In a significant development, five Independent Power Producers (IPPs)—four established under the 1994 power policy and one under the 2002 policy—have agreed to terminate their Power Purchase Agreements (PPAs) with the government. This move comes as part of broader efforts to reduce Pakistan’s financial burden and ease pressure on consumers. According to a senior official involved in the Task Force on Power Sector, the agreements are nearly finalized, and the IPPs will sign the termination documents once the remaining formalities are settled.
Payment and Capacity Cost Negotiations
Under the new arrangement, the IPPs will not receive future payments for their power production, although they will be compensated for past dues. However, this payment will only cover the cost of electricity and not include interest. A key point under negotiation is the past capacity payments owed to the IPPs, which range between Rs80-100 billion. The final amount is still being discussed.
These IPPs were originally set up on a BOOT (Build, Operate, Own, Transfer) basis, meaning that those under this model will be handed over to the government upon termination of the contracts. The IPPs not built on the BOOT model will remain under private ownership.
Consumer Savings and Economic Relief
The government expects to save Rs300 billion over the next 3-10 years from reduced capacity payments, which will provide relief to consumers in the form of a Rs0.60 per unit reduction in electricity tariffs, equaling about Rs60 billion in savings annually. After the termination of their contracts, the five IPPs will no longer be allowed to operate on a “take-or-pay” basis, meaning that the government won’t be obligated to pay them whether or not it uses the electricity.
Transition to Competitive Power Market
In addition to the five IPPs, the government has identified 17 more power producers established under the 1994 and 2002 policies. These IPPs will shift from the “take-or-pay” model to a “take-and-pay” mechanism, meaning the government will only pay for the electricity it actually purchases. This arrangement will remain until a private power market, known as the Competitive Trading Bilateral Contract Market (CTBCM), is fully established.
The CTBCM is expected to be operational within 18 to 24 months, allowing IPPs to sell electricity directly to clients by paying wheeling charges for using the grid. However, the current wheeling charge of Rs26 per unit is seen as too high, and the government is working on reducing this to make the private power market functional.
Lowering Electricity Costs
One of the key challenges for Pakistan’s power sector is the high cost of electricity, partly driven by the taxes, duties, and surcharges embedded in consumers’ bills. Currently, the government collects Rs800 billion annually from electricity bills, with consumers paying Rs8 per unit in taxes. Officials are pushing for a 50% reduction in these charges, which would lower tariffs by Rs4 per unit.
The task force is also working to bring down the cost of electricity from renewable sources like wind and solar. Some solar plants charge as much as Rs27 per unit, while wind IPPs receive up to Rs40 per unit. These rates are being targeted for rationalization, with the aim of reducing solar power costs to Rs7 per unit and wind power costs to more manageable levels.
Conclusion
The termination of PPAs with five IPPs and the shift toward a more competitive power market represent significant steps toward easing the financial burden on Pakistan’s power sector. These measures aim to save billions in capacity payments and reduce electricity tariffs for consumers, while fostering a more sustainable and cost-effective energy landscape. However, much will depend on how quickly the government can implement these changes, including the establishment of the CTBCM and the reduction of wheeling charges and taxes on electricity bills.
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