The sun rises on the power grid

The economic landscape constantly evolves through innovation and obsolescence – a process economist Joseph Schumpeter called ‘creative destruction’.

New technologies and models replace outdated ones, as seen in the historical transition from the steam engine to the internet. Today, Pakistan’s power grid is undergoing a similar shift, driven by the rapid rise of rooftop solar. This decentralised generation model challenges the centralised utility structure, offering both opportunity and disruption.

Schumpeter’s theory explains how capitalism thrives on disruptive change, driven by innovation, profit motives and competition. In Pakistan, falling solar PV costs and rising grid tariffs are fueling this transformation. Consumers are becoming ‘prosumers’ – generating their own power – and are fundamentally altering the traditional electricity paradigm.

From an energy economics standpoint, this represents a transition in the structure of electricity supply from a natural monopoly to a more contestable and distributed generation model. Historically, the electricity sector operated under cost-of-service regulation due to the characteristics of a natural monopoly – high fixed costs, indivisibility of capital and economies of scale. However, existing scientific literature suggests that distributed generation technologies such as rooftop solar inherently disrupt these assumptions by reducing the minimum efficient scale required for market entry and introducing competitive pressures on previously monopolistic utilities.

Historically, disruptive technologies often face resistance. The 19th-century Luddite movement, where textile workers destroyed machines that threatened their jobs, exemplifies this pattern. While Pakistan’s solar shift is different, similar tensions persist. Power utilities, fearing revenue losses and underutilised assets, may view decentralised solar with apprehension. Stakeholders may cling to cross-subsidisation mechanisms and legacy infrastructure to protect vested interests. However, the Luddite example underscores the futility of resistance; what is needed instead is a managed transition that balances innovation with social impact.

Pakistan is experiencing a sharp rise in rooftop solar adoption, disrupting its power sector. Net-metering capacity jumped from 5MW in 2017 to 2,451MW by FY2024, reaching 4,135MW by December. At the current pace, it may surpass 14,000MW by FY2034. This surge is fueled by soaring grid tariffs (Rs47/kWh in 2024), falling solar panel costs, favourable net-metering policies, and an unreliable grid.

However, this growth challenges grid finances. In FY2024, net-metering reduced sales by 3.2 billion kWh, shifting Rs101 billion in fixed costs to other users – raising average tariffs by Rs0.9/kWh. By FY2034, the impact could rise to Rs545 billion and Rs3.6/kWh. These pressures stem not just from solar, but also from entrenched inefficiencies and outdated tariff structures.

Rooftop solar also strains conventional plants. Reduced grid demand has led to costly part-load operations – Rs55.67 billion in Partial Load Adjustment Charges (PLAC) in FY2023–24, up from Rs46.59 billion in FY2022–23 – violating economic dispatch principles. DISCOs, whose revenues depend on volumetric sales, will be hit hard. While they pay Rs6,460/kW/month in capacity charges, they recover only Rs200–500/kW/month from consumers, creating a tariff mismatch that worsens circular debt and threatens privatization plans. Technically, net metering introduces grid issues like back-feeding, causing voltage fluctuations and operational challenges in a system built for one-way flow.

The discourse around rooftop solar must also acknowledge technical challenges associated with solar net-metering. One prominent issue is ‘back-feeding’, a condition where surplus solar-generated electricity flows back into a distribution grid originally designed for one-way transmission. Unregulated back-feeding can lead to voltage fluctuations, grid instability and increased operational complexity for distribution companies. Recently, we saw in Sri Lanka the Ceylon Electricity Board’s (CEB) appeals to all rooftop solar system owners across the country to voluntarily switch off their systems during daytime hours – till 3pm each day – from April 13 to April 21.

To manage such challenges, countries like Australia have begun charging solar prosumers a fee for using the grid essentially as a virtual battery, highlighting that even mature renewable energy markets must address these complexities.

However, it is critical to contextualise the Australian experience. Unlike Pakistan, Australia does not face pronounced tariff anomalies, widespread systemic inefficiencies or entrenched capacity trap problems.

Understanding Pakistan's electricity consumption mix is essential for appreciating the impact of rooftop solar. In FY2023–24, the household sector emerged as the largest electricity consumer, accounting for approximately 50 per cent of total consumption. Up to 60 per cent of Pakistan’s electricity consumption comes from unproductive sectors, with only about 18 per cent attributed to the industrial sector. Rooftop solar offers a potential solution to this imbalance by reducing residential demand and, in the long run, making grid power more attractive and affordable for industrial users.

Pakistan’s electricity tariff structure is characterised by an increasing block tariff (IBT) for residential consumers, where the per-unit cost rises with higher levels of consumption. This structure incorporates subsidies for ‘protected’ and ‘lifeline’ consumers with very low consumption levels, typically funded through cross-subsidisation from high-end consumers. The average electricity rate for lifeline and protected consumers is around Rs10/unit, while for high-end consumers it can reach as high as Rs47/unit.

The increasing adoption of rooftop solar by high-end consumers, who previously contributed significantly to the cross-subsidy pool, is now jeopardising the financial sustainability of this system. From an economic efficiency perspective, this results in a distortion in marginal cost pricing. Addressing this imbalance may require a shift toward cost-reflective tariffs or targeted subsidies funded through fiscal resources rather than embedded cross-subsidies.

The only way forward is to adopt a prudent policy framework for Pakistan’s power sector, one that strategically employs the dual approach of ‘Sunrise and Sunset’. This approach emphasises nurturing a conducive regulatory, technical and financial environment for the ‘Sunrise’ by accelerating rooftop solar adoption through streamlined net-metering policies, targeted incentives, affordable financing, supportive grid modernisation and tariff rationalisation that encourages productive electricity demand.

Concurrently, the policy must facilitate the ‘Sunset’ – the systematic early retirement or phased closure of fossil fuel-based generation assets, particularly coal-fired power plants, using innovative global mechanisms such as Just Energy Transition Partnerships (JETPs), Energy Transition Mechanisms (ETMs), or ‘coal-to-clean’ credit initiatives.

By integrating these parallel strategies, Pakistan can effectively redirect investments from outdated fossil fuel infrastructure towards decentralised renewable energy systems – managing economic disruption, ensuring social equity and advancing a resilient, sustainable and affordable energy future.

This transformation exemplifies a broader shift in the generation mix and capital formation, as outlined in energy economics. Investment in capital-intensive centralised generation is now being challenged by decentralised, modular technologies with lower capital intensity and reduced lead times. It is also important to understand the utility of distributed solar as a transformative tool at the intersection of economy, energy and environment.

Rooftop solar offers significant environmental benefits, reducing reliance on fossil fuels and cutting carbon emissions, both critical to climate change mitigation.

While some argue that net metering primarily benefits the wealthy, the reality in Pakistan is different: most adopters are middle-class families that have invested their hard-earned savings for energy security in the face of rising tariffs and unreliable grid supply. Solar is not a luxury; it is a necessity-driven choice for a more resilient and sustainable future, one that can ultimately enhance productive demand within the power grid.

The writer has a doctorate inenergy economics and serves

as a research fellow in the Sustainable Development Policy Institute (SDPI).