The rollercoaster journey of IPPs in Pakistan

In the early 1990s, Pakistan embarked on what seemed to be an energy revolution.

With Hubco launched in 1994 as the country’s first greenfield Independent Power Producer (IPP) and the privatization of Kapco in 1996 to National Power UK, Pakistan positioned itself as a trailblazer in attracting private investments in the power sector. These milestones marked a promising beginning, creating a vision of energy self-reliance and economic growth.

Yet, three decades later, the narrative surrounding IPPs has shifted dramatically. Instead of being celebrated as a success story, the sector has been cast in a shadow of criticism, its image marred by controversies and inefficiencies. So, what went wrong? How did a promising beginning unravel into a cautionary tale?

A house built on shaky policies

The challenges facing Pakistan’s IPP sector are deeply rooted in policy missteps. During the 1990s, as the country faced acute power shortages, the governments of the time prioritized quick fixes over long-term solutions. The emphasis was on building thermal plants running on imported fuel, which were faster to set up but came with significant risks.

These decisions exposed Pakistan’s energy sector to global fuel price fluctuations and exchange rate volatility. Contracts pegged to the U.S. dollar exacerbated the problem, as rupee depreciation made electricity tariffs unsustainable. The rising costs crippled consumers and strained the economy, further compounded by systemic inefficiencies in transmission and distribution, such as energy losses and poor bill recovery.

The focus on thermal plants and imported fuel left the country ill-prepared for a future driven by renewable energy and self-sufficiency, creating a sector overly reliant on external factors and vulnerable to economic shocks.

Complacency and missed opportunities

While government policies bear a significant share of the blame, the IPPs themselves are not without fault. Many enjoyed guaranteed returns through “take-or-pay” agreements, fostering a sense of complacency. Despite their financial clout and decades of operation, innovation within the sector was notably absent.

For example, hybrid solutions like integrating solar with wind projects—especially in resource-rich southern regions—could have reduced costs and diversified energy production. Yet, such opportunities remained largely untapped.

Moreover, the IPPs fell short in their corporate social responsibilities (CSR). Despite operating for over 25 years, few IPPs invested meaningfully in local community development or initiatives like education, healthcare, or women’s empowerment. Public engagement was minimal, and positive steps taken in areas like Health, Safety, and Environment (HSE) were rarely publicized. This silence allowed negative narratives to dominate public perception.

Perhaps most critically, the IPPs failed to become vocal advocates for structural reforms in the energy sector. They remained silent on key issues such as the need for investment in transmission and distribution infrastructure. By failing to shape the public discourse or challenge misrepresentations, the IPPs found themselves cast as scapegoats for Pakistan’s energy woes.

The end of an era

Today, the IPP era in Pakistan seems to be nearing its end. The transition to the Competitive Trading Bilateral Contract Market (CTBCM) is reshaping the energy landscape. By eliminating government-backed financial guarantees and placing risk on market participants, CTBCM aims to create a more competitive and sustainable energy framework.

Simultaneously, advancements in self-generation and energy storage are disrupting the traditional grid model. As solar panel prices fall and battery storage becomes more affordable, households, businesses, and industries are increasingly exploring off-grid solutions. Together, CTBCM and self-generation represent a significant departure from the conventional IPP model, signaling a paradigm shift in Pakistan’s energy sector.

Lessons for Pakistan’s energy sector

The rise and fall of IPPs offer valuable lessons for policymakers, investors, and energy players:

1- The power sector is the backbone of the economy: Energy drives industrial growth, commerce, and public well-being. Mismanagement in this sector can have cascading effects across the entire economy.

2- Governance is non-negotiable: Effective governance is critical to navigating the complexities of the energy sector. From policy formulation to regulation, putting the right people in the right roles is essential. An independent and competent regulator is central to maintaining balance and ensuring long-term stability.

3- Innovation must lead the way: Energy markets worldwide are evolving toward renewables, hybrid solutions, and decentralized systems. Pakistan must adopt similar innovations to remain competitive and sustainable.

4- Community engagement builds trust: Companies operating in the energy sector must invest in their host communities. Transparent communication, CSR initiatives, and public engagement are vital for building goodwill and fostering long-term relationships.

5- The government’s role should be facilitator, not operator: Governments should focus on creating robust policy frameworks and encouraging private-sector participation, avoiding direct operational control.

6- Stakeholder participation is key: From industry experts to community leaders, all stakeholders must contribute to the sector’s governance. A collaborative approach ensures that diverse perspectives guide decision-making.

A new dawn for energy in Pakistan

The story of IPPs in Pakistan is not just a tale of missteps—it is a blueprint for what must be avoided in the future. As the country pivots to a new energy era, it has the opportunity to learn from past mistakes and create a sustainable, resilient, and inclusive energy sector. Whether through CTBCM, self-generation, or innovative renewables, Pakistan can redefine its energy narrative and serve as a model for the region. The transition from IPPs is not the end—it is the beginning of a new chapter in Pakistan’s energy journey.

Copyright Business Recorder, 2024