Pakistan’s energy sector has long been a key contributor to the country’s economic growth and development, but it remains surrounded by chronic challenges such as inefficiencies, world-high costs, and frequent load-shedding. Among all these challenges, the conundrum of Independent Power Producers (IPPs) remains central. This IPP crisis is rooted in structural inefficiencies, financial mismanagement, and contractual disputes.
If the crisis in not resolved, it can not only threaten the sustainability of the Pakistan’s energy supply but also the overall macroeconomic stability. Government and policymakers must prepare a well-thought-out plan with a mix of some immediate fiscal reforms as well as corrective reforms to address this conundrum.
This issue is a result of a complex interplay between policy decisions of the 1990s and subsequent evolution of the energy sector. At its core, the crisis stems from power purchase agreements (PPAs) that guaranteed high returns to IPPs, often indexed to the US dollar. While these agreements were initially intended to attract much-needed foreign investment, they have since led to ballooning capacity payments, exacerbating the country’s circular debt.
The circular debt— combined gas and power sector circular debt— now exceeding Rs 5 trillion, represents the debt owed by the government to power producers and distributors. This debt has led to liquidity issues for IPPs, delaying payments and causing a cascade of financial stress across the sector. The inability to resolve these issues has resulted in a lack of investment in new infrastructure and frequent power outages, which stifle economic growth.
The Pakistani government has taken steps to address the intensified controversy surrounding Independent Power Producers (IPPs), driven by concerns over high electricity generation costs and unfavorable contractual agreements. In response, the government initiated an investigation into allegations of “additional profiteering” among IPPs, particularly those linked to the China-Pakistan Economic Corridor (CPEC). The Power Division also clarified that discussions were ongoing, and no unilateral actions would be taken without consensus.
Revised PPAs inked with about one dozen IPPs
The Senate Standing Committee on Power also conducted a thorough review of these agreements, including a forensic audit to ensure transparency and accountability.
Recently, according to some news reports, 17 Independent Power Producers (IPPs) have reached an agreement on a hybrid ‘take and pay’ model amicably after more than two weeks of extensive and hard negotiation. This comprehensive approach reflects the government’s effort to balance legal obligations with the pressing need to reduce electricity costs for consumers, with potential implications for Pakistan’s energy sector.
Other than the above-mentioned immediate measures taken by the government, the IPP crisis in Pakistan can benefit from adapting several international best practices. Drawing lessons from South Africa, Pakistan might consider renegotiating existing power purchase agreements (PPAs) with IPPs to balance profitability and consumer affordability. South Africa’s approach involved extending contract terms while lowering tariffs, which could offer a sustainable financial model for Pakistan without forcing IPPs to incur losses.
Additionally, the community ownership model used in Denmark, where local groups own wind farms, could be adapted to Pakistan. This model reduces the burden on the national grid, lowers transmission losses, and supports local economic development.
India’s UDAY scheme, aimed at reforming distribution companies by improving operational efficiency and restructuring debt, suggests that Pakistan could also benefit from restructuring its power distribution sector. Furthermore, adopting transparent forensic audits, as seen in the Philippines and Nigeria, could enhance accountability in Pakistan’s power sector. Engaging independent international auditors could bolster the credibility of these audits.
Germany’s successful Energiewende, which emphasizes transitioning from fossil fuels to renewable energy, provides another valuable lesson. By accelerating its shift towards renewable sources like solar and wind, and offering incentives for such investments, Pakistan could reduce its reliance on costly fossil fuel-based power. Moving away from an over-reliance on thermal power plants by investing in renewable sources such as hydropower, wind, and solar can reduce vulnerability to international price shocks. This requires substantial infrastructure investment and regulatory support for renewable projects.
Japan’s emphasis on energy efficiency through stringent regulations and incentives presents another potential path for Pakistan. Introducing policies that promote energy-efficient technologies and public awareness campaigns could reduce overall energy consumption. By integrating these global practices into its strategy, Pakistan could address the root causes of its energy issues, leading to a more stable and affordable power sector.
In addition to renegotiation and addressing inefficiencies, improving governance and regulatory oversight is essential. Strengthening institutions like the National Electric Power Regulatory Authority (NEPRA) to enforce transparent tariff setting and monitoring of IPPs is crucial. This could further streamline decision-making and enhance policy implementation, addressing long-standing inefficiencies.
Furthermore, innovative financial solutions are needed to tackle the circular debt issue. Securitizing debt into tradeable securities or creating a dedicated energy fund, potentially supported by international financial institutions, could provide liquidity and spread the financial burden over time. Implementing smart grid technologies and improving billing efficiency could help reduce transmission and distribution losses.
Enhancing demand-side efficiency is equally important; investing in smart grid technologies and improving enforcement against electricity theft could significantly reduce technical and non-technical losses, thus improving the sector’s financial health. These combined efforts reflect a comprehensive strategy to reform Pakistan’s energy sector, aiming for a more sustainable and efficient system.
The IPP crisis is not merely a financial issue but a fundamental challenge to not only to energy security but also to Pakistan’s economic security, requiring a comprehensive and coordinated response.
Resolving it requires a holistic approach that aligns energy policy with broader economic goals. Policymakers must prioritize transparency, fiscal discipline, and long-term sustainability in their strategies. By renegotiating IPP contracts, improving distribution efficiency, diversifying the energy mix, restructuring financial obligations, and strengthening regulatory oversight, Pakistan can navigate its way out of this crisis.
The long-term goal should be the creation of a resilient, efficient, and sustainable energy system that supports economic growth and improves the quality of life for all Pakistanis. As the government and stakeholders work towards these objectives, it is crucial to maintain a balance between short-term relief and long-term sustainability.
The article does not necessarily reflect the opinion of Business Recorder or its owners
A Pakistani economist based in Saudi Arabia.
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