Walk into any mid-sized factory in Lahore, Pakistan, on a summer afternoon, and you’ll hear the same sound: loud, diesel-fueled power generators running because the electricity grid is down.
For factory workers and owners, the heavy hum of the backup unit is a constant audible reminder of lost hours and profits.
Pakistan spent a decade and borrowed tens of billions of dollars building power plants under the China-Pakistan Economic Corridor (CPEC). It now has more generation capacity than it can use, and yet it still can’t keep the lights on.
It’s an energy crisis cum financial crunch that is getting worse, not better. And it could deteriorate further if the CPEC’s second phase, dressed in the language of green corridors and industrial revival, is carried out as proposed.
Pakistan’s power sector circular debt stood at 1.89 trillion rupees (US$6.7 billion) as of February, up nearly 200 billion rupees in just two months. Of that total, 543 billion rupees trace directly to CPEC power projects, marking an all-time high.
The International Monetary Fund has closely monitored Islamabad’s payments to Chinese power producers, and bluntly said that the debt poses a serious threat to economic stability. The circular debt, which requires Pakistan to pay for Chinese-built capacity on a take-or-pay basis, works like a slow drain on national coffers.
Consumers don’t pay their power bills in full, distribution companies can’t afford to pay the generators, generators can’t buy fuel, fuel stops arriving, plants slow down and outages happen. And the punishing cycle repeats.
Before CPEC’s power plants came online, annual power capacity charges were around 384 billion rupees. They are now 2.1 trillion rupees because Pakistan signed contracts guaranteeing payments to Chinese independent power producers, whether the electricity was used or not. That means the country pays whether the lights are on or off.
Three of the flagship coal plants at Sahiwal, Port Qasim and Hub burn coal shipped in from Indonesia, South Africa and Australia. So when global coal prices spike, Pakistani electricity tariffs do as well.
Industries that can’t absorb those costs shut down production lines. Consumers who can’t afford the bills don’t pay. And the unpaid bills pile up, creating a debt trap from the inside.
Islamabad has tried to negotiate a way out with Beijing. The government raised 1.23 trillion rupees and earmarked 565 billion rupees to clear overdue payments to seven Chinese coal plants and 49 renewable projects.
It has asked Chinese operators to waive 170 billion rupees in late-payment charges, the same deal that domestic power producers had accepted, writing off 377 billion rupees between them.
However, the Chinese IPPs said no. Their position, relayed through back channels, was that any concession to Pakistan would open the door to renegotiations across the entire Belt and Road infrastructure network worldwide.
Meanwhile, the IMF objected when Pakistan tried to quietly funnel 50 billion rupees to Chinese power producers without renegotiating first. Islamabad is thus caught between two creditors pulling in opposite directions. Meanwhile, a $23.5 billion trade deficit in the first nine months of this fiscal year has left Islamabad with almost no bargaining power.
CPEC 2.0 is supposed to change the narrative. While Phase One allocated nearly 75% of its energy investment to coal, the new Phase Two framework will pivot toward greener solar, wind, hydropower and storage.
The completed projects have added 9,504 megawatts to the national power grid. Meanwhile, BYD is set to assemble electric vehicles (EVs) in Pakistan by mid-2026, a sign that Chinese capital allocated to Pakistan is, at least on paper, moving beyond concrete and coal.
But the credibility of these ambitions runs smack into Phase One’s unlearned lessons. Pakistan sidelined the Diamer-Bhasha, Dasu and Bunji hydropower projects, which could have delivered over 15,000 megawatts of cheap, domestic energy, and opted for imported coal instead.
Nobody has explained why, at least not publicly. And two of the new Special Economic Zones under CPEC 2.0 sit in documented flood-risk areas, one in a Sindh district devastated by the 2022 floods. If the infrastructure gets washed out every few years, the returns will never arrive.
Then there is Balochistan. Since 2021, at least 20 Chinese nationals have been killed and 34 injured in attacks claimed by the Baloch Liberation Army and allied groups.
The BLA does not hide its motive: it wants China out of Balochistan, and the CPEC shut down entirely. In January 2026, its operations killed 48 people in a single month.
Days before Prime Minister Shehbaz Sharif flew to Beijing in May to celebrate 75 years of bilateral diplomatic ties, a suicide car bomb tore through a train in Quetta. The timing was not accidental, and Beijing noticed.
By September 2025, China had stepped back from solely financing the Ml-1 railway upgrade, causing Pakistan to turn to a consortium of the Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB) and other Chinese lenders to keep the CPEC’s single largest project alive.
The fixes are well-known. Independent audits of CPEC power contracts, not political negotiations, must be the basis for any renegotiation of terms. Coal plant retirements need to go on the formal bilateral agenda before Phase Two embeds more stranded assets into the grid.
Balochistan needs jobs and revenue, not just army deployments to protect projects imposed from above and often without local consultation. The BLA is known to recruit from communities negatively affected by Chinese investments in their homelands.
Finally, Pakistan needs to stop financing past debt with new debt, a pattern that has quietly consumed the fiscal bounty that industrialization and export growth were supposed to generate.
CPEC 2.0 carries real ambition. But Pakistan’s problem is rooted in what have proven to be the fanciful projections and lop-sided terms of Phase One. Until China and Pakistan resolve their phase one debt imbroglio, Islamabad would be wise to temper the implementation of Phase Two.
Amna Asif is affiliated with the Pakistan College of Law. The views expressed here are the author’s own.