ISLAMABAD: In a significant move to address the challenges posed by independent power producers (IPPs), Prime Minister Shehbaz Sharif’s government has decided to adopt a uniform approach for both state-run and privately-owned IPPs by implementing a take-and-pay payment model.
According to an official involved in the power sector reform task force, “We have resolved to remove the government from the electricity business. The government-owned power plants, which currently generate 52% of the electricity, will also transition to the take-and-pay model. The government will only provide financing to make these plants operational.”
This announcement follows recent reports indicating that four IPP owners were warned of consequences if they did not voluntarily terminate their power purchase agreements (PPAs) and switch to the pay-and-take model.
The official elaborated, stating, “Electricity will be purchased from government power facilities under the take-and-pay model, meaning payments will only be made for the electricity consumed. Returns on equity will also be based on this model.”
This decision ensures that both private IPPs and government power plants receive the same treatment. In response to queries, the official noted that the task force is expected to take an additional two months to finalize its recommendations aimed at reducing power tariffs and making the power sector financially sustainable.
Despite this transition, the government will continue to cover loan repayments for its power plants, including those operating on nuclear, hydro, RLNG, and coal. Additionally, discussions are underway with the Chinese government to extend loan repayment periods from 10 to 20 years.
The government has approached five IPPs—four established under the 1994 policy and one under the 2002 policy—requesting them to voluntarily cancel their PPAs. Based on recommendations from the National Transmission and Dispatch Company (NTDC), the government will neither purchase electricity from these IPPs nor make capacity payments to them.
The official highlighted that the remaining contracts for these IPPs range from three to ten years and that they have already reaped excessive profits. Pakistan cannot sustain high power tariffs while providing relief to its inflation-affected populace.
The official lamented that the economy has suffered due to high capacity payments and conveyed that the IPPs have been notified of this issue. A forensic audit will be initiated for any IPP that does not terminate its contract, with allegations that some IPPs incorrectly reported losses in operations and maintenance from 2020 to 2024, resulting in substantial financial savings.
It was claimed that one IPP owner secured loans by pledging assets of the power plants, contrary to their agreements with the government, which has been compensating the loans and returns on equity for the plant. This is considered a breach of contract.
The official projected potential savings of Rs300 billion in capacity payments over the next three to ten years, translating to consumer relief of Rs0.60 per unit, totaling Rs60 billion in a single year.
Furthermore, 17 additional IPPs under the 1994 and 2002 policies have been identified to transition to the take-and-pay model, with the government continuing to buy electricity from them until a private power market is established.
Once this market is in place, these 17 IPPs will be permitted to sell electricity under the Competitive Trading Bilateral Contract Market (CTBCM) framework. The establishment of the CTBCM is anticipated within the next one-and-a-half to two years, allowing IPPs to sell electricity to clients with appropriate wheeling charges.
The official indicated that the current wheeling charge of Rs26 per unit is not feasible, suggesting it should be adjusted to facilitate the proper functioning of the CTBCM.
The Federal Bureau of Revenue (FBR) is urged to decrease its revenue collection from electricity bills, which currently totals Rs800 billion annually. This indicates that electricity consumers are paying Rs8 per unit in taxes, duties, and surcharges. A reduction of these charges by 50% could lower the tariff by Rs4 per unit.
The task force is also working to lower tariffs for wind and solar power plants, with some solar plants currently charging Rs27 per unit, while the target should be Rs7 per unit. Wind IPPs are charging Rs40 per unit, which also needs rationalization.
The official concluded that efforts will be made to engage with both wind and solar IPPs to bring their tariffs down. No comments have been obtained from the IPPs regarding these developments.
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