IPPs and Financially Collapsing Pakistan

This Analytical Article has been published in the latest edition of The Truth International magazine

ISLAMABAD: Financial crisis in Pakistan has been deteriorating with the passage of time. The crisis has deepened to such an extent that a hue and cry has started in the country over critical issues crippling Pakistan. Among them the issue of Independent Power Producers (IPPs) has emerged as a hot topic, haunting the power consumers being forced to pay inflated bills and those who are advocating to get rid of payment to those IPPs which are not generating electricity. In 2023-24, the government paid around 1930 billion rupees as capacity charges to the IPPs while in this financial year, the government would have to extort more than 2000 billion rupees from the electricity consumers to pay to IPPs as capacity charges.

Recently, Energy Minister Sardar Awais Khan Leghari and former caretaker minister for Commerce and Industries, Dr. Gohar Ejaz, have criticized the agreements with independent power producers (IPPs), stating they benefit the companies at the expense of consumers due to government “incompetence.”

Minister Leghari pointed out that each consumer is paying around Rs 18 per unit as capacity charges which is a main source of headache for the public.

Former Caretaker Minister and APTMA chief

Meanwhile, in a post on X, Dr. Ejaz, former caretaker minister, chairman of APTMA and a real estate tycoon, argued that the government should limit its role to policy-making and regulation, as it lacks the competence to manage businesses effectively. He emphasized the need for privatization and other reforms to lower electricity prices. “The government is a policymaker and a regulator. It is not competent to do business, and the power sector is a true reflection of this incompetence, imposing misery on all electric consumers in Pakistan through these IPP agreements that benefit 40 companies over 240 million people,” Ejaz wrote.

He highlighted the issue of capacity charges, noting, “Capacity charges of over Rs 2 trillion, which should be Rs 8 per unit, are being charged at Rs 24 per unit due to non-operation and over-invoicing of these power plants, many of which are government-managed and half-operated. They should all be privatized, and the power sector should operate as merchant plants and through electricity exchanges, selling electricity at the cheapest rates to privatized distribution companies, not at fixed capacity charges and pass-through fuel costs. Electricity will cost less than half, at Rs 30 per unit compared to Rs 60 per unit for all consumers—domestic, commercial, and industrial. We are all victims of incompetence,” the former caretaker minister added.

Experts argue that Pakistan’s economic crisis is significantly driven by its power sector and propose bypassing government involvement.

Dr. Ejaz previously stated that the actual power tariff should be below Rs8 per unit, but the government is charging Rs60 per unit due to flawed contracts with the IPPs. “Why was a Rs2 trillion capacity payment made to power plants last year, costing all consumers Rs24 per unit when the actual cost should be below Rs8 per unit? Payments were made for idle capacity to IPPs, which should only be paid for power produced and delivered to the National Grid,” he said.

The former minister argued that if electricity were bought from the cheapest suppliers without any capacity payments and treated as merchant suppliers, prices would fall below Rs30 per unit instead of over Rs60 per unit.

Therefore, consumers pay for the potential to generate and deliver electricity even if it’s not used. For the 2023-24 fiscal year, it’s estimated that consumers will pay Rs2 trillion in capacity and fixed charges to IPPs. Over the past five years, capacity charges have increased from one-third to two-thirds as more generation capacity has been added. Furthermore, net hydel profits are being paid to Khyber Pakhtunkhwa (KP) and Punjab, further increasing consumer bills.

Electricity tariffs cannot be reduced as long as capacity and fixed charges persist. No efforts have been made to mitigate these charges. One potential solution is to sell electricity from such power plants at reduced rates to a selected group of consumers, eliminating distribution and transmission system add-ons, taxes, duties, and surcharges, including net hydel profits of KP and Punjab.

The goal is to reduce payments to idle IPPs or those operating below the minimum guaranteed takeoff and to provide incentives to specific categories of industrial, agricultural, and other consumers whose increased output would benefit the national interest.

FPCCI concerns and line of action

Furthermore, the Federation of Pakistan Chambers of Commerce & Industry (FPCCI) has launched a final attempt to rescue the Pakistani economy and its citizens from the “unbearable capacity charges” imposed by independent power producers (IPPs). Recently, the FPCCI Acting President announced the organization’s plan to contest these charges in the Supreme Court and the Special Investment Facilitation Council (SIFC). He highlighted the frustration of the business community, noting their “loud and clear” objections to the IPP capacity charges. He expressed disappointment that, despite being the primary stakeholders, the business community had been excluded from discussions to resolve this issue.

The FPCCI proposed a three-pronged strategy to address the power sector crisis: conducting a forensic audit of IPPs, abolishing capacity charges in favor of payment based solely on generated electricity, and renegotiating power purchase agreements. Khan highlighted the severe financial burden, stating that Pakistan paid an estimated Rs 2,000 billion in capacity charges during FY24, with expectations of an increase to Rs 2,700-2,800 billion in FY25. He explained that dollar-indexed guarantees, coupled with a weakening Pakistani rupee, result in higher returns for IPPs, placing additional financial strain on both the government and the public.

The FPCCI’s demands extend to a comprehensive review of IPP agreements, price reevaluations within legal boundaries, and enhanced oversight to prevent over-invoicing. They also called for an examination of energy infrastructure contracts for potential misinformation and fraud.

Senate Standing Committee’s viewpoint about 40 Families and Millions of Consumers

During a meeting of the Senate Standing Committee on Cabinet Division, chaired by Rana Mahmoodul Hasan, NEPRA Chairman Waseem Mukhtar discussed potential solutions to the ongoing issue of high electricity bills. He emphasized that maintaining macroeconomic stability is essential to preventing further increases in electricity rates. “If the macroeconomy remains stable, electricity rates will not rise,” Mukhtar stated.

He also pointed out that without investor confidence and economic stability, controlling the rising cost of electricity would be challenging.

Committee members expressed their frustration over the escalating electricity prices, noting that the public is feeling the strain. “Due to the increase in electricity prices, people are holding us by the neck,” they remarked, adding that “Independent Power Producers (IPPs) linked to 40 families are significantly burdening the public. These IPPs are costing the public dearly.” The members identified the IPPs as a major source of public anxiety, criticizing the current contractual agreements and calling for a forensic audit of these contracts.

The committee also questioned the decision to allow a coal plant in Sahiwal, citing the logistical challenges of transporting coal by train from the port. They stressed the need for a comprehensive solution to escape the “trap” of IPPs, urging a thorough review and potential renegotiation of IPP tariffs.

The members called for a forensic audit of IPP contracts to ensure transparency and fairness, alongside the development of a strategic plan to mitigate the high costs associated with IPPs and explore alternative energy sources.

End