Opinion: Pakistan’s solar journey is feeling the heat from cost shifting

In 2015, Pakistan quietly ushered in a new era of decentralised energy. The drily named Net Metering Regulations bill allowed households and businesses to install solar panels and sell excess electricity back to the grid, earning at the same rate they paid to consume electricity. It was a bold step in a country struggling with power shortages, rising import bills and growing public frustration with costly, unreliable electricity.

The impact was swift. Spurred by falling solar panel prices, and some of the highest retail electricity tariffs in South Asia, Pakistan experienced a solar boom. In 2024 alone, 22 gigawatts of solar panels were imported – an astonishing figure given Pakistan’s total installed capacity is 46 GW.

Yet, behind this success lies a quieter tension: the fundamental problem of “stranded costs”.

There is a growing economic mismatch between how utilities recover costs and how electricity is now being consumed. Pakistan’s utilities have historically relied on volumetric tariffs – charging per kilowatt-hour sold – to recover both energy and fixed infrastructure costs (poles, wires, substations and administrative overheads). As more customers adopt distributed solar and generate a portion of their own electricity, the number of kilowatt-hours sold by the utility shrinks.

This doesn’t reduce the actual cost of running the grid. Instead, the fixed costs get spread over a smaller base, triggering rate increases for all other customers. In turn, these higher tariffs make distributed generation even more financially attractive, particularly for commercial and industrial customers, who account for a significant share of utility revenue. As large customers reduce their reliance on grid power, utilities are left with stranded assets – infrastructure that was built assuming higher demand and now has no clear recovery pathway.

Still, the financial pressure on utilities is real. Pakistan operates a single-buyer electricity market, where the Central Power Purchasing Agency (CPPA-G) signs deals with power producers and state-owned distribution companies (DISCOs) are responsible for selling electricity to end users, collecting payments and curbing theft. As more affluent customers install solar and reduce their reliance on the grid, DISCOs face shrinking revenues and growing losses. The utility’s sales volumes decline, while its fixed costs persist or rise and tariffs for remaining customers go up, prompting further defections. This creates a feedback loop known as the “utility death spiral”.

Fixed costs are expenses that do not change with the amount of electricity sold. These include payments for long-term power contracts, infrastructure maintenance, staff salaries and loan repayments for power plants and grid equipment. Even if fewer units of electricity are consumed, these costs remain – which is why falling sales can strain a utility’s finances.

Saddled with high distribution losses, poor billing recovery and heavy reliance on imported fuels, these state-owned distribution companies are caught in a bind: unable to stop the bleeding, yet politically constrained from raising tariffs enough to cover their losses. This is not just taking place in Pakistan, a similar situation is also unfolding in South Africa.

From net metering to net billing

Pakistan’s National Electric Power Regulatory Authority (Nepra) has proposed a shift to net billing. This has already been approved by the Economic Coordination Committee and now awaits cabinet ratification. If finalised, Nepra will formally incorporate the changes into the regulatory framework, potentially ending Pakistan’s near decade-long net metering regime.

Mirroring the US state of California’s Net Energy Metering (Nem) 3.0 policy, it compensates solar customers based not on retail prices, but on the utility’s avoided cost – what it would have spent to generate or procure that electricity – typically a much lower rate than the retail tariff.

Under the new Nepra proposal, compensation for customers exporting excess energy to the grid would more closely reflect the value of that power to the system. In Pakistan, this is often between per kilowatt-hour (kWh), compared to retail rates above PKR 27 per kWh in many parts of the country. In theory, this brings greater fairness to the system by reducing cross-subsidisation (where non-solar users shoulder more of the grid’s fixed costs) and keeps utilities financially afloat.

But it also reshapes the economics of solar. For new adoptees, the payback period for rooftop systems without storage more than doubles from 1-2 years to 4-5 years. While the move is likely to stabilise the grid and protect non-solar users, it could slow down the pace of new installations. This is unless they are paired with innovative business models, such as solar-plus-storage (which allows users to avoid buying expensive peak-time power) or peer-to-peer energy trading (which lets them sell surplus energy directly to others).

California’s experience offers a cautionary tale. After transitioning to net billing in 2023, rooftop solar installations declined. However, it also saw a surge in battery adoption, as customers sought to store energy for use during expensive peak hours. Pakistan could see a similar trend: a slowdown in installations of pure rooftop photovoltaic systems but growing interest in self-sufficiency solutions that combine solar with lithium-ion batteries and smart inverters.

Fixing the bigger problem: inefficient distribution

Still, net billing alone won’t fix Pakistan’s energy challenges. The high electricity prices pushing consumers toward solar stem from deeper structural issues: operational inefficiencies, overpriced fuel contracts, mounting circular debt and weak governance.

Even as Nepra changes its regulations for distributed generation, state-owned distribution companies must urgently reduce technical losses, modernise metering and billing systems, optimise power procurement – and be held accountable. Until the underlying cost of electricity comes down, consumers will continue to seek alternatives to grid supply, regardless of how they are compensated. This points to a deeper truth: grid defection in Pakistan in favour of solar isn’t so much a vote for clean energy, but an economic escape route.

A glimpse into the future: batteries and a smarter grid

Even as Pakistan shifts to net billing, its solar journey is far from over. Storage technologies – especially lithium-ion batteries – are becoming more affordable and accessible. As battery prices fall, more solar users will opt to store energy for self-consumption, particularly during evening hours.

Rooftop solar paired with battery storage can significantly enhance grid resilience by reducing reliance on the grid during peak hours and power outages. By storing excess solar energy during the day and using it in the evening – when Pakistan’s grid is under the most strain – these systems can help flatten peak demand, reducing the need for costly peaking plants that rely on imported fuels.

This shift not only cuts national fuel expenditures but also defers the need for new transmission and distribution infrastructure, easing pressure on a grid already burdened by high losses and capacity constraints. In effect, distributed solar-plus-storage acts as a decentralised buffer, strengthening the grid while empowering consumers.

To stay ahead of these trends, Pakistan’s power planners must look beyond short-term fixes. Strategic investments are needed in ‘demand response’ systems, smart grids and tariff designs that reflect the true value of electricity, varying by time of use and location.

Encouraging consumers, through flexible pricing and monetary incentives, to shift their electricity use to times when it is more plentiful or general demand is lower. This can also support greater use of renewable power.

A smarter, more responsive grid would empower consumers by allowing households and businesses to shape their energy use based on real-time conditions, reducing the strain on the system while giving consumers more control.

This article originally appeared on Dialogue Earth and has been reproduced with permission