Pakistan-adjusted parameters, the total just transition cost across all seven plants is estimated at $1.2-2.1 billion (an estimate to inform financing structures, not precise budgets).
The three imported-coal CFPPs (Sahiwal, Port Qasim, China Power Hub) are significant employers despite operating in more diversified economies; Sahiwal alone created 1,683 jobs, including 1,033 local; Port Qasim and China Power Hub report similar sizes. Retirement here requires roughly $130-230 million per plant for retraining, job-matching into renewables, supplier transitions, and continuity of CSR-funded services.
For local-coal plants, stakes are higher: four mine-mouth plants anchor an integrated economy in one of Pakistan’s most underdeveloped regions. TEL and ThalNova support smaller workforces (300-800 jobs, $100-175 million to transition); Engro Thar Block II supports 2,500 jobs ($200-350 million). Thar Block-1 alone provides 18,000+ local jobs and funds schools, clinics, and water infrastructure, requiring $400-700 million for these services alongside mine closure and alternative livelihoods.
Financing the Coal-to-Clean Transition
Traditional cash buyouts are unfeasible given Pakistan’s credit constraints. RMB-denominated Panda Bonds offer a pathway to refinance the $3.1 billion in outstanding CPEC coal debt, eliminating the “currency mismatch” that worsens debt service obligations. Carbon monetization can also unlock results-based finance, according to the Verra VM0052 methodology used for early CFPP retirement with just-transition requirements, converting avoided emissions into bankable assets tradable under Article 6.2 of the Paris Agreement, with proceeds reinvested into condenser repurposing.
These instruments remain methodologically untested, however: VM0052 has not yet been submitted for review by the Integrity Council for the Voluntary Carbon Market, and any transaction must guard against retiring an efficient plant like Sahiwal simply shifting generation to less efficient Thar lignite units, offsetting the emissions gain. A credible pathway depends on sequencing a National Coal Retirement Plan before any individual transaction, not after.
Institutional Readiness and the “Green CPEC”
Early retirement of Chinese-financed CFPPs also offers a pathway to de-risk China’s investment portfolio in Pakistan. Outstanding dues to CPEC projects exceed $1.1 billion. Left unaddressed, these risk reclassification as non-performing loans. Structured retirement or refinancing turns that potential default into a “green” exit, aligned with China’s Green Belt and Road commitments and its NDC 3.0 emissions caps.
For Pakistan, this means reduced exposure to volatile fuel costs, less circular debt, and a path to cheaper localized renewables. For China, the wins are parallel: a successful case could position it as a leader in energy transition, while capital tied up in coal is redirected into BESS and grid modernization, keeping lenders commercially engaged rather than exiting Pakistan’s power sector. A Joint Green CPEC Track and dedicated Energy Transition Cell would let both countries pursue these gains together — recovering principal while giving Pakistan fiscal space to accelerate its 60 percent renewable target.
Looking Ahead
The convergence of fiscal instability, public health concerns, and climate commitments has made this transition non-negotiable for Pakistan. While domestic policy must lead, a rapid, just transition requires sustained cooperation within a Green CPEC framework — spanning innovative financing, technical repurposing into inertia hubs, and institutionalized carbon monetization.
This is mutually beneficial, not a one-sided ask of China: resolving the payment impasse lets Pakistan de-risk the Chinese portfolio and accelerate its renewable target, while letting China convert at-risk arrears into recovered principal and reinvestment rather than a reputational and financial loss.
Managed carefully, particularly for regions like Tharparkar, this transition is no longer just an environmental goal, it is the definitive strategy for Pakistan’s sovereign resilience and long-term fiscal survival.
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