The coalition government led by the Pakistan Muslim League-Nawaz (PML-N) is actively renegotiating contracts with independent power producers (IPPs) to address the unsustainable electricity tariffs burdening households and businesses. Energy Minister Awais Leghari emphasized the urgent need to reduce tariffs, currently around 28 US cents per unit for commercial users, down to 9 cents per unit.
“The existing price structure of power in this country is not sustainable,” Leghari stated in an interview with Reuters. The ongoing discussions reflect a mutual understanding between power producers and the government that the current situation cannot persist. Leghari underscored the necessity for all stakeholders to make concessions without entirely compromising business sustainability, stressing that these adjustments must happen promptly.
Rising power tariffs have exacerbated social unrest and industrial shutdowns in Pakistan’s $350 billion economy, which has faced contraction and record-high inflation in recent years. A decade ago, to combat chronic power shortages, Pakistan approved numerous private projects by IPPs, financed largely by foreign lenders. These deals guaranteed high returns and included commitments to pay for unused power, creating a financial strain amid the current economic crisis.
With reduced power consumption due to the economic downturn, the country is left with excess capacity, incurring costs for unused power. To cover these costs, the government has incorporated fixed costs and capacity payments into consumer bills, prompting protests from both domestic users and industrial associations.
Sources within the power sector revealed that the renegotiation efforts include slashing guaranteed returns, capping dollar rates, and shifting away from paying for unused power. These sources, requesting anonymity, indicated that these changes are crucial for the viability of the energy sector, a focal point in the staff-level pact with the International Monetary Fund (IMF) for a $7 billion bailout. The IMF’s staff report highlighted the necessity of revisiting power deals.
Pakistan has initiated talks on restructuring power sector debt owed to China and negotiating structural reforms, but progress has been slow. The government has also committed to halting power sector subsidies.
Leghari pointed out that the current rates are unaffordable for both domestic and commercial consumers, hindering growth and making power prices regionally uncompetitive. This has put critical exports at a disadvantage. He reiterated the goal of reducing tariffs to 9 cents per unit for commercial users.
Earlier this week, Leghari indicated that permanent relief for consumers is forthcoming. On Geo News’ “Aaj Shahzeb Khanzada Kay Sath,” he mentioned that a detailed review of IPP-related matters had been completed, promising good news soon.
However, Leghari cautioned that any unilateral changes to IPP contracts are improbable. Last month, he warned that such actions could lead to a “Reko Diq-like situation,” referring to the significant financial repercussions from the government’s handling of a mining dispute. Over the past 15 years, Pakistan has incurred losses of nearly Rs5,082 billion due to circular debt issues, resulting in an annual loss of Rs370 billion.
The renegotiations with IPPs aim to alleviate the financial strain on consumers and ensure the sustainability of Pakistan’s power sector, marking a critical step towards economic stability and growth.
