The government has halted payments to 18 Independent Power Producers (IPPs) with a combined capacity of 4,267 MW. These IPPs are set to enter negotiations with the government to revise their contracts, shifting from the current “take-or-pay” model to a “take-and-pay” system, according to sources. The sudden halt in payments has raised questions, especially as there has been no official reason provided for this action.
These IPPs were established under the Power Generation Policies of 1994 and 2002, which aimed to address Pakistan’s power shortages at the time. Under the “take-or-pay” model, IPPs have been guaranteed payments regardless of whether the electricity is utilized, placing a significant burden on the government’s finances. The shift to “take-and-pay” would mean IPPs are only paid for the electricity that is actually supplied to the grid, and is expected to be implemented over the next two years.
Temporary payment moratorium
While some officials suggest the payment halt is temporary, insiders are speculating that this may be linked to broader efforts to prioritize dues to Chinese IPPs. This move coincides with Prime Minister Li Qiang’s upcoming visit to Pakistan. Another reason being discussed is the need to clear payments related to the early termination agreements with five IPPs, as approved earlier by the government.
Energy reforms in motion
This payment freeze comes on the heels of the government’s recent decision to terminate agreements with five other IPPs, including The Hub Power Company Limited (HUBCO) and Lalpir Power Limited. This termination, approved by the cabinet, is projected to save Rs60 billion annually for consumers and Rs411 billion for the national treasury. The government’s broader goal is to shift all IPPs to the “take-and-pay” model, which would pay IPPs only for the energy they generate and supply, thus easing the financial burden of capacity payments.
[Link to our previous piece on these reforms]
What’s next for the energy sector?
Power Division sources have assured the IMF that they are working on a comprehensive framework to support the transition to a new wholesale energy market, expected to be fully functional by 2025. This Competitive Trading Bilateral Contract Market (CTBCM) is expected to introduce more competition in the energy sector and improve overall distribution efficiency.
IPPs have been largely cooperative, with some indicating their willingness to renegotiate contracts in the national interest. One executive from Liberty Daharki Power, one of the affected IPPs, even publicly acknowledged the need for contract revisions, emphasizing the need for transparency in the process.
Long-term strategy
The government has made it clear that the financial burden of the power sector is unsustainable, and reforms like the conversion of IPP contracts are part of a larger strategy to stabilize the energy market. Additionally, the government aims to reduce circular debt, improve the management of distribution companies, and ensure electricity supply is both affordable and reliable for the public.
This move also ties into broader efforts to address Pakistan’s growing external debt and fiscal challenges, which have been exacerbated by energy sector inefficiencies. With the IMF watching closely, these reforms are seen as critical to meeting Pakistan’s long-term economic goals.
The halt in payments and subsequent negotiations mark a pivotal moment in Pakistan’s ongoing efforts to reform its power sector, with potentially significant implications for the country’s financial stability and energy future.
