During the last 30 years, the one sector that has brought Pakistan to the brink of default is the power sector. It all began with the 1994 power policy when Independent Power Producers (IPPs) were invited to invest in the energy sector of Pakistan at a 17% rate of return in dollar terms. At that time, it was touted as a solution to end the energy crisis of Pakistan and the rupee-dollar parity also supported the decision. Initially, some Chinese companies showed some interest under the CPEC umbrella. Later on, cartel owners of sugar mills, cement, fertilizers, steel mills, textile, banks, LPG and auto sector jumped on the bandwagon and began reaping the benefits of subsidized fuel and tax exemptions. These power plants were installed with the capacity to generate 125% of the total energy requirement of Pakistan but only 48% is being delivered. Some of the projects could not be termed as IPPs!
During the first 60 years of our independence, we set up 20 GW of power capacity. In the next 15 years, we almost doubled that capacity. Public sector projects like those done by WAPDA, the Pakistan Atomic Energy Commission (PAEC), the RLNG ones contributed significantly to the current aggregate installed capacity in the country and the resultant capacity payment burden. The root causes of the current high-capacity payments and electricity tariffs are as follows:
- Trade imbalance: Constant pressure on the PKR results in depreciation, leading to inflation. Since most components of the economy are linked with the USD directly or indirectly, the rates of all commodities necessarily increase. Like everything else in the country, both capacity payments and energy payments have increased massively due to PKR depreciation.
- Poor decision-making: The decision-makers either lack good intent, capability, or both, as deemed necessary by experts for formulating policies or making major decisions with far-reaching consequences. Businessmen spend a lot of time and money conducting feasibility studies before making investment decisions. In contrast, governments sometimes decide overnight. How did they allow the capacity to almost double in 10-15 years without considering our economy and the buying power of our people? Why did the government allow the concurrent development of WAPDA projects, Genco projects, PAEC projects, RLNG projects along with regular IPP projects in such a short period? Why did the government not listen to experts who were forewarning about the capacity payment trap? Between 2013-2019, no less than 9,000 MW capacity was added based on imported fuels (imported coal and imported RLNG). These are brand-new projects, yet their utilization factor has been low and is likely to be even lower during 2024-25. It appears several misconceived decisions were taken for political mileage. The country is now facing the brunt of those decisions.
- Major leakages: What steps have been taken to address other issues that significantly impact the energy tariff, such as high technical losses, theft, and chronic non-payment? The aggregate financial loss under these heads is greater than the aggregate capacity payments being made to the IPPs.
The power policies should have been formulated with thorough deliberation and consultation. The concessions and returns on both debt and equity should have been optimized. New capacity should have been added after taking into consideration all aspects of the economy, including its unholy linkage with USD. Had the government added newer capacity wisely and after due diligence, the capacity payments would further be halved. Had the government dealt with the technical and non-technical losses via privatization of distribution companies or otherwise, the power tariff would be even lower.
On 27th June 2024, Central Power Purchasing Authority(CPPA) has disbursed nearly Rs142 billion to Independent Power Plants (IPPs) in order to reduce the stock of circular debt. As per the Ministry of Energy’s monthly report, during 11MFY23, the stock of circular debt increased by Rs394 billion to Rs2,646 billion, which translates into a monthly average Rs35.8 billion, compared to a decline of Rs27 billion during the same period last year.
Nowadays, there is huge uproar on social media and among business circles that Power Purchase Agreements (PPAs) of these IPPs need to be reviewed otherwise Pakistan could face severe business disruptions and industrial closures. Some of the agreements have been renegotiated and are valid till 2054. Due to the IPP agreements, Pakistan has become one of the most expensive countries in the region for electricity, and the cost of production is increasing. Because of high production costs, buyers in the global market are starting to overlook Pakistani exporters, leading to the potential cancellation of export contracts. Capacity Payment Agreements with IPPs are a significant cause of the economic crisis in the country as 100% of the payments are being made to them despite the fact that only 48% of the electricity produced by IPPs is utilized. The devaluation of the rupee has further complicated the issue. Instead of promoting alternative energy sources like wind power, our national system discourages their use while continuing to make Capacity Payments to these power plants. Consumers will end up paying billions of rupees annually for electricity they do not use thus sinking the country’s economy into a quagmire.