Crushed under the weight of power bills, the apex body of businesses in the country has approached the Supreme Court, seeking its intervention against the power generation policies of the government over the past 30 years.
The Federation of Pakistan Chamber of Commerce and Industry (FPCCI) on Tuesday filed a request in the top court asking it to declare the power generation policies of 1994, 2002, and 2015 null and void.
The FPCCI has also requested the top court to declare that the government of Pakistan and its instrumentalities cannot profit from providing essential facilities (such as electricity) to the general public, where such facilities are not available except from the government of Pakistan.
The body has also requested the top court to direct the government to conduct a thorough forensic audit of all Independent Power Producers (IPPs). The top court was requested to direct the government to implement the 2020 report and recover excess profits earned by IPPs.
The business body requested the Supreme Court issue directions to the government to renegotiate all IPP agreements and change them from "Take or Pay" to "Take and Pay." Further, they requested anomalies regarding the calculation of IRR from all IPP agreements be removed and that all such directions, which allow the dollarisation of amounts not actually invested or borrowed in foreign currencies, be withdrawn.
FPCCI filed the petition under Article 184(3) through its counsel, Faisal Naqvi. It listed the federal government, the National Electric Power Regulatory Authority (NEPRA), and the IPPs Association as respondents.
The federation of chambers maintained that it is settled law that the right to life, including the right to electricity, has been guaranteed under Article 9 of the Constitution.
"Consequently, the failure of the state of Pakistan to provide electricity in a reasonably affordable manner amounts to an unconstitutional infringement of the right to life of its citizens. The fact that the purchase of electric power for delivery to the citizens of Pakistan has been done without competitive bidding exacerbates this foundational violation of the Constitution."
They argued that for the past 30 years, Pakistan's electricity sector has been used for uninformed experiments in policy-making, all of which have served only to enrich domestic and international elites at the expense of Pakistan's citizens.
"The first offender in this regard was the World Bank, which was directly responsible for the 1994 Policy and which directly benefitted from the skewed incentives in the 1994 Policy," the FPCCI said.
"The irony, however, is that even though the World Bank itself, along with most experts, has long since recognised that the 1994 Policy was disastrously flawed, the 1994 Policy lives on in the form of the 2015 Policy."
It further stated that the government is on track to make capacity payments totalling almost Rs2.1 trillion while the total circular debt for the energy sector in 2024 swelled to Rs5.422 trillion.
"At the same time, numerous IPPs are being paid billions despite not producing any electricity. Not surprisingly, Pakistan has the highest electricity tariffs in the region," they said, adding, "Not only is this placing an unbearable burden on domestic consumers, but industries are being forced to either go off-grid or else shut down. Meanwhile, the government is trying to recover higher and higher tariffs from a smaller and smaller pool of customers."
These agreements, they argued, were also jeopardizing the impending record 24th loan programme from the International Monetary Fund (IMF), for which Pakistan had recently secured a staff-level agreement. The IMF program comes a few months after the global financial institution diplomatically stated that the debt situation was unsustainable.
However, notwithstanding the IMF programme, Pakistan remains in a highly vulnerable position. Pakistan's public debt currently stands at 77% of its annual gross domestic product (GDP), a level considered dangerous for an emerging market.
Further, its gross financing need of 24% (i.e. the sum of the budget deficit and the debt due over the coming year) is second in the developing world, behind only Egypt.
Overall, Pakistan pays around six percent of its economy annually in interest alone, the highest amount any country in the developing world has to pay.
"One of the main reasons for Pakistan's perennial economic crisis is its electricity sector," the petition stated, adding that the country is on track to pay approximately Rs3.58 trillion in payments to electricity generating companies this year.
"Out of this total amount, approximately Rs2.63 trillion is likely to be recovered, while the remainder will be subsidised by the government. This unrecovered amount will be added to already existing stocks of 'circular debt', currently estimated at Rs5.422 trillion."
Currently, Pakistan has an installed generation capacity of 45,885 Megawatts. Of this, 23,860 MW (52%) has been installed by state-owned entities (both federal and provincial), while the remaining capacity of 22,043 MW (48%) has been installed by IPPs.
It is important to note that, against its installed generation capacity of 45,885 MW, the maximum power demand during summers is around 30,000 MW, while peak winter loads are closer to 12,000 MW.
"Notwithstanding this current oversupply of electricity, IPPs are scheduled to add another 7,460 MW by 2032. This capacity is in addition to the 11,550 MW due to be added through government-owned projects such as the 4,320 MW Dasu Hydroelectric Project (which is due to be completed in 2026), the 4,500 MW Diamer-Basha Hydroelectric Project (due in 2029), the 1,530 MW Tarbela V extension (due in 2026), and the 1,200 MW Chashma V nuclear plant (due in 2031)."
The petition further stated that all IPP contracts for the sale of electricity are structured in two tiers. First, the power purchaser is required to make "capacity payments". These payments are required to cover all fixed costs of the IPPs, including debt repayments, as well as Operations and Management costs (O&M Costs) and return on equity (RoE) at a stipulated rate. "These "capacity payments" are to be made by the power purchaser whether or not any electricity is actually purchased. In addition to capacity payments, a variable cost is attributable to the production of energy over and above a certain plant capacity factor (normally 60%). In other words, if more than 60% of a plant's capacity is utilised for electricity generation, then the relevant IPP is entitled to additional payments.
Fuel cost is treated as a pass-through item.
It is estimated that during the current financial year (2024 – 2025), capacity payments will total Rs2.1 trillion (equal to about 1.9% of GDP). In FY 2023-24, 45% of capacity payments were made to government-owned plants, 15% to private parties (mostly local), and 40% to IPPs set up under the China-Pakistan Economic Corridor (CPEC).
"Notwithstanding the trillions being paid as capacity charges to the IPPs, their actual capacity utilisation of the IPPs is very low. For example, coal IPPs will receive about Rs700 billion in capacity charges this year, and yet they are operating at below 25% capacity."
Similarly, wind-powered IPPs are operating below 50% capacity but will receive Rs175 billion in capacity charges. Even RLNG plants (which are government-owned) are operating at less than 50% but are due to receive Rs180 billion per year. In some cases, IPPs are getting paid billions in capacity charges without generating a single unit. It is also important to note the exponential manner in which such charges have increased. In 2015, an average of 13,000 MW of electricity was being consumed with capacity charges of Rs200 billion (against an installed capacity of about 20,000 MW).
Today, consumption still averages around 13,000 MW, but capacity charges have increased by more than 1,000% to Rs2.1 trillion (against an installed capacity of about 45,885 MW).