Pakistan’s energy crisis is not merely a problem of electricity generation. It is the outcome of decades of flawed policies, poorly structured contracts, weak regulatory oversight, financial mismanagement and a growing disconnect between the public interest and the interests protected under power-sector agreements.
Over the past three decades, Independent Power Producers (IPPs) have played an important role in increasing Pakistan’s electricity-generation capacity and attracting private investment. However, the same system also introduced contractual arrangements whose financial burden was ultimately transferred to electricity consumers, taxpayers and the broader economy.
Contracts with IPPs were signed under the power policies of 1994, 2002, 2006 and 2015. Their basic objective was to encourage private investors to finance power projects while the government guaranteed electricity purchases, returns on investment and, in certain cases, payments under sovereign guarantees. At the time, Pakistan genuinely needed private investment. The problem emerged when long-term public interest, realistic demand projections and competitive procurement were overshadowed by arrangements that transferred enormous financial liabilities to future electricity consumers.
Where Did the Injustice Occur?
The most fundamental injustice to consumers lies in the system of capacity payments. Under certain contracts, the government is required to pay for the availability of a power plant’s generation capacity regardless of whether that electricity is actually needed or generated.
This can be understood through a simple example. Imagine renting a machine that you need only half the time but, under the contract, you are required to pay the full rental cost throughout the year. Even when the machine remains unused, the payments continue. A similar principle operating on a national scale has become a major financial burden for Pakistan’s power sector.
Capacity payments reportedly reached around Rs2.1 trillion in fiscal year 2024. These costs are ultimately incorporated, directly or indirectly, into electricity tariffs and passed on to consumers. As a result, households do not simply pay for the electricity they consume; they also bear the cost of unused or underutilised generation capacity.
This raises a fundamental question: if the government did not have sufficiently accurate projections of electricity demand, economic growth, industrial production and consumers’ ability to pay, why were long-term financial guarantees provided for such a large amount of generation capacity?
Contracts Designed to Protect Investors, Risks Shifted to Consumers?
Pakistan offered IPPs a range of incentives to attract investment, including guaranteed returns, sovereign guarantees and dollar-linked payments. These policies succeeded in bringing investment into the power sector and expanding generation capacity. However, their other side was that currency depreciation, imported fuel costs and financial risks increasingly found their way into electricity tariffs.
It would not be economically or legally correct to suggest that private investors necessarily obtained these benefits through illegal means. If the contracts were legally executed under government-approved policies, investors are entitled to seek payments according to the agreed terms.
The real question is: Why were such terms approved in the first place, and who was responsible for protecting the public interest?
Therefore, the entire IPP crisis cannot simply be blamed on private power producers. Responsibility also rests with successive governments, policymakers and regulatory institutions that designed the contracts, approved tariffs and supervised their implementation.
Questions Over NEPRA’s Role
Recent concerns raised by a Senate committee regarding capacity payments to non-operational power plants, the failure to provide detailed information about tariff determination and calls for a comprehensive performance audit of the National Electric Power Regulatory Authority (NEPRA) have added further urgency to the debate.
If a regulator is repeatedly asked to disclose how tariffs for different IPPs were determined, what the actual installation costs of projects were, how much generation capacity exists, what the per-unit cost is and how profit margins were calculated, but complete and transparent answers remain unavailable, how can public confidence be maintained?
Regulatory independence must not mean freedom from accountability. NEPRA should remain protected from political interference, but it must also be answerable to Parliament, audit institutions and the public.
Payments to Non-Operational Plants: A Double Burden on Consumers
The payment of substantial capacity charges to non-operational or underutilised power plants is among the most troubling aspects of the current system.
If a power plant is not supplying the required electricity to the national grid, is technically unavailable, or is economically inefficient, there must be a strong economic justification for recovering the cost of its capacity from consumers.
This is precisely where parliamentary oversight, forensic audits and transparent scrutiny of contracts become essential.
Every power plant should be examined to determine its original investment, debt exposure, approved profit margin, capacity factor, fuel costs and the total amount recovered from consumers over the years.
Government’s Recent Savings: A Positive Step, but Not the Complete Solution
According to the government, negotiations and revisions of IPP agreements have generated expected savings of approximately Rs1.571 trillion in future payments.
The government has stated that termination of five IPP agreements would save Rs411 billion, revision of tariffs for eight bagasse-based plants would save Rs238 billion, and tariff reductions for 14 thermal power plants would save another Rs922 billion.
These figures are significant. But the real question is: When, how and to what extent will these savings reach electricity consumers?
If contractual revisions reduce the government’s financial liabilities but do not result in a meaningful reduction in electricity bills, the reform will remain incomplete from the public’s perspective.
The government should publish detailed information on every saving, its fiscal impact and the portion of that saving actually transferred to consumers.
Circular Debt: A Symptom of the Deeper Disease
The IPP problem cannot be separated from Pakistan’s circular-debt crisis. By June 2024, the circular debt of the power sector had reportedly reached approximately Rs2.39 trillion.
However, IPPs are not solely responsible for this crisis. Electricity theft, weak recoveries by distribution companies, transmission and distribution losses, an outdated grid, political interference and poor governance have also contributed substantially.
Therefore, merely changing IPP agreements will not solve the problem. If electricity theft continues, bill recovery remains weak and transmission losses persist, much of the financial relief generated through IPP reforms could once again disappear.
The Greatest Injustice to Consumers: Lack of Transparency
The Pakistani public has a fundamental right to know what contracts were signed in its name, at what price electricity was guaranteed, what profit margins were approved, how capacity payments were determined and what safeguards were included to protect the public interest.
A Public Contract Dashboard should be created for every IPP, disclosing the contract period, original investment, tariff, capacity payments, actual electricity generation, total payments, profit, fuel costs and outstanding government liabilities.
If an ordinary consumer can see every charge on an electricity bill, then records of payments worth billions and trillions of rupees from the national exchequer should not remain hidden from the public.
What Is the Way Forward?
Pakistan does not need to declare war on private investment, nor should it attempt to terminate every past contract unilaterally. What it needs is transparent, legally sound and mutually agreed reform.
Future power projects should be procured through genuine competitive bidding rather than relying on cost-plus arrangements. Renewable energy, solar power, wind, battery storage and indigenous energy resources should receive greater priority.
New generation capacity required by 2030 should be procured at the lowest possible cost through transparent competitive bidding.
The transition from Take-or-Pay to Take-and-Pay arrangements can also be part of the solution, but such a system requires accurate demand forecasting and a reliable transmission grid.
Above all, the government must establish one fundamental principle:
Investors have a legitimate right to earn a reasonable return, but not by transferring excessive and unnecessary financial risks to the public.
Pakistan does not need a confrontation with IPPs; it needs better contracts. The government must simultaneously preserve investor confidence and protect consumers from unaffordable electricity. These two objectives can be achieved together if power-sector agreements are based on economic logic, transparency and competition rather than political expediency.
The history of Pakistan’s IPP agreements offers an important lesson: whenever the state commits itself to long-term financial obligations, the burden is not borne only by the government that signs the agreement. Future governments and future generations inherit those liabilities as well.
Therefore, accountability should not be limited to asking how many contracts have been terminated today. The more important question is:
Why should Pakistan ever again sign contracts in which profits are private while the risks are ultimately borne by the public?
Real reform in the energy sector will come only when an electricity bill reflects the genuine cost of electricity rather than becoming a cumulative charge for past policy mistakes, unnecessary capacity payments, poor revenue collection and failures of governance.
The people of Pakistan need affordable electricity. But even more fundamentally, they need a system in which every rupee collected from them is transparent, justified and accountable.
