Hafiz Ahsaan Ahmad Khokhar is an energy and tax expert and practicing Advocate Supreme Court of Pakistan with 25 years legal standing. He has held a number of significant quasi-judicial positions including Chairman of Pakistan's Customs, Excise, and Sales Tax Appellate Tribunal, Justice of peace, federal counsel, and Senior Advisor to the Federal Ombudsman. His email address is hafizahsaan47@gmail.com, and his Whatsapp number is 0300-8487161.
Power purchase agreements (PPAs) with Independent electricity Producers (IPPs), which were made under various regimes without careful consideration of the potential consequences, are the primary cause of Pakistan’s power or electricity issues. As a result, the nation is currently facing and on the verge of economic collapse. The buyer lacked the impartial consultant’s services and professional or technical expertise to manage the massive amount of IPPs. Rather, the buyer signed agreements with terms ranging from 25 to 30 years. Contracts stipulate that you must purchase a minimum and fixed quantity of power from the IPPs. Other studies indicate that the tariff structure indicates that fuel charges, under the “take or pay” contracts that Pakistan has embraced, account for one third of the total expenses of a typical thermal IPP, while fixed charges make up two thirds of the total costs of these IPPs. These contracts’ main drawback is that most of them were awarded without first seeking competitive bids and due future diligence.
Because of these IPPs agreements; energy users already receive the worst form of invoices in the world: taxes and capacity fees account for 70% of their bills. These accumulative factors also pose undoubtedly a threat to our national security fundamentals and make the economy less competitive, unbearable for domestic, agriculture and manufacturing consumers, and severely hinder it. Approximately the previous 15 years, the country has lost approximately Rs 5,082 billion due to the governments’ inability to control the circular debt, amounting to an annual loss of Rs 370 billion. Since July 2018, the power purchase price has climbed by 95.82 percent, mostly as a result of the power tariff’s greater capacity component. The spanning period of these IPPS will end around 2050, and one can imagine what will happen. Pakistan has to make investments in renewable energy sources like hydroelectric, solar, and wind power in order to diversify its energy mix. Reducing energy waste and transmission losses, governance, cost and infrastructure can also be achieved by putting energy-efficient technologies, including smart grids and metering systems, into use.
As of January 31, 2024 Pakistan possessed an installed power generation capacity of 46,035 MW, comprising 28,811 MW of thermal power, 10,635 MW of hydroelectric power, 1,838 MW of wind, 882 MW of solar power, 249 MW of bagasse, and 3,620 MW of nuclear power. While the transmission and distribution capacity is stopped at about 22,000 MW, the greatest total demand from residential and industrial estates is close to 31,000 MW. This results in a roughly 9,000 MW shortfall at the height of demand. The nation’s peak demand is significantly less than its installed capacity of 46,035 MW; hence the additional 9,000 MW that is needed cannot be transmitted because of poor transmission.
On the other side, Allaha has blessed Pakistan to possess a hydropower potential exceeding 60,000 megawatts. But thus far, only a small portion i.e. 10% to 15% of this potential has been realized. There are numerous prospects for hydroelectric projects in the Indus River system, including its tributaries. Large dam development, run-of-the-river plans, and minor hydropower initiatives could all contribute to the potential’s use. Pakistan is heavily simultaneously exposed to the sun’s rays, particularly in its south and southwest. Pakistan boasts one of the greatest average solar irradiances in the world, ranging from 5 to 7 kWh per square meter per day. Based on solar irradiation levels, the World Bank believes that Pakistan has a solar power potential of up to 2.9 million MW, whereas the ADB places Pakistan’s solar energy potential at about 100,000 MW. This statistic encompasses off-grid solar applications including solar water pumps and household systems as well as grid-connected solar power plants. Pakistan is expected to have a wind power potential of about 346,000 MW by the World Bank. Whereas, Pakistan has a potential for wind generation of about 50,000 MW, according to the ADB. This statistic shows the potential amount of wind power projects that Pakistan may reasonably construct across its many locations, but regrettably the nation has been far away to tap these potentials for boosting its economy. We must explore and use these energy resources in the larger interest of the country and people.
Pakistan attempted to attract private investment in the power industry during the severe energy shortages of the late 1980s and early 1990s, which is when Independent Power Producers (IPPs) first appeared in the country. Pakistan launched the Power Policy in 1994 with the goal of luring private capital into the electricity industry by means of competitive IPP project bidding. The federal government issued 70 Memorandum of Understandings (MOUs) and Letters of Intent (LOIs) to Independent Power Producers (IPPs) in 1994, marking the beginning of the nation’s greatest energy conservation programme with the goal of producing 13,000 MW. There are presently 49 independent power producers in Pakistan, of which 8 are hydroelectric and 41 are thermal. Pakistan started experiencing serious problems in the power sector after that.
