Pakistan’s power sector is grappling with severe issues, including a highly non-competitive environment. Over the past five years, electricity consumers have been forced to pay around 6 trillion rupees. If capacity payments for the current fiscal year are included, this figure is expected to exceed 8 trillion rupees from 2019-20 to 2024-25. For the past five years (2019/20 to 2023/24), capacity charges amounted to 6 trillion rupees. With an estimated 2.1 trillion rupees for the fiscal year 2024-25, the total will reach 8 trillion rupees.
Consumer and tariff issues include Energy Purchase Price (EPP), Capacity Purchase Price (CPP), Transmission and Distribution (T&D) losses, distribution and supplier margins, and adjustments from previous years. In fiscal year 2022, the EPP tariff accounted for about 60% of the total, while CPP comprised around 40%.
The percentage of CPP in the overall tariff has been increasing, with EPP and CPP accounting for about 50% during fiscal year 2023.
The contracts with Independent Power Producers (IPPs) have been a lucrative source for certain individuals at the expense of silent consumers in Pakistan.
Supporters of PPP and PML-N argue that severe load-shedding in 1994-95 and 2015-18 was unavoidable to attract Chinese IPPs for power generation.
In contrast, a model implemented in Bangladesh allowed private individuals and companies to create mini-grids and purchase excess electricity for storage, developing a private sector-led market for electricity trading with minimal government intervention.
If Pakistan had adopted a similar model, the capacity payment issue might have been avoided.
Official data shows that capacity payments over the past five years have exceeded 6 trillion rupees, with amounts of 856 billion rupees in 2019-20, 796 billion in 2020-21, 971 billion in 2021-22, 1321 billion in 2022-23, and 2112 billion in 2023-24.
Ironically, consumers paid 5 trillion rupees in electricity charges over the past five years, with the situation worsening as capacity payments reached 2112 billion rupees in 2023-24 while electricity charges were only 1048 billion rupees.
This discrepancy has been widening each year, highlighting the need to amend local IPP contracts.
Economist Yousaf Nazar stated that capacity payments account for 1.9% of GDP and should be fully transparent.
The projects were approved in secrecy and haste, lacking long-term planning and integration into a broader macroeconomic framework.
Financing infrastructure with expensive foreign currency has proven problematic, as seen in many African countries.
Former Finance Ministry advisor Dr. Khakan Najeeb mentioned that 52% of Pakistan’s power capacity is government-owned, while the term IPP applies to the remaining 48% power plants established under policies from 1994, 2002, and 2015.
The plants from 1994 and 2002 have largely operated under state agreements, with some reviewed and revised in 2020 to eliminate dollar indexing.
The remaining IPPs, whose contracts were extended under the 1944 and 2002 policies, should be removed from the system.
Dr. Najeeb explained that the heavy financial burden of capacity payments is due to plants established under the 2015 policy, which contribute approximately 23% of Pakistan’s power generation capacity.
A comprehensive study of tariff types and a forensic audit could clarify any irregularities and help address potential issues.
Reprofiling approximately 9 billion dollars in commercial loans with Chinese lenders could reduce tariffs through extended loan terms. Additionally, converting four coal plants with high energy costs into local operations could also provide cost relief.
Dr. Najeeb emphasized that reducing production costs requires improvements in supply-side management, although this is part of the broader energy crisis narrative.
The energy sector needs real regulatory, operational, and policy changes. Pakistan’s energy sector largely suffers from governance issues, with inadequate professional input and ineffective management by the government.