Availability of surplus power in the country, often a source of fiscal constraints, can become the cornerstone of a new industrial policy aimed at attracting energy-intensive manufacturing to the country, integrating value chains, and increasing exports. A surge in consumption of electricity through solar and an increasing prevalence of battery storage at a household level will continue to erode demand from the grid at an accelerated level, which can potentially threaten grid stability.
However, integrating the same into the planning process and allocating surplus power to energy-intensive manufacturing can provide the necessary demand, as well as a stimulus to economic growth and jobs.
Such reallocation of surplus power would require a transition away from an archaic and often pedantic ivory-tower-driven view of cost-plus pricing, which is grossly inefficient in terms of allocating resources. There is a dire need to move towards a marginal cost regime, wherein surplus power can be auctioned or made available to industries or sectors that generate incremental economic value, whether that is through exports, job generation, or simply higher industrial growth.
There needs to be a rethink of what kind of industrial growth we want, and that should drive decisions regarding power pricing while also ensuring no cross-subsidies or direct subsidies are at play.
At this point, Pakistan has an opportunity to develop an energy-intensive industry stack that may include steel, copper smelting, aluminium, and other energy-intensive industries. An incentive framework can be created wherein surplus power is made available at marginal cost, while both forward and backward integration processes can be initiated and completed before a sunset period.
The kind of industrial growth we want should drive decisions regarding power pricing while also ensuring no cross or direct subsidies are at play
Another area that can substantially benefit from the availability of power at marginal cost is cold-chain infrastructure within the agricultural space, which is non-existent at this point. A lot of the same can be attributed to a distorted tax policy which actively discourages any value-addition, but also due to the high cost of power for such interventions, which makes most such projects uneconomical. A blend of solar and grid would effectively reduce power costs in a way that can make many such projects feasible – but the same needs to be designed in a way that is long-standing and not dependent on the whims of one office or another.
A World Bank working paper tracking the “return of industrial policy” counted a surge of subsidy-fuelled interventions after 2008, noting that subsidies now distort trade four times more than tariffs in manufacturing sectors. The same study stresses that climate goals and supply-chain security are the dominant motives, with import barriers and domestic subsidies as the preferred instruments.
Supporters argue that carefully targeted state intervention can surface a “latent comparative advantage”, industries that markets overlook because early movers bear discovery costs.
A scorecard for an effective, successful industrial policy is suggested by the economist Dani Rodrik through design principles that measure results, keep incentives time-bound, and, above all, let losers go. We need to get losers to go and not nurture them to become perpetual infants.
Installed generation capacity has galloped far ahead of peak demand, and the gap may continue to increase as the surge in solar adoption and storage of power through batteries continue. This will further shave off demand from the grid, making it economically or even technically unsustainable.
That gap saddles remaining consumers on the grid with capacity-payment surcharges, but it also means thousands of idle megawatts that could be sold at different points during the day, at marginal or fuel-only prices. It is entirely possible to provide electricity in the range of three to five US cents per kWh through a time-of-use mechanism for qualified industrial feeders, focusing on generating incremental demand for electricity and exports. Availability of such power at marginal prices can be tied to an increase in exports.
Even from a legal and regulatory perspective, this would simply mean carving out existing Power Purchase Agreements, such that surplus demand can be mopped up by greenfield or brownfield industries demanding incremental power. Once price certainty can be ensured, domestic and foreign investors alike can gravitate towards investing.
Each industry identified earlier can generate incremental value through forward and backward integration and can have a multiplier effect through higher exports and job creation. Capitalising on coal and gas available in Sindh, copper, and other minerals in Balochistan, it is possible to utilise affordable electricity (through better pricing) for adding value to the same minerals locally and priming them for exports through forward integration.
The policy tools range from auctioning surplus power to industries embarking on greenfield or brownfield projects with an export orientation at a marginal-cost-plus pricing regime to reviving dormant special economic zones by enabling the availability of better service quality across the board, whether that is through the provision of electricity, gas, or water, or something as basic as on-site effluent treatment. There needs to be a very clear target for increasing export share, wherein incumbents and their exports are tracked on an annual basis — failure to attain the same may result in being regarded as a loser and being let go.
There are two options: allow surplus capacity to remain a budgetary albatross while risking a stranded grid, or convert it into the low-cost electrons that power a new generation of metal, mineral and agrifood exports. Done with discipline, Pakistan’s power-led industrial policy could turn a liability into an engine of growth. Done badly, it risks reinforcing the very distortions that critics of industrial policy lament.
The writer is assistant professor of practice at IBA, member of the Tariff Determination Thar Coal Energy Board, and CEO, NCGCL
Published in Dawn, The Business and Finance Weekly, June 10th, 2025
