The government has introduced a new financial model for 18 independent power producers (IPPs) to cut capacity payments and recover what it calls “excess profits” made in previous years, Dawn reported citing sources.
A task force is renegotiating power purchase agreements (PPAs) with four IPPs established under the 1994 policy and 14 under the 2002 policy.
Under the proposed changes, the government plans to replace the existing “take-or-pay” model, which obliges payment regardless of power usage, with a “take-and-pay” model for the remainder of the plants’ operational life, ranging from three to 17 years.
The shift could substantially reduce fixed costs, which the government argues were overstated by IPPs at the time of tariff setting. IPPs have pushed back, asserting that gains resulted from efficiency improvements rather than inflated costs.
The renegotiations include restructuring capacity payments, which are set to be reduced to 70-75% of the annual average fixed costs over the last five years.
In addition, eight bagasse-fired IPPs are expected to save the government an estimated Rs85-100 billion after delinking fuel pricing from international coal rates and removing dollar indexation.
In response, at least 10 IPPs have expressed concerns over the government’s “coercive” negotiation methods, arguing in a letter to Prime Minister Shehbaz Sharif that capacity payments are not solely responsible for high electricity tariffs.
They claimed that the total generation cost accounts for only Rs27 per kWh, whereas consumer tariffs exceed Rs60 per kWh, attributing the increase to taxes, transmission costs, and theft.
IPPs argue that even a complete cut in capacity payments for the 2002 policy plants would only reduce tariffs by Rs0.5 per kWh. Citing a 22% decline in power demand and rising exchange rates, they contend that these factors have already increased capacity payments by 40%. IPP representatives have also warned that repeatedly renegotiating or terminating contracts could erode investor confidence, impacting future private sector participation in Pakistan’s energy sector.
The task force, however, maintains that the contracts will not be terminated, as the IPPs are essential for baseload stability and regional power supply. Essential fixed payments will continue, with the focus on reducing profitability without risking IPP solvency.
The exact savings from the renegotiated contracts remain unspecified, but officials anticipate a substantial reduction in the power subsidy burden on the national budget. Despite these expectations, IPPs and foreign stakeholders have raised concerns, with the German government voicing reservations over changes affecting the Rousch Power Project Ltd, partly owned by Siemens.
An IPP executive criticized the approach, likening it to the nationalization moves of the 1970s, and suggested that the government’s short-term gains could have lasting effects on investor confidence.
