ISLAMABAD: The coalition government, led by the PML-N, is renegotiating contracts with independent power producers (IPPs) to address “unsustainable” electricity tariffs, Energy Minister Awais Leghari stated, as households and businesses struggle with skyrocketing energy costs.
Soaring power tariffs have sparked social unrest and forced industrial closures in Pakistan’s $350 billion economy, which has contracted twice in recent years amid record-high inflation.
“The current price structure of electricity in this country is not sustainable,” Awais Leghari, the federal minister heading the Power Division, told the media.
He added that discussions were ongoing between the government and power producers because “both sides clearly understand that the status quo cannot be maintained.”
Leghari emphasized that all stakeholders would need to “make concessions to a certain extent,” while ensuring business sustainability is not entirely compromised, and that this should be done “as soon as possible.”
A decade ago, amid chronic energy shortages, Pakistan approved numerous private projects by the IPPs, largely financed by foreign lenders. These incentivized deals included high guaranteed returns and commitments to pay for unused power.
However, a prolonged economic crisis has significantly reduced power consumption, leaving the country with excess capacity that still needs to be paid for.
With limited funds, the government has included these fixed costs and capacity payments in consumer bills, sparking protests from households and industrial groups.
Four sources in the power sector said that changes to the contracts being discussed included reducing guaranteed returns, capping dollar exchange rates, and shifting away from paying for unused power. The sources requested anonymity as they were not authorized to speak to the media.
The viability of the energy sector was a key focus of a critical staff-level agreement in May with the International Monetary Fund (IMF) for a $7 billion bailout. The IMF’s staff report stressed the importance of revisiting power deals.
Pakistan has already initiated talks on restructuring power sector debt owed to China, along with negotiations on structural reforms, but progress has been slow. The country has also committed to ending power sector subsidies.
Leghari said that current electricity rates were unaffordable for both domestic and commercial consumers, hindering growth as power prices are no longer regionally competitive, putting crucial exports at a disadvantage.
He mentioned that the goal was to reduce tariffs for commercial users to 9 US cents per unit, down from the current rate of around 28 cents.
Earlier this week, the minister hinted at a “permanent relief” for consumers in the near future.
Leghari also revealed that a detailed review of issues related to IPPs had been completed, and the public could expect ‘good news’ soon.
However, any one-sided amendments to IPP contracts seem unlikely, as Leghari cautioned last month that the government could not unilaterally terminate agreements, warning that such a move could lead to a “Reko Diq-like situation.”
In the past 15 years, Pakistan has lost nearly Rs5,082 billion due to the government’s failure to address the circular debt problem, resulting in an annual loss of Rs370 billion.
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