A fierce debate blaming exorbitant electricity prices on expensive power purchase agreements with the Independent Power Producers (IPPs) has been raging for the past couple of weeks. This issue is not new; the media has long highlighted it, urging successive governments to undertake serious reforms to fix the collapsing power sector.

Contracts with the IPPs, including fixed capacity payments and guaranteed returns, and high consumer prices are partly to blame for our growing power woes and high electricity rates. Multiple reasons, including recent ones like steep exchange rate depreciation, elevated interest rates, increased costs of imported fuel for generation, shrinking demand, and taxes, contribute to the massive gap between the basket price at which the government buys electricity from the producers and at which it sells to consumers.

Helmed by former caretaker trade minister and textile industry magnate Gohar Ejaz, who has denounced the power purchase contracts with the IPPs as a “swindle,” the narrative against the power producers has struck a chord. After all, no one in the country has been spared from inflated electricity bills, with middle-class households subsisting from paycheck to paycheck bearing the brunt. Thus, when an influential figure like the former minister asserts daily that power consumers are burdened with unaffordable electricity bills due to these power purchase contracts with the IPPs, advocating for their annulment or amendment, he garners applause from both TV show hosts and a populace strained by inflation. However, the hasty demand to rescind legally binding contracts with the IPPs is tantamount to imploring the sovereign to default on its international contractual obligations—a move that would deter foreign investors. The revelation that Ejaz intends to petition the Supreme Court on this matter has resurrected memories of the Reko Diq case, where an unfavorable verdict inflicted a $900 million loss on Pakistan, an amount unlikely to be recuperated from the project for many years. Sovereign default is not a viable solution. Alternative remedies exist, such as the government, which owns nearly half of the generation capacity constructed with taxpayer money, forfeiting its profits and curbing system inefficiencies and theft losses.

Gohar Ejaz delineated comprehensive strategies to reform Pakistan’s power sector, underscoring the necessity for transparency, accountability, and efficiency to benefit all stakeholders. Trade bodies issued statements following his disclosure of data on payments to the IPPs, revealing the significant financial strain on consumers. He disclosed that over the past year, the IPPs received payments amounting to Rs1.95 trillion. He condemned corrupt contracts and mismanagement that led to electricity being sold at Rs60 per unit, calling for public action against the agreements.

For decades, the general populace has protested in vain against escalating electricity tariffs and persistent power outages. This summer, exacerbated by the IMF’s retraction of various industrial concessions, the country’s elite industrialists and business chambers have directed their ire towards the independent power producers (IPPs).

Irritated by the exorbitant capacity payments to the IPPs, leaders from trade and industry have implored the government to reassess the power purchase agreements, advocating for a reduced electricity tariff of 9 cents per unit to ensure the industry’s survival. However, many of these demands, seemingly fueled by emotion and frustration, are impractical and unfeasible. The agreements forged between the government and the IPPs are backed by sovereign guarantees, with arbitration typically conducted in the UK or other secure international jurisdictions.

Efforts to review these power purchase agreements have been made repeatedly but to no avail. Conversely, despite awareness of the consequences, additional IPPs have been integrated into the national grid under the same terms, further burdening the power sector with capacity payments. The saga of the IPPs in Pakistan is a tale of avarice and exploitation by vested interests, with minimal focus on providing reliable and affordable electricity to consumers. The industrial fraternity is not exempt from blame, having opportunistically capitalized on the trend to reap substantial profits. They failed to foresee that the indiscriminate proliferation of the IPPs would eventually strangle the industry. Numerous large industrial groups diverted funds from their primary businesses towards establishing the IPPs.

An illustrative example of this reckless trend is highlighted in the Pakistan Economic Survey of 2021–22. The installed electricity generation capacity reached 41,557MW in 2022. The peak demand from residential and industrial sectors stands at approximately 31,000 MW, while the transmission and distribution capacity is around 22,000MW.

This results in a deficit of about 9,000MW during peak demand periods. Although the peak demand is well below the installed capacity of 41,557MW, the additional 9,000MW cannot be transmitted due to inadequate evacuation capacity. It begs the question of why 9,000MW was added to the grid when the grid could not accommodate it. Numerous other instances of reckless waste lack plausible explanations.

If the industry’s leadership genuinely aims to provide affordable electricity to its members, it must cease seeking concessions and taking ineffectual actions. Instead, it must contribute meaningfully and exert influence on the government to conduct an independent forensic audit of the entire power sector supply chain. This should be followed by the sincere implementation of the audit findings, overriding all vested interests and considerations.