ISLAMABAD: In a significant development aimed at mitigating the financial strain on Pakistan’s power sector, five independent power producers (IPPs) have agreed to terminate their power purchase agreements (PPAs) with the government. This move is part of the incumbent administration’s broader strategy to tackle the multifaceted challenges facing the sector.
An official from the task force on the power sector disclosed that modalities for the contract terminations are being finalized. Once these details are settled, the IPPs will formally sign the termination agreements. This agreement follows a stern warning issued by Prime Minister Shehbaz Sharif’s administration last month, urging IPP owners to voluntarily terminate their contracts or face consequences.
The government projects significant annual savings from these terminations, estimating that it will save between Rs139-150 billion by eliminating capacity payments to these IPPs over the next 3-5 years. These capacity payments have been a considerable financial burden, as the government has previously made excess payments to the IPPs in the form of capacity payments, returns on equity, and loans.
While future capacity payments will cease, the government has committed to settling outstanding dues with the IPPs, amounting to approximately Rs80-100 billion. However, these payments will only cover the cost of electricity, excluding interest.
Of the five IPPs involved, four were established under the 1994 power policy and one under the 2002 policy. The termination of their contracts is expected to yield significant savings. The government anticipates saving Rs300 billion over the next 3-10 years, translating to a relief of Rs0.60 per unit for consumers, or Rs60 billion in one year.
The official also mentioned that 17 additional IPPs, set up under the 1994 and 2002 policies, will transition from the take-or-pay mechanism to a take-and-pay mode. This shift will continue until a private power market is established under the Competitive Trading Bilateral Contract Market (CTBCM) regime, allowing IPPs to sell electricity directly to clients using wheeling charges.
Efforts are underway to establish the CTBCM within the next 1.5 to 2 years. The official emphasized the need to rationalize wheeling charges to ensure the regime’s success, proposing a reduction in the current Rs26 per unit charge. Additionally, the Federal Board of Revenue (FBR) is urged to decrease its revenue collection through electricity bills, which currently adds Rs8 per unit in taxes, duties, and surcharges. A 50% reduction in these fees could reduce tariffs by Rs4 per unit.
The task force is also working to lower tariffs on wind and solar power plants. Some solar plants currently charge Rs27 per unit, which should be reduced to Rs7 per unit, and wind IPPs charge Rs40 per unit, which needs rationalization.
The termination of the PPAs with five IPPs marks a pivotal step towards alleviating financial pressures in Pakistan’s power sector. By reducing capacity payments and transitioning to more sustainable financial models, the government aims to provide relief to consumers and foster a more efficient energy market.
