It's time to shift toward Keynesian model, where industrial demand creation becomes anchor for generation planning
One of the ten commandments for electricity planning is ‘Thou Shalt Not Expand Electricity Supply Without Industrial Demand’. New power plants become stranded, costly monuments to poor planning without industrial demand.
The Indicative Generation Capacity Expansion Plan (IGCEP) has long been employed for Pakistan’s power sector planning. Crafted through rigorous economic modeling, it seeks to forecast and chart a least-cost pathway for capacity expansion. In theory, this approach is sound – after all, system planning should be least-cost, reliable, and resource-efficient. However, in practice, IGCEP has operated within a narrow frame: one that defines ‘optimisation’ as building more capacity rather than rationalising what already exists.
The 2025–2035 edition of the IGCEP, recently approved by the prime minister, signals a welcome departure from past practice in one important respect. For the first time, the government has excluded nearly 8,000MW of high-cost generation projects previously in the pipeline but failed to meet economic viability thresholds. This is a commendable move – acknowledging that power sector planning must be rooted in national interest, not donor pressure, political entitlements, or contractual inertia. The government’s announcement of potential savings worth Rs4,743 billion through project exclusion and schedule optimisation reflects fiscal prudence and growing maturity in infrastructure governance.
Yet even with such welcome corrections, the core assumption of the IGCEP remains dangerously one-dimensional: that future challenges can be met by adding the right kind of megawatts. In reality, Pakistan’s energy crisis is not one of insufficient generation capacity, but of underutilised assets, unaffordable electricity, and demand that simply isn’t growing fast enough, particularly in the productive (industrial and commercial) sectors.
As of now, a large portion of installed generation sits idle for most of the year. High efficiency imported coal plants like Sahiwal and China Hub, once celebrated as symbols of progress, are now dispatched at suboptimal levels but still collect capacity payments denominated in foreign currency. Despite being technically efficient, these plants are economically misaligned in today’s macro-fiscal and climate context. Yet the IGCEP treats them as fixed realities instead of considering them potential liabilities needing an exit plan.
This is where early retirement mechanisms such as the Energy Transition Mechanism (ETM), currently being piloted by the Asian Development Bank (ADB) in countries like Indonesia and the Philippines, offer a practical way forward. ETM is designed to mobilise concessional finance and blended capital to buy out the remaining lifetime of fossil fuel plants and replace them with cleaner alternatives. Similarly, the Coal to Clean Credit Initiative (CCCI), supported by the Rockefeller Foundation, aims to create a new carbon credit methodology that rewards early coal retirement with high-integrity credits. These can be monetised to reduce debt, reinvest in renewables, or cushion fiscal stress.
For Pakistan, applying such tools could transform its IGCEP from a passive projection to an active decarbonisation roadmap. For example, modelling the early retirement of Sahiwal and China Hub through ETM or CCCI mechanisms could help unlock climate-linked concessional finance, lower capacity payments, and simultaneously reduce Pakistan’s carbon footprint. However, for this to be viable, the IGCEP must begin to incorporate financial modelling of exit options, carbon cost assumptions, and transition risk profiling - none of which currently exist in the model structure.
It is increasingly clear that even a state-of-the-art least-cost plan will not be sustainable without a concurrent demand-side strategy. Without a productive demand expansion plan – one that drives industrial consumption, electrifies transport, and supports new manufacturing zones – any new or efficient generation, no matter how cheap, will risk becoming a stranded asset. Pakistan's base demand remains stagnant; the large-scale manufacturing sector is declining, and residential consumers are shifting toward rooftop solar, further shrinking the utility-scale market. Planning generation in isolation, without matching it with demand creation, is akin to building airports without passengers.
One crucial external variable that must now be embedded in generation planning is the Carbon Border Adjustment Mechanism (CBAM). As the European Union begins implementing CBAM, industries and utilities with carbon-intensive supply chains will face new financial penalties when exporting to European markets. While Thar coal may appear ‘least-cost’ on paper today, once CBAM is enforced and carbon intensity is priced, the true cost of Thar coal generation will rise – potentially becoming unviable not just for exports, but also for local industries seeking international market access. This introduces a new risk dimension for coal-fired plants: they may be compliant with local economic merit, but non-compliant with global carbon markets, thereby stranding industrial users who depend on ‘clean electricity’ certification.
Therefore, a revised IGCEP framework must go beyond domestic LCOE comparisons. It must be structured to model and simulate international policy risks (like CBAM), energy transition financing opportunities (like ETM), and macroeconomic constraints (like foreign exchange volatility). This will require a new generation of planning tools that link generation decisions with fiscal exposure, trade competitiveness, climate goals, and industrial growth.
Another significant and welcome development in Pakistan’s power sector reform journey is the initiation of Integrated System Planning (ISP) – the long-overdue effort to align generation planning through the IGCEP with the Transmission System Expansion Plan (TSEP). This process, formally started only last year, represents a crucial departure from the past siloed planning approach, where generation capacity was modelled in isolation from the physical infrastructure needed to evacuate it. Historically, generation was approved and financed without evaluating whether the transmission grid could economically and reliably dispatch the output. The result was stranded capacity, system losses and costly curtailments.
ISP aims to correct that by enabling co-optimisation of generation and transmission, and ensuring that transmission investments are prioritised based on modelled generation flows and regional resource availability. While this is a laudable step forward, ISP itself must be seen as a subsystem of a more comprehensive framework – Integrated Resource Planning (IRP). IRP includes supply-side generation and transmission, fuel logistics, storage, distribution networks and even demand-side measures such as energy efficiency and demand response.
However, for Pakistan, even IRP is not sufficient. What the country urgently needs is Integrated Economic Planning (IEP) – a framework where the power system is planned not merely to meet forecasted consumption but to stimulate new demand in alignment with national development goals. The traditional premise of classical economics – that ‘supply creates its own demand’ – has repeatedly failed in Pakistan’s power sector. Despite an oversupply of capacity, demand and affordability have stagnated. It is time to shift toward a Keynesian model, where industrial demand creation becomes the anchor for generation planning.
In this reimagined paradigm, the IGCEP should evolve into IDCEP – the Industrial Demand Capacity Expansion Plan – a plan that forecasts generation not based on assumed growth trajectories, but on targeted policies to electrify industry, incentivise export zones, shift transport to electric modes, and provide power to new digital and manufacturing clusters. Only then will supply planning cease to be speculative and become strategic.
Thus, the IGCEP should no longer be viewed merely as a generation expansion plan. It must now evolve into a comprehensive economic and decarbonisation strategy – one that reflects not just the cost of new plants, but the cost of keeping old ones open, the cost of failing to meet climate obligations and the cost of not growing demand. Only by integrating generation with early retirement, with industrial demand planning and with global carbon pricing regimes can Pakistan finally arrive at an energy pathway that is affordable, sustainable and future-proof.
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