Several reports state that IPPs had a fixed tariff 7 cent in dollar terms never considering the country’s currency depreciation in future. There investment payback period was of two to four years, which profits could reach 18.37 times the investment and that dividends could exceed 23 times the investment. Interestingly, under the 1994 Power Policy, 16 out of 17 IPPs invested a total of Rs52 billion in capital and made profits exceeding Rs 417 billion.
There is no doubt that Take-or-pay independent power producers (IPPs) are reportedly placing a heavy financial strain on residential, commercial, and industrial customers. These reports are grounded in actual facts. While an additional 17,000 MW of generation capacity is being planned, the industrial sector’s electricity use has decreased by 25% as a result of exorbitant power prices. Six IPPs had a remaining life of six to ten years under the 1994 generation policy, while Kot Addu Power Company had a one-year lifespan. Similarly, 12 IPPs had 14–21 years left on their lives under the 2002 policy. There are 12–19 years left on the renewable energy (solar and wind) programme from 2006. This applies to 19 IPPs. Under the 2006 policy, the eight bagasse-based projects from 2013 had a remaining life of four to twenty-eight years. But it was a bad idea to prolong the terms of the contracts for IPPs established under the 1994 and 2002 programmes.
Notwithstanding the foregoing, Pakistan has nonetheless seen overcapacity in the electricity generation sector as a result of the construction of IPPs without sufficient demand forecasts. Consequently, even in cases where the generated electricity isn’t fully utilized, the government is required to provide capacity payments to IPPs. The nation’s finances are strained by these excess capacity payments, which also add to circular debt. According to estimates, during the 2023–24 fiscal years, consumers will have to pay IPPs capacity and fixed costs of Rs 1.3 trillion, with additional Rs 2800 billion. Over the past five years, capacity costs have gone from one-third to two-thirds due to increasing generation capacity.
Without a doubt, the exorbitant cost of the electricity under IPP contracts, along with the spiraling capacity payments and finance costs associated with cyclical debt have rendered the country’s electrical supply unviable for customers and economy as well. Conversely, as per different reports during the first half of 2023–24, the electricity distribution businesses experienced losses and inefficiencies of Rs77 billion, compared to Rs62 billion during the same time in 2022–23. “Discos’ under-recoveries increased to Rs149 billion in the first half of 2023–24 from Rs62 billion in the same period of 2022–23; as of June 30, however, their cumulative under-recoveries were Rs236 billion.
As early as possible, the federal government must begin conducting forensic audits of these IPPS, including investment forensic audits, in order to look into any abnormalities in the financial transactions of IPPs or potential criminal behavior.- technical audit: to evaluate the output and efficiency of power plants owned by IPP, – financial audit: to carefully examine the financial transactions and records of IPPs,- fuel audit: to confirm that IPPs’ reported fuel usage and expenses are accurate,- performance audits: these assess how well IPPs are carrying out their allocated duties. They also include investment, tax, generation capacity, heat rate, and performance benchmarking audits.
The first step should be done by the federal government to stop using capacity payment fees based on “Take or Pay” if these audits show any substantial legal or technical discrepancies. Parallel to this, the federal government ought to renegotiate contracts with IPPs in order to resolve matters like tariff changes, payment conditions, or contractual obligations, as the issue of circular debt and capacity payment costs is becoming worse. Of course, there are provisions in IPP contracts that allow verdicts from international arbitrations to be implemented; nonetheless, taking action now is just as crucial as waiting until it is too late.
With the help of these audits, Pakistan can improve the power sector’s overall efficacy and transparency by: – Finding and fixing any irregularities or inefficiencies in IPPs’ operations; – Negotiating more fair terms and prices with IPPs; – Recovering any overpayments or excess profits made by IPPs; and transparency of the power sector. A variety of further measures could be taken, including converting the fundamental tariff of IPPs from dollars to Pakistani currency and launching the country’s alternate energy resources by enhancing the current energy mixtures towards hydroelectric and alternate energy. Similarly, the owners of IPPs should be paid their profits in Pakistani rupees instead of US dollars. Instead of using a Take or Pay contract, the country might save Rs 5,500 billion by just exchanging currencies.
Thus in view of above such alarming situation, it is imperative to review or re-negotiate the IPPS, Power Purchase Agreements immediately in order to prevent Pakistan’s economy from collapsing, as they clearly fall into the categories of currency mismatch, extravagant dollar rates, extravagant concessions, based on incorrect installation capacity/heat test, and involving sovereign guarantees and the lack of audits. Renegotiating contracts is both legally and economically necessary when the nation or its economy is in danger of defaulting and the decisions and agreements made were based on misrepresentation, lavish concessions, misnomer-installation capacity, exuberant capacity payment and investment without a verification mechanism—all of which are obviously against the public and state interest.
