Independent Power Producers And The Energy Crisis

"Due to the one-sided beneficial agreements with the IPPs, the country has already suffered immense damage"

Independent Power Producers And The Energy Crisis

In Pakistan today over 40% of the people are living below the poverty line and electricity prices are now going through the roof. It is now becoming almost impossible for the middle class to pay their electricity bills. With the increase in power rates, the prices of daily consumables and eatables are also on an upward trajectory thus causing pain and misery in the lives of majority of the citizens of Pakistan. The increase in power costs has resulted in wide spread public protests and demonstrations but so far the government of the day seems oblivious to these howls of protest and no relief appears to be within the reach of the government – for reasons best known to the Powers That Be. 

Some concessions in energy prices for low income groups or lower end users have been announced rather late, but this could be of some benefit to hardly 10-15% of the total population - and the vast majority will continue to suffer under the weight of crippling power prices. What are the reasons for such crushing and crippling power rates? Will there ever be any relief from the curse of power shortage? And how are the Independent Power producers responsible for the current energy crisis? 

The first Benazir government elected in 1988 was dismissed by Ghulam Ishaq Khan using his powers of article 58(2)B in 1992. This government was succeeded by the Nawaz Sharif’s government, which initiated many business-friendly and free-market reforms that included the first IPP contract for the largest power sector project with the Hub Power Company in 1992. The Hub Power Company was established in 1991as the first independent power producer in Pakistan and even today it remains the biggest power producer in the country with a combined installed generation capacity of 3581 MW. Some of the major investors or shareholders in HUBCO are Blackstone, Finback investment partners, Leonard Green and Partners, Atlas Partners, and Hellman and Friedman making it one of the largest foreign investor in Pakistan. Since 1992 about fifty big and small independent power producers have started generating electricity and have signed contracts with the government to supply their generated power to WAPDA to be distributed to the consumers along the national grid. Some other eminent names in the IPPs are Atlas Power Limited, Attock Generation Limited, Azad Jammu and Kashmir power development organization, Central power generation Company, Chanar Energy Limited, China Power Hub generation Company, Japan Power Generation, Kohinoor Energy Limited, Dawood Power Ltd, Japan Power Generation Ltd etc.

During the last few years, the power rates have risen from Rs 24 to almost Rs 76 per unit – and all this increase has been attributed to increasing generation costs, power losses, government-imposed taxes and power theft. The last of these is euphemistically called “line losses” in Pakistan, and nobody points out the fact that power theft is possible only with the collusion of power distribution companies – and should not be written off as “Line Losses.” 

According to power experts, the main reason for the high cost of electricity rates in the country is the supply contracts signed with the Independent Power Producers (IPPs) in tandem with electricity theft, and the consequences are faced by the common people in the form of load shedding and high rates of power. According to the available data, the generation capacity of the country as of 30 June 2022 was 43,755 MW, inclusive of 26,683 MW Thermal, 10,635 MW Hydro, 1,838 MW Wind, 630 MW Solar, 369 MW Biogas and 3,620 MW Nuclear. The total electricity consumption of the country does not exceed 31,000 MW and the total number of Independent Power Producers produce about 19,000 MW of electric power. This means that there is a dire need to review the contracts with the IPPs and bring down their production to 10,000 MW – and thus bring about a positive effect on the national economy. 

As of today, the per unit price of electricity is above 60 rupees, making it out of reach of the common people. Competitive industrial production is not possible with such expensive electricity. According to figures available to the media, 340 million free units of electricity are provided to government officials, resulting in unwanted burden on the common consumer. Due to the one-sided beneficial agreements with the IPPs, the country has already suffered immense damage. Pakistan is now under debt to the IMF and the common people are suffering. The agreements signed with the IPPs must be re-examined and investigated. All those who benefitted from these contracts must be exposed and punished according to the law of the land. 

The induction of independent power producers in a state such as Pakistan which has a weak currency and fragile economy has led to many challenges, especially the accumulation of circular debt. This is an amalgamation of unpaid dues and bills between the consumers with the government, and the government with the power producers and distributors. The state’s reliance on take-or-pay contracts, which require the government to pay for a minimum amount of electricity from IPPs, whether or not it is needed, has contributed to circular debt. ‘Take-or-Pay’ is a feature found in Pakistani power purchase agreements. It essentially means that the state or consumer party will purchase a specific quantity of electricity from the producer over a defined period, but regardless of whether the electricity is needed or used, the government will firmly commit to payment. This model guarantees IPPs a steady income which negates the payment delay risk that they often face in underdeveloped states. 

Revenue collection from consumers is only 60%, whereas the government is contractually bound to pay the IPPs a fixed amount according to the signed agreements. To pay back and fulfil the purchase agreement, the state cannot reduce the cost of electricity or put into force any sort of subsidy. 

The causes of the energy crisis in Pakistan boil down to a lack of political will or any consistent pragmatic energy policies. There are also factors economic instability and the lack of technical expertise; excessive reliance on non-renewable and costly fossil fuels, outdated transmission lines and faulty infrastructure; line losses and power theft; inefficient power managers and a corrupt system of management. 

It is about time that the role of the IPPs is thoroughly investigated and the facts placed before the public.