FeaturedNationalVOLUME 19 ISSUE # 34

Energy crisis: need to renegotiate the IPP deals

People all over the country are up in protest against the exorbitant electricity bills which are now touching unprecedented levels. The president of the FPCCI demanded that the government should cancel all agreements with the Independent Power Producers (IPPs) and procure electricity for the national grid from cheaper and cost-effective sources without any strings vis-à-vis capacity charges.

In recent months unfair and unbearable electricity tariffs have led to widespread industrial closures and massive job losses. At present, there is an installed generation capacity of over 40,000 MW; while the peak demand and transmission capacity is merely 25,000 MW, showing a big gap between actual demand and installed generation capacity.

The payment of Rs2 trillion capacity charges to 40 power companies is a big burden on the national economy. The biggest scandal is that the IPPs continue to receive payments in the name of capacity charges even when there is no electricity generated or supplied. It is relevant to note here that capacity charges constitute two-thirds of the total cost of electricity, while fuel costs comprise only one-third.

‘Take-or-Pay’ is the main feature of Pakistani power purchase agreements which essentially means that the state or consumer party will pay for a specific quantity of electricity units from the producer over a defined period of time, regardless of whether electricity is needed or used. This model guarantees the IPPs a steady stream of income without any risk of delay or default, with the other party at a clear disadvantage. Revenue collection from consumers may vary from time to time but the government is contractually bound to pay the IPPs a fixed amount according to the signed agreements.

The induction of the independent power producers has led to the accumulation of a huge amount of circular debt which is an amalgamation of unpaid dues and bills between the consumers and the government, power producers and distributors. The state’s reliance on take-or-pay contracts, which require the government to pay for a minimum amount of electricity from the IPPs, whether or not it is needed, has contributed to circular debt. The circular debt totaled Rs2.64 trillion as of February 2024.

Pakistan’s energy sector has been trapped in one sides contractual arrangements in perpetuity with the IPPs since the 1994 power policy. According to various expert studies, the IPPs have been enjoying returns exceeding 73 percent in dollar terms. This profit margin is unusually high as compared to international standards and practices. As the payment guarantees written into the agreements with the IPPs are indexed to the US dollar, any depreciation of the Pakistani rupee increases the margin of return for the IPPs. The initial return on equity for the IPPs was set at 18 percent and later reduced to 12 percent in the 2002 power policy, but this is still very high when compared to the global norms.

There are tell-tale signs of corruption and mishandling in the IPP deals signed by various governments in the past. This is proved by the fact that as compared with similar projects in other countries, many IPPs in Pakistan were financed through inflated invoicing on capital goods; which means perpetual returns to the investors on ghost equity. This is illustrated by the fact that the tariff for coal based plants in Pakistan is 9 cents as compared to 5.6 cents for similar plants in Bangladesh as per FY25 power purchase price. It may be mentioned here that the imported coal-based plants have the highest capacity charge of Rs60.48 per kWh as compared to Rs26.01 per kWh for the second highest capacity charge out of all thermal generation.

It has been reported that the IPPs often resort to misreporting and over-billing and thus squeeze extra money because tariffs are guaranteed under the existing contracts protected by international law. It is alleged that actual oil consumption of several oil-based plants is less than what is billed by the IPPs. When attempts are made to audit and check discrepancies in their financial statements, the IPPs create legal hurdles to obstruct the process. The IPPs also inflate operational and maintenance costs, with actual expenses billed at rates much higher than the prevailing market prices.

According to business circles, the recent surge in electricity rates could trigger civil unrest and discontent among the business community of Pakistan. There is a consensus of opinion in the country that there is a need for a comprehensive review of all IPP agreements, price re-evaluation within legal bounds and improved oversight to prevent over-invoicing. Examination of the energy infrastructure with regard to clauses related to misinformation and fraud is also required. In order to solve the raging energy crisis, the federal government must devise a new strategy to renegotiate with the IPPs so that electricity can be provided to the industry as well as general consumers at affordable prices.