IPPs Demand Overhaul of Contracts with Conditions to End Agreements
Private Power Producers Cite Unaffordable Tariffs, Call for Reform Amid Capacity Payment Disputes
IPPs Propose Terms to End Contracts Amid Concerns Over Government Power Policies
Islamabad-(Mudassar Iqbal): Ten Independent Power Producers (IPPs) established under Pakistan’s Generation Policy 2002 have reached out to Prime Minister Shehbaz Sharif with specific conditions for terminating their sovereign contracts, voicing concerns over government handling of private sector power agreements. This step comes as frustration grows over claims that capacity payments to IPPs are driving up consumer tariffs, making electricity unaffordable.
In a joint letter to the Prime Minister, the IPPs—including Pakgen Power, Nishat Power, Nishat Chunian, Sapphire, Hubco Narowal, Kohinoor Energy, Liberty FSD, Halmore, Laraib, and Orient Power—emphasized discussions aimed at revising Power Purchase Agreements (PPAs) from a “take or pay” model to a “take and pay” model.
Special Assistant to the Prime Minister on Power, Muhammad Ali, confirmed that talks with IPPs under the 2002 policy will commence on Monday.
While the IPPs acknowledged high consumer tariffs, they contend that capacity payments are not the primary cause. They highlighted key points in their argument:
– The average generation tariff stands at Rs 27/kWh, whereas consumer tariffs exceed Rs 60/kWh due to taxes, transmission and distribution costs, as well as losses and theft.
– Capacity payments across all IPPs contribute Rs 17/kWh to the generation tariff, with more than half going to government-owned IPPs.
– Power demand has fallen by over 22% in the last two years, resulting in a Rs 5/kWh increase in capacity payments.
– The significant devaluation of the exchange rate in recent years has driven capacity payments up by over 40%.
The IPPs pointed out that former Prime Minister Shahid Khaqan Abbasi recently stated that it is Pakistan’s weak economy, rather than the IPPs, that has impacted the sector.
Sources indicate that the Task Force on Power Reforms, led by Minister for Power Sardar Awais Khan Leghari, plans to replace “take or pay” contracts with new “take and pay” agreements. However, the IPPs argue that this shift would be financially unsustainable and risk their insolvency, as they would bear fixed costs without a guaranteed purchase commitment from the government.
The IPPs expressed that the current approach is biased, especially as the government recently introduced a new dollar-indexed tariff with a 14% return, which still includes a “take or pay” mechanism.
In their letter, the IPPs set out specific conditions for terminating contracts:
– Payment of all outstanding dues at the time of termination.
– Removal of all “take or pay” agreements to eliminate capacity payments.
– Authorization to sell power to private buyers while using the existing transmission and distribution network.
– Continued provision of LNG from SNGPL for LNG-dependent IPPs until they are allowed to import fuel privately.
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The IPPs cautioned that compelled renegotiations of their sovereign power agreements could seriously harm the privatization efforts and deter investor confidence. They emphasized that effectively lowering consumer tariffs would demand higher power sales, substantial improvements to the transmission and distribution networks, and a decrease in the substantial tax load.
The IPPs have called for an immediate meeting with all relevant stakeholders to review the government’s approach and discuss their suggested measures.
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