As the probe into the operations and profitability of Independent Power Producers (IPPs) reaches its concluding phase, around half a dozen owners of these companies have been called to Islamabad for questioning on Monday, September 2, says a report by Business Recorder. This development marks a significant step in the government’s efforts to address alleged undue profits made by these power producers. The questioning is intended to be courteous, seeking clarification and evidence related to the profitability of these companies.
Background and Approach
The current government, led by Prime Minister Shehbaz Sharif, has adopted a strategy similar to the one used by the previous administration under Imran Khan in 2021. The objective is to apply pressure on IPPs to cooperate with the government’s energy cost-reduction measures. Initially, teams were sent to various power plants to collect relevant records and operational data. This was followed by questioning of senior IPP executives in different cities. The final stage involves summoning the owners of these IPPs to Islamabad for further discussions.
Objective of the Investigation
The government’s primary aim is to negotiate revised contract terms with IPPs. Officials argue that current electricity prices are unsustainable for both industrial and domestic consumers, necessitating IPP support to reduce costs. It has been reported that IPPs have received substantial payments over the years, including Rs1 trillion in capacity payments to 26 IPPs over the past decade. The government is now urging IPP owners to renegotiate contract terms to alleviate financial pressure on the national economy.
Payments to IPPs and Electricity Pricing
A breakdown of capacity payments and electricity pricing reveals the complexities of the current energy landscape.
| Category | Price Contribution (Rs. per unit) |
|---|---|
| Government-Sponsored Generation Units | Rs. 12.00 |
| Thar Coal and CPEC Coal-Based Plants | Rs. 4.60 |
| IPPs (1994 and 2002 policies) | Rs. 1.39 |
| Total Capacity Charges | Rs. 18.00 |
Even if all capacity payments to IPPs established under the 1994 and 2002 policies were removed, the total reduction in electricity costs would be marginal—around Rs. 0.54 per unit for the 1994 policy plants and Rs. 0.85 per unit for the 2002 policy plants. Such measures would offer limited relief to consumers but could severely damage investor confidence and perceptions of Pakistan’s reliability as an investment destination.
Concerns of IPP Owners and Industry Stakeholders
The government’s tactics have raised concerns among IPP owners and potential foreign investors. The handling of capacity payments is viewed by many as problematic, with fears that coercive measures could deter future investment in Pakistan’s energy sector. A senior executive from the power industry highlighted that addressing the issue through aggressive negotiations could undermine the trust of both current and prospective investors.
Energy sector investors argue that a collaborative approach would be more beneficial, as punitive measures could destabilize the investment environment. In particular, foreign investors, who are critical to the development of Pakistan’s energy infrastructure, may perceive such actions as a signal that sovereign guarantees and contractual agreements in Pakistan are unreliable.
Government’s Internal Review and Briefings
Minister for Power Awais Leghari has indicated that a team of 50-60 experts is thoroughly examining the power plant agreements to advise the government on its next steps. Despite assurances that the government will not unilaterally alter IPP contracts, there is widespread concern about the use of pressure tactics to force compliance with revised terms.
Leghari has emphasized the need for cooperation from IPPs, stating that the current financial burden on the power sector cannot be sustained without their support. An in-camera briefing was given to the Senate Standing Committee on Power on August 6, 2024, to discuss the ongoing investigations into IPPs, though specific details were not disclosed to the public.
Financial Losses and Structural Inefficiencies
The energy sector in Pakistan continues to face significant challenges, including transmission and distribution (T&D) losses and under-recovery by distribution companies (DISCOs). In the first half of the 2023-24 fiscal year, these inefficiencies led to financial losses amounting to Rs. 77 billion, compared to Rs. 62 billion in the same period of the previous fiscal year.
| Fiscal Year | T&D Losses (Rs. billion) |
|---|---|
| 2022-23 (First Half) | Rs. 62 |
| 2023-24 (First Half) | Rs. 77 |
Future Outlook and Investor Confidence
The ongoing investigation and the government’s approach towards IPPs have sparked debate among stakeholders. Private power producers argue that the government’s emphasis on renegotiating contracts, which were last updated in 2021, appears more focused on political gains rather than delivering substantial benefits to the public. They warn that such an approach could damage Pakistan’s reputation as a viable investment destination.
Government officials remain hopeful that the investigation may yield some concessions from IPPs, which could be touted as a significant success. However, the long-term impact on investor confidence remains a critical concern. The government must balance the need to provide immediate financial relief to consumers with the imperative to maintain a stable and attractive environment for foreign and domestic investments.
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