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Reviewing the Impact of Power Purchase Agreements (PPAs) on Pakistan’s Energy Sector

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Ahmed Farhan

The power crisis in Pakistan, an alarming issue that demands immediate and concerted action, is primarily rooted in the Power Purchase Agreements (PPAs) signed with Independent Power Producers (IPPs) under various regimes. These agreements mandate the purchase of a fixed quantity of power from IPPs, with a tariff structure heavily skewed towards fuel charges and fixed costs, thereby imposing a significant financial burden on both consumers and the government. The absence of competitive bidding and due diligence in awarding these contracts has further compounded the challenges faced by the energy sector.

The consequences of these agreements have been detrimental, leading to not just exorbitant electricity bills for consumers, but also substantial financial losses for the government. One of the key issues is the ‘circular debt ‘, a term used to describe the debt that is not paid by one party and is then passed on to another, which has been reaching approximately Rs5,082 billion over the past 15 years. The annual loss due to circular debt stands at a staggering Rs370 billion, with a 95.82% increase in power purchase prices since July 2018.

To overcome these challenges, Pakistan has a unique opportunity to diversify its energy mix by investing in renewable energy sources such as hydroelectric, solar, and wind power. This strategic shift, coupled with the implementation of energy-efficient technologies and the rectification of infrastructure inefficiencies, can significantly contribute to mitigating energy waste and transmission losses, thereby paving the way for a more sustainable and resilient energy sector.

As of January 31, 2024, Pakistan’s installed power generation capacity stood at 46,035MW, yet the nation faces a shortfall during peak demand due to inadequate transmission capacity. Emphasizing the need to tap into its vast hydropower potential and leverage wind power resources, the country must focus on realizing a greater portion of its untapped energy potential.

The roots of the power crisis can be traced back to the initiation of IPPs in the late 1980s and early 1990s, where private sector investment was sought through competitive bidding. Subsequently, the absence of careful consideration of currency depreciation and investment payback periods in the contracts has contributed to the financial strain experienced by both industrial and residential consumers.

Given the impending end of the IPPs’ spanning period around 2050, along with the overcapacity in electricity generation, a situation where the country is producing more electricity than it can consume, Pakistan faces the urgent need to address the challenges posed by these agreements. Forensic audits of IPPs, technical assessments of power plant efficiency, and financial examinations of transactions are crucial steps to uncover irregularities and inefficiencies within the sector.

Renegotiating contracts with IPPs to address tariff adjustments and payment conditions and eliminating the ‘take or pay’ option in capacity payments is a critical priority. This, along with the conversion of the fundamental tariff of IPPs from dollars to rupees and the strategic utilization of alternate energy resources, can potentially alleviate the financial burden on the economy, providing a much-needed respite and stability.

It is of utmost importance for the government to take immediate action to review and renegotiate the IPPs’ Power Purchase Agreements. We urge all stakeholders, including energy sector professionals, policymakers, and the public, to support these efforts. This is a crucial step to safeguard Pakistan’s economy from further turmoil and ensure transparency and efficacy in the power sector.

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