In recent decades, Pakistan has experienced a significant increase in the installation of power plants intended to address the country’s chronic power crisis. These Independent Power Producers (IPPs) were initially celebrated as critical players in stabilizing the nation’s energy supply. However, the reality has turned out to be far more complex. While IPPs have indeed become an integral part of Pakistan’s power infrastructure, the financial burdens they impose have proven to be unsustainable and detrimental to both the economy and the general populace.
Payments to IPPs, known as “Capacity Payments,” are escalating at an alarming rate. These payments, intended to ensure a reliable power supply, have paradoxically led to exorbitant electricity prices. The impact on the industrial sector has been severe, causing widespread closures, and for the average citizen, paying for basic electricity has become an increasingly unaffordable luxury. This has resulted in a significant decline in the quality of life for many Pakistanis.
A staggering amount of additional payments, totaling trillions of rupees, are being funneled to government IPPs as capacity charges. Former Federal Commerce Minister Dr. Gohar Ijaz points out that 45% of these charges are borne by government IPPs.
Meanwhile, coal-fired IPPs account for 25%, and wind and RLNG-powered plants are charging capacity fees equivalent to 100% of their production, despite operating at less than 50% capacity.
A critical issue plaguing the power sector is that no power plant has managed to operate at full capacity for even a single day since agreements with these IPPs were inked. This inefficiency has turned IPPs into economic parasites, draining the national economy. Capacity charges are paid for approximately 50% of unused electricity, covering bank loans, financial expenses, fixed operational costs, and profits, all sanctioned by the National Electric Power Regulatory Authority (NEPRA).
NEPRA estimates that in the fiscal year 2024-25, electricity consumption will rise by at least 3%, with a total generation of 130 billion units. The total cost of these units, including production, purchase, and delivery, will be around 3227 billion rupees. Out of this, 161 billion rupees will be spent on electricity costs, including fuel and maintenance, while 116 billion rupees will be allocated to capacity charges.
The actual cost of electricity represents only 35% of the total power purchase price, with the remaining 65% attributed to capacity charges. This discrepancy underscores the inefficiencies in power management and distribution.
NEPRA’s estimates suggest that without transmission losses, the power purchase price per unit should be Rs. 17.66. Yet, the average national power purchase price is fixed at Rs. 27 per unit for 2024-25.
The situation for consumers is dire. After accounting for transmission and recovery losses, the average national price per unit is projected to be between Rs. 65 to Rs. 72. The financial burden is exacerbated by additional taxes, duties, surcharges, and adjustments. In the last fiscal year alone, consumers paid an extra Rs. 245 billion due to higher tariffs. For 2024-25, an increased tariff is expected to generate additional revenues of Rs. 485 billion for Distribution Companies (DISCOs). Consumers will also be subjected to an 18% sales tax and other levies, adding up to 580 billion rupees.
The exorbitant electricity costs are causing widespread distress. People are forced to sell valuable possessions to pay their bills, and many industrial units have shut down due to prohibitive production costs. The impact on the national economy is profound, with reduced industrial output, increased unemployment, and a subsequent rise in poverty levels. This situation demands urgent government intervention to curb electricity prices.
To alleviate this crisis, the government must abandon the policy of indiscriminate electricity price hikes. Legislative measures should be taken to ensure payments to IPPs are made only for the electricity actually purchased. This approach would provide a foundation for renegotiating IPP contracts. By addressing the root causes of inefficiency and overpayment, the government can establish a more equitable and sustainable energy sector.
Beyond legislative measures, improving the efficiency of electricity distribution companies is crucial. Better management practices can significantly reduce operational costs and minimize losses. For instance, investing in modern infrastructure, reducing transmission losses, and ensuring timely maintenance can enhance overall efficiency.
NEPRA’s own estimates indicate that with improved management, the cost of electricity can be further reduced, alleviating some of the financial burdens on consumers.
In the long run, diversifying the energy mix by incorporating more renewable energy sources can help mitigate the reliance on expensive IPPs. Solar, wind, and hydroelectric power offer more sustainable and cost-effective alternatives. Investing in renewable energy infrastructure not only reduces the dependency on fossil fuels but also lowers the overall cost of electricity production.
Encouraging public-private partnerships (PPPs) in the energy sector can also drive improvements. PPPs can bring in private sector expertise, efficiency, and investment, while the government provides regulatory support and oversight. This collaboration can lead to more innovative solutions and better resource management, ultimately benefiting consumers and the economy.
The initial promise of IPPs in solving Pakistan’s power crisis has been overshadowed by financial and operational inefficiencies. To truly address the problem, comprehensive reforms in the energy sector are needed. These reforms should focus on better management, increased efficiency, and a fair pricing mechanism that does not unduly burden consumers and the national economy. Legislative actions, investments in renewable energy, and public-private partnerships are essential steps toward a more sustainable and equitable power supply. Only through these measures can Pakistan hope to overcome its energy challenges and secure a brighter future for its citizens.
Ms Saba Kiran is an MS graduate of the Department of Aerospace and Strategic Studies at Air University, Islamabad. She has a background in political science and takes an academic interest in ethnopolitical conflicts, national security, strategic stability, and social conflict analysis.