Overwhelmed by the relentless surge in electricity costs, Pakistan’s business community is at its wits’ end. These skyrocketing bills are crippling production, pushing industrialists and traders to the brink. Maintaining operations and providing employment has become a Herculean task.
As the Chief Patron of the United Business Group (UBG) under the Federation of Pakistan Chambers of Commerce & Industry (FPCCI), I am inundated daily with calls from chambers, trade associations, and business figures across the country.
Their unified plea is their struggle against the unmanageable increase in electricity tariffs, leaving them with no option but to shut down factories and lay off hardworking employees.
A quarter of the industry has already shut down as the government of Pakistan extracts around Rs2 trillion annually from the pockets of 240 million citizens, handing it over to IPPs, out of which 52 percent are government-owned, under the guise of capacity charges, regardless of whether they generate electricity or not.
The FPCCI leadership is compelled to present the case to the public, exposing the plight inflicted by the IPPs. In the past two weeks, FPCCI leadership, including myself and Group Leader Dr. Gohar Ejaz, has candidly discussed these issues to alert the public, policymakers, and the government that business cannot proceed as usual unless the irrational agreements with IPPs are terminated and priorities realigned.
The nation demands transparency about the exorbitant payments to IPPs and whether these private power plants are operating at full capacity. Capacity payments—charges paid to power companies to maintain their generation capabilities—are not new.
According to NEPRA, Pakistan hosts 90 IPPs, with monthly electricity bills encompassing capacity payment charges alongside the total units consumed, income tax, and fuel price adjustments.
Capacity payments ensure power plants remain operational to meet peak demand. For instance, if winter demand is 10,000 MW and summer demand surges to 20,000 MW, the government must maintain a production capacity of 20,000 MW year-round.
In 2015, with an average consumption of 13,000 MW, the total capacity was 20,000 MW, costing Rs200 billion in capacity payments. By 2024, although average demand remains 13,000 MW, production capacity has soared to over 43,000 MW, including 23,400 MW from new IPPs. Consequently, capacity payments have escalated tenfold to Rs2,000 billion.
The per-unit cost to the government is around Rs35, including Rs10.60 for fuel and Rs24 for capacity charges. Despite selling this electricity to consumers at Rs60 per unit, the government incurs colossal losses. The industry is unable to compete in the market while purchasing electricity at this price, resulting in closure of factories.
In the 1990s, Pakistan’s pursuit of a swift solution to its power shortages led to a hasty adoption of Independent Power Producers (IPPs). However, this expedient has evolved into a perpetual predicament, ensnaring the nation in an inescapable cycle of exorbitant electricity costs.
Domestic consumers are now burdened with unaffordable electricity bills that surpass their entire income, while industries struggle to remain competitive in the market due to prohibitively high power tariffs. This has resulted in a wave of industrial closures, exacerbating the country’s economic woes.
A critical examination of the situation reveals that successive governments, since the inception of the IPP program in the 1990s, have inadvertently perpetuated this crisis. The initial agreements contained provisions for tariff reductions after a specified period, but these were never implemented, allowing the crisis to escalate unchecked.
The Energy Minister’s stance that we are bound by agreements is incorrect; no law in the world permits one-sided exploitation. While agreements should be honored, this does not extend to robbery and exploitation. The government must free the nation from this plunder.
Media reports suggest that even the IMF has proposed that capacity payments should be withdrawn to let the economy grow. We believe not only should capacity payments cease, but all old thermal units should also be shut down. It is undeniable that the country cannot progress without revisiting agreements with IPPs.
Before proceeding with new privatization deals, the Federal government should reassure the nation about the IPP agreements. Over the past two years, less than 50% of the 23,400 MW produced by IPPs has been utilized.
The IPP power plants based on 5,000 MW of imported coal have operated at less than 25% capacity in the past two years.
Despite operating at 25% capacity, they are receiving full capacity charges amounting to 692 billion rupees. Wind energy operations are below 50%, yet 175 billion rupees is being charged per unit with additional charges, while RLNG plants, operating at 25% capacity, are receiving 180 billion rupees.
This is a national tragedy, as these agreements have resulted in the extraction of 2 trillion rupees annually from Pakistan’s 240 million people.
Last year, electricity worth 1,198 rupees was purchased from IPPs against hefty payments amounting to 3,127 billion rupees.
The Asian Development Bank’s Asian Development Outlook paints a bleak picture of Pakistan’s economic situation. According to the ADB, inflation in the country will not fall below 15% during the current fiscal year, while economic growth will remain limited to 2.8%.
Furthermore, for the next decade, the country’s economy will grow at half the pace of other regional countries, relying heavily on debt. This report should serve as a wake-up call for the government.
Economic targets cannot be achieved through estimates alone. The current policies do not promote either the industrial or agricultural sectors.
The current electricity rates are making it impossible to keep the industrial wheels turning, and unbearable energy costs are leading to the shutdown of small and large industries alike.
Only if the industrial wheels keep running without interruption will it create new job opportunities for the youth, and increase purchasing power that will help mitigate the effects of inflation?
The unanimous stance of Pakistan’s business community is that the government must forsake empty promises of economic recovery and confront reality by challenging the IPPs.
A thriving economy is the lifeblood of any nation, fostering prosperity, stability, and peace.
When economic activities halt, chaos reigns. Regrettably, IPPs have gripped the nation’s lifeline with their iron hands, and the government hesitates to act, citing state guarantees. At a time when the business community and public are united in protest against these exploitative agreements, the government must renegotiate these unreasonable contracts with IPPs to end this economic tyranny and pave the way for national advancement.
This is a moment of reckoning; let us be accountable and act decisively for the nation’s future.
Copyright Business Recorder, 2024
The writer is Patron-in-Chief, United Business Group
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