By Qamar Bashir
The government has recently launched a discreet campaign against Independent Power
Producers (IPPs), highlighting issues related to high electricity tariffs. Previously, the
outcry against rising power costs came primarily from consumers, chambers of
commerce, and small and medium enterprises, whose demands were largely ignored.
However, the government now seems to realize that addressing the dual issues of
electricity and gas circular debt is critical for its survival. To build pressure, the various
scandals and secret information including the payment of large subsidies to IPPs and
capacity payments to idle power producers have been leaked to the media.
This has kickstarted a heated debate in the mainstream media. Critics, analysts and
energy experts are arguing that the agreements with IPPs were detrimental to national
interests due to high production costs leading to elevated tariffs for consumers. The
guaranteed payments have significantly increased the national debt and dependency on
private entities for essential services, reducing governmental control over energy
infrastructure. Furthermore, these contracts are prone to inefficiencies and corruption,
escalating costs and reducing transparency, ultimately straining public finances and
economic stability.
Ironically, most of these problematic IPP agreements were signed during the PPP and
PML(N) periods. The initial policy to attract private investment in the power sector was
introduced in 1994, followed by a second wave of IPPs between 1995 and 1997. A severe
energy crisis from 2005 to 2010 increased reliance on IPPs, and in 2012, the Private
Power and Infrastructure Board (PPIB) was made a statutory body to streamline
development. The CPEC projects from 2013 to 2018 further expanded IPP capacity,
especially in coal and renewables. During the PTI government in 2020, the government
renegotiated terms with 47 IPPs to address high tariffs, but the total liability to IPPs in
the power sector remains approximately Rs2.31 trillion.
Former Minister Gohar Ejaz revealed that the government pays Rs2 trillion annually to
IPPs under "Take or Pay" clauses, even when no electricity is produced. IPPs have
utilized less than 50% of their 23,400 MW generation capacity over the past two years,
incurring additional costs of nearly Rs1 trillion due to idle and partially operational
plants.
The media, civil society and political forces are pressuring the government to renegotiate
power tariff payable to IPPS. The demand, though logical and sensible, is difficult to
implement due to long-term Power Purchase Agreements (PPAs) with fixed terms, "Take
or Pay" clauses, and capacity payments obligating the government to pay for unused
power. These contracts include sovereign guarantees, making them legally binding and
difficult to alter without facing international arbitration, which can result in hefty fines.
Additionally, Bilateral Investment Treaties (BITs) protect foreign investments, adding
another layer of complexity. Attempts to renegotiate can erode investor confidence and
impact the country's credit rating and future foreign investment prospects.
But the country cannot sustain this heavy burden anymore and it needs to get out of this
paradox sooner the better, but how?.
In typical contractual agreements for power projects, it is common for the initial costs to
be high due to the capital investment required. Over time, these costs are expected to
decrease as the Independent Power Producers (IPPs) recover their fixed costs and earn
profits. Additionally, some agreements may include provisions for the eventual transfer
of the entity to the government once the IPP has recovered its fixed costs and achieved a
reasonable return on investment.
However, many of the agreements signed with IPPs in Pakistan appear to have
overlooked these aspects. Instead, they included "Take or Pay" clauses and guaranteed
payments that ensure ongoing high costs even after the initial investment has been
recouped. This has led to a situation where the expected reduction in costs over time has
not materialized, continuing to strain public finances and contributing to circular debt.
The government of Pakistan however should not give knee jerk reactions by unilaterally
terminating the agreements, but should think creatively to create a win-win situation
while renegotiating with Independent Power Producers (IPPs). It should search, find and
adopt international best practices that can provide valuable insights. However, there is no
second opinion that renegotiating terms and tariffs is essential,
The renewed negotiations should bring the IPPs willing on the table and convince them
with logic and wisdom. The terms of reference should include; adjusting payment terms
to reflect actual power consumption rather than fixed capacity payments and gradually
lowering tariffs as IPPs recover their fixed costs and earn reasonable profits.
Amending "Take or Pay" clauses to "Take and Pay" agreements, where payments are
made based on actual electricity supplied, and incorporating performance-based
incentives can also improve efficiency and reliability.
The government should offer its continued support and guarantee linked to operational
efficiencies and reduced tariffs to maintain investor confidence while phasing out
subsidies as IPP financial health improves.
Encouraging long-term partnerships, such as equity participation in future projects and
including provisions for transferring ownership to the government after fixed costs are
recovered, aligns IPP interests with national development goals and ensures
sustainability.
Promoting renewable energy through competitive bidding and diversification into
renewable projects can reduce operational costs and environmental impacts.
This strategy not only lowers electricity tariffs but also enhances energy security and
sustainability. Examples from other countries, like the Philippines, which restructured its
power sector through the Electric Power Industry Reform Act (EPIRA) in 2001, show
that renegotiating contracts and introducing competitive bidding can stabilize prices and
improve financial health.
India's Electricity Act 2003 promoted competition and efficiency by unbundling state
electricity boards and allowing open access and competitive bidding, leading to increased
private investment.
Similarly, South Africa's Renewable Energy Independent Power Producer Procurement
Programme (REIPPPP) attracted significant investment in renewables through
competitive bidding, reducing costs and enhancing energy security.
Ghana’s approach of renegotiating IPP contracts, reducing capacity charges, and
improving state utility efficiency further illustrates how strategic reforms can address
similar challenges.
Implementing these strategies, based on international best practices, can help Pakistan
negotiate more favorable terms with IPPs, ensuring both parties benefit while addressing
the country's energy and financial challenges. This approach can reduce electricity costs,
lower circular debt, and promote a sustainable and efficient
