The economic cost of IPPs’ agreement

Like many other developing countries Pakistan has been grappling with a severe energy crisis for several years marked by unmet high demand, circular debt and over reliance on fossil fuels. The demand for energy continues to rise as the rise in population growth, industrialization and urbanization. Insufficient investment, outdated distribution system and the land line losses has contributed to persistent power shortages and frequent electricity load shedding that has hindered economic growth, development and effecting daily life.
Pakistan faces severe load shedding especially during the summer from May to August 2023. The electricity shortage widened to 7000 megawatts whilst the demand rising to 28200 megawatts, while the supply was 21200 megawatts.
In order to resolve the prevailing issue of energy crisis, government decided to privatize the distribution of the electricity, which fell under the domain of WAPDA, in 1993. There were 311 distribution companies formed such as LESCO, PESCO etc. They said we cannot run it as higher cost of distribution but the government said that we will subside you and we will also give you tax exemption.
As a result in 1994 private power producers’ policy was adopted in Pakistan. The crux of the policy was that, whoever will invest in Pakistan power production will get the sovereign guaranty of their investment and will earn fixed amount of profit in dollar denominations. They were free to operate anywhere they want and can use oil whichever oil they want to use. The government will buy them oil and anything necessary on a subsidized and fixed rate.
Investors were to be provided a dollar based international rate of return of 15 to 18 percent over the period of 25-30 year of the power purchase agreement. Furthermore they will be paid according to their production. America and IMF glorify Pakistan for their power policy, United State Secretary of Energy Hazel Reid O’Leary called it as the best energy policy in the world. This policy was beneficial only for business community but not from the consumers point of view. This was a small project not like the huge project of Tarbela Dam due to which the cost of production was so high and it was also not environment friendly.
In 1994 power production jumped to 42000 MW, but power transmission capacity was 22000 MW. Due to bad transmission system of electricity around 18 to 20 percent power transmission loss. Transmission of electricity was less but government was obliged to pay them according to their production, the circular debt started to rise. Circular debt and load shedding subsidies is 70 percent. Several international agencies such as USAID have suggested policies to recover line losses.
The load shedding that we are facing from the 1990 till now is not because we cannot produce electricity but it is because of huge circular debt which is around Rs2309 billion as of 2021 and the terms and conditions of independent power producers policy that we cannot afford the electricity. Back in 2003 domestic private investors were interested to invest in energy sector provided that, they had similar opportunities as that of private foreigner investors. Due to this in 2003 amendments were made in IPPs’ policy. Both the foreign and domestic investors transfer over 333 billion dollar to foreign countries till now.
In 2020 senate formulated a committee to investigate IPP’S circular debt and found out that 39 billion rupees were paid by government to IPPs by overbilling from IPPs. After the investigation the negotiation were done with IPPs due to which IPPs agreed on fixed profit of 15 percent which was between 15-18 percent back then. Given the recent decision to have market determined exchange rate deprecated against the dollar. This resulted in IPPs demanding the government to increase prices, in accordance to new exchange rate.
In order to compensate the energy sector government decided to increase the energy prices to collect more revenue but the government policy badly failed as rather than rise in revenue the total revenue from consumer decreases as people are not willing to pay electricity bill. According to PIDE report 78 to 80 percent of small enterprises are at risk of default due to power inflation.
To resolve the prevailing issue of energy crisis in Pakistan government should invest in transmissions mechanism of electricity to get the full potential of total power production which will result in less power shortage and load shedding and will also help in retaining the full potential of small and medium enterprises.
Government should renegotiate with IPPs on capacity payment or should nationalize the energy sector as the cost of privatization is unbearable. Government should move to cheaper oil and gas alternative through TAPT pipeline agreement between Iran and Pakistan which were to be completed as of 2014 but the project is still not completed till now which will reduce the cost of power generation.
Since 1990 cost of electricity has climbed by 53 percent. Government should invest in small dams (floods) and solar power to reduce the dependency on generation of power energy through petroleum and coal.