Is the revised PPAs (power producers agreements) with 17 IPPs a viable solution?
by Noor Fatima
The power sector in Pakistan is trapped in a vicious cycle of circular debt, a phenomenon that has crippled the country’s energy infrastructure and economy. Circular debt refers to the financial quagmire where power distribution companies (DISCOs) cannot pay power generation companies (GENCOs), who, in turn, fail to pay fuel suppliers. This disrupts electricity generation, making supply unreliable and unaffordable for consumers. As of June 2024, Pakistan’s circular debt has increased to over Rs2.7 trillion, a staggering figure that underscores the severity of the crisis. This situation demands immediate and comprehensive policy interventions to prevent further economic instability and ensure a sustainable energy future.
Origin and causes
Circular debt has its origins in the disastrous policies of 1990s particularly of 1994, which incentivized private investment in power generation through Independent Power Producers (IPPs). Under this arrangement the government guaranteed high returns to Independent Power Producers (IPPs) for installed generation capacity on a “Take or Pay” model. The private investors were given high tariffs and incentives due to which they made excessive profits. The reliance on imported fuel and inadequate infrastructure contributed to higher electricity prices. Such long-term contracts were made repeatedly without any impact analysis.
According to official figures, Pakistan’s total installed electricity capacity stands at 42,131MW while the installed capacity of all 100 IPPs operating in Pakistan is 24,958MW. Among them, only 10 large IPPs constitute 53% of this capacity and the remaining form 47%. But the country still faces a shortfall of 5,000MW–7,000 MW during peak demand periods. This gap is exacerbated by inefficiencies in the system, including transmission and distribution losses of up to 18%.
The 10 IPPs, their installed capacity and year of maturity of agreement:
Power Plant Project | Installed Capacity | Year of Maturity |
Quaid-i-Azam Thermal Power | 1180MW | 30 Dec 2047 |
Balloki Power Project | 1223MW | 28 Jan 2048 |
Haveli Bahadur Shah Project | 1233MW | 8 Jan 2048 |
PTPL Power Project | 1263MW | 30 March 2050 |
Hub Power Project, HUBCO | 1292MW | 25 Aug 2025 |
Shanghai Thar Coal Project | 1320MW | 30 Dec 2050 |
HUBCO/China Power Project | 1320MW | 30 Aug 2048 |
Port Qasim Power Project | 1320MW | 30 Dec 2047 |
Huaneng Shabong Ruyi | 1320MW | 30 Dec 2047 |
Kot Addu Power Project, KAPCO | 1638MW | 21 Sep 2024 |
These IPPs (except KAPCO and HUBCO) are locked into long-term contracts that guarantee capacity payments until 2047–2050. Despite producing less electricity, these IPPs continue to receive massive payments, draining economic resources. For example, the government paid Rs979.3 billion capacity payments to 33 IPPs during financial year 2023-24, a figure projected to rise to Rs1.5 trillion by 2025. These IPPS produce less electricity but receiving huge capacity payments.
The government, however, has taken some steps to address the crisis. For instance, 17 IPPs have renegotiated their Power Purchase Agreements (PPAs) under a “Take and Pay” model, saving the government Rs1.1 trillion. However, none of the large IPPs are included in these renegotiations, raising concerns about the future trajectory of circular debt. Moreover, the termination of five IPPs near their expiry dates (except Atlas Power) has provided limited relief, as these plants were already nearing the end of their operational lives.
Another critical issue is the lack of investment in renewable energy. Despite Pakistan’s immense potential for solar, wind, and hydropower, renewables account for only 4% of the energy mix, compared to 60% from fossil fuels. This over-reliance on imported fuels not only increases costs but also exposes the country to global price fluctuations.
Solutions
The government must prioritise renegotiating contracts with the 10 large IPPs, shifting from the “Take or Pay” model to a “Take and Pay” model. This would ensure that IPPs are paid only for the electricity they generate, reducing unnecessary capacity payments. Additionally, the state should prioritise purchasing electricity from cost-effective sources, such as renewables and domestic coal, to optimise capacity payments.
Pakistan needs to accelerate the development of renewable energy projects to reduce its reliance on imported fuels. The government’s plan to add 7,500 MW of new IPPs should focus on solar, wind, and hydropower, which offer long-term sustainability and lower generation costs.
Strengthening the National Electric Power Regulatory Authority (NEPRA) and other regulatory bodies is crucial to addressing mismanagement and corruption in the power sector. Proper auditing and monitoring of IPPs can prevent over-invoicing and ensure transparency.
Additionally, hiring for key positions should be based on merit and expertise rather than political influence.
Upgrading the transmission and distribution infrastructure is essential to reducing losses and improving efficiency. Smart grid technologies and advanced metering systems can help DISCOs curb theft and improve revenue collection.
Public awareness campaigns and incentives for energy-efficient appliances can reduce overall demand, easing the burden on the power sector. For example, replacing traditional incandescent bulbs with LED lights can save up to 80% of energy consumption.
The power crisis is a multifaceted issue that requires a holistic approach to resolve. Addressing the circular debt problem, renegotiating contracts with IPPs, investing in renewable energy, and improving governance are all critical steps toward a sustainable energy future. Without immediate and effective action, the power sector will continue to drain economic resources, hinder industrial growth, and exacerbate poverty. Policymakers must act decisively to stabilise the energy sector and ensure long-lasting economic growth.
Noor Fatima hails from Gilgit-Baltistan. She is a student of BSc Economics at Quaid-i-Azam University, Islamabad. Email: nf.2882002@gmail.com