Power Sector Circular Debt Rises by PKR 240 Billion: Negative for IPPs and Energy Suppliers

What the circular debt report revealed

A recent report by an economic policy think tank has contradicted government claims regarding the reduction of circular debt in Pakistan's power sector. According to Express News, the report indicates that instead of decreasing, the power sector's circular debt actually worsened, increasing by PKR 240 billion over the initial 10 months of fiscal year 2026. This alarming rise has pushed the total circular debt to PKR 1,854 billion.

The think tank's analysis suggests that any refinancing or recycling efforts by government institutions have merely altered the form of the debt rather than genuinely reducing its overall size. The report identifies several core reasons for the persistent deficit in the power sector, including expensive power purchase agreements, burdensome capacity charges (payments made to power plants for simply being available to generate electricity, even if they are not fully utilised), and the ongoing inefficiencies of electricity distribution companies.

Why rising circular debt matters for power and energy stocks

Circular debt is a critical issue in Pakistan's energy sector, representing a chain of unpaid dues that ripples through the entire supply chain. When distribution companies fail to collect payments from consumers or pay power producers on time, it creates a backlog. This backlog then prevents power producers from paying their fuel suppliers, such as oil and gas exploration companies and gas utilities. The continuous increase in this debt means that companies operating within this chain face delayed payments, which can severely impact their cash flow, liquidity, and ability to fund operations or distribute profits.

For power generation companies, the accumulation of circular debt directly affects their receivables, making it harder to manage working capital. For companies that supply fuel to these power plants, it means their own payments are delayed, leading to a build-up of receivables on their balance sheets. This situation creates financial instability across the energy sector, making it a persistent challenge for listed companies.

Which stocks, and why

The increase in power sector circular debt has a negative impact on several companies listed on the Pakistan Stock Exchange, particularly those in the power generation and energy supply sectors:

• Hub Power, K-Electric, Nishat Power, Kot Addu Power: These are Independent Power Producers (IPPs) that generate electricity and sell it to the national grid. They are at the receiving end of the circular debt chain, meaning they are owed significant amounts by government-owned distribution companies. The reported PKR 240 billion increase in circular debt implies further delays in payments to these companies, straining their cash flows and potentially affecting their ability to declare dividends or invest in future projects. This is a direct, negative impact on their business operations.

• Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, Mari Petroleum: As major oil and gas exploration and production (E&P) companies, these firms supply fuel (primarily gas and furnace oil) to various power plants. They are significant creditors in the broader energy circular debt framework. An increase in the power sector's circular debt means that the payments they are due for their fuel supplies will likely be further delayed, leading to a rise in their receivables and impacting their liquidity.

• Sui Northern Gas Pipelines, Sui Southern Gas Company: These gas utilities are responsible for the transmission and distribution of natural gas, including to power generation facilities. They are also exposed to the circular debt problem, as unpaid dues from power plants for gas supplies accumulate. The reported increase in power sector circular debt will negatively affect their ability to recover these dues, impacting their financial health and potentially their investment capacity.

What to watch

Investors should closely monitor any new government initiatives or policy changes aimed at resolving the persistent issue of energy circular debt. Specific payment plans, refinancing schemes, or structural reforms in the power sector could signal a shift. Additionally, keeping an eye on the quarterly financial results of the affected power generation, E&P, and gas utility companies will provide concrete data on changes in their receivables, cash flows, and overall profitability, which will confirm the actual impact of this ongoing challenge.