Finally, some good news for the harassed, overburdened power consumers. Last week, the prime minister announced that five independent power producers (IPPs) have agreed to “voluntarily” negotiate their power purchase agreements with the government. It is estimated that the move would save Rs411 billion and bring down the per unit electricity tariff. It is relevant to point out here that  capacity payments account for 35pc of the Rs51.81 per unit retail cost, while taxes and levies make up 31pc.

The five IPPs — Rousch Power, Saba Power, Atlas Power, Lalpir Power Limited and Hub Power Company Limited (Hubco) — which started working under the independent power policies of 1994 and 2002, made the decision after the hue and cry over the agreements signed with these power producers which bound the government to pay them even for the electricity it didn’t purchase. These costs, known as capacity payments, are blamed for soaring electricity prices. Under the new arrangements, the five IPPs will be paid outstanding dues only for the cost of electricity they have supplied to the grid. It is also claimed that the Rs80-100 billion, owed to these companies as capacity payments, is also being re-negotiated.

After these five deals are finalised, the government plans to renegotiate contracts with all other IPPs set up after 2002, except those built under the China-Pakistan Economic Corridor (CPEC). The power producers will be asked to forgo their fixed capacity payments and agree to a take-and-pay mode from the current take-or-pay deals. This means that the government will only pay for the electricity supplied to the national grid.

It is agreed on all hands that the IPPs deals are riddled with corruption. The PML-N government in 1998 threatened to shut down 11 IPPs over alleged corruption charges and technical reasons. According to media reports, the IPPs caved under pressure as they were told to either re-negotiate the deals or face the possibility of forensic audits of their projects. The latter could have led to criminal cases against the private power producers.

It may be recalled here that the private sector began participating in capital-intensive power generation projects in many developing countries in the 1990s, as governments had limited resources to invest in them. So, independent power plants were set up with the collaboration of private companies. But in a few years, IPP payments became a heavy burden in most countries where increasing generation capacity was the main  policy aim in total disregard of other factors. The power sector became untenable without simultaneous demand management and lack of reforms in the transmission and distribution systems. The expanding generation capacity outpaced the rate of industrial and economic growth.

The power tariffs have two components. The first part is capacity tariff, including debt repayment, fixed O&M and insurance costs, and return on invested equity. The second is the variable tariff, including fuel and variable O&M costs. The latter fluctuates based on fuel prices and plant utilisation. Banks typically financed 80 per cent of project costs with 10-year loan tenors, so the tariff is high in the first 10 years and lower for the remainder of the project’s life.

The termination of agreements with the IPPs will bring some relief to the consumers. But  energy experts hold a contrary view. They say that similar re-negotiations in the past had failed to yield the desired benefits. Their scepticism stems from the fact that there are many unresolved issues other than capacity payments such as a poor transmission system, power generation through expensive fuel, and low recovery. All these factors also contribute to expensive electricity.

In other words, any long-term effort to reduce electricity prices must take notice of serious inefficiencies in the system, including an expensive energy mix, unpaid power bills and an outdated transmission system which is unable to supply cheaper power produced in the south to the north.

In a nutshell, the electricity tariffs cannot be reduced on a sustainable basis without a holistic solution to the issues plaguing the entire energy supply chain. Creeping devaluation of the rupee, rising foreign debt servicing costs and declining power consumption have also  contributed to the rising electricity tariff in recent years. As a result, the cost of electricity before taxes rose from Rs13.4 per unit in 2020 to Rs24.8 in 2023 and to Rs35.5 today.

Any reforms in the power sector that actually provide a tangible benefit to users have to be holistic and also incorporate systemic issues other than IPPs’ contracts. For this, the government will have to take an inclusive and all comprehensive approach: one that takes care of the interests of both consumers and the sector as a whole.

To conclude, electricity tariffs are now the highest in the world and need to be brought down drastically to provide some relief to the consumer as well as the industrial sector.