Can Ending IPP Agreements Really Cut Electricity Tariffs? What Experts Have to Say

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In a recent move, the government has terminated contracts with five Independent Power Producers (IPPs) which will ultimately save Rs 60 billion annually for consumers. The termination of contracts with IPPs will reduce the electricity tariffs as well. It should be noted that the decision has been made on October 10 in a federal cabinet meeting, chaired by Prime Minister Shehbaz Sharif.

However, it is pertinent to mention here that these IPPs have voluntarily agreed terms as stated by Prime Minister, in the national interest collectively. The Prime Minister said that in the first phase, the five IPPs with whom the contracts will be terminated include HUBCO, Lalpir, Rousch Power, Saba Power and Atlas Power.

The Prime Minister, Shehbaz Sharif, in the federal cabinet meeting said, “These five IPPs have played a crucial role in initiating much-needed public relief. With the grace of Almighty Allah, the national economy is stabilising swiftly.” He further acknowledged the remittances from overseas Pakistanis that totaled up to $8.8 billion last quarter, stating that these remittances demonstrate a trust of overseas Pakistanis in the Pakistan’s economy apart from providing relief to the country’s economic system.

Moreover, the power minister, Awais Ahmad Khan Leghari, has said that the government has plans to further review the contractual plans with other IPPs as well which will ultimately further decrease the electricity costs by up to Rs 8-10 per unit. Mr. Laghari further stated, “We have initiated the process by starting negotiations to reprofile the debt of Chinese power plants established under the CPEC portfolio. If the Karachi (airport blast) incident didn’t happen, several Memorandums of Understanding would be signed with China in the next couple of weeks.”

As per the claims of power minister, the move would save Rs 411 billion collectively and would reduce tariffs by Rs 0.71. However, the energy experts claim that reducing tariffs of electricity through terminating contracts with IPPs will still be of least benefit as there are other major factors that contribute to increased electricity prices. These include:

  • Poor transmission system
  • Power generation through expensive fuel
  • Low recovery
  • Expensive energy mix
  • Low bill recovery system

The Chief Executive Officer of an IPP stated, “The authorities may achieve some temporary gains by coercing us into accepting the revised agreement, but the electricity tariffs cannot be reduced on a sustainable basis without holistically addressing the issues plaguing the entire energy supply chain.”

Furthermore, some analysts believe that even if all the contracts with IPPs from 1994 to 2002 will be terminated, there will be no direct benefit to consumers and the reduction will be minimal in consumer tariffs, around Rs 1.39 per unit. As per analysts, the investor confidence in the energy sector is also weakening as is evident from the government’s failure to attract suitable investors for its 600 MW solar project in Muzaffargarh.

According to an energy expert, “The investors haven’t forgotten the forced contract revisions imposed on power producers as recently as 2021.”

Analysts believe that relief for consumers in electricity tariffs is only possible in the case of policy stability and this will only happen if political stability remains in the country in the long term. According to a Karachi-based power analyst, “Contract revisions may have yielded some savings for the government, but they have happened at the cost of long-term policy stability and without any known benefit to consumers.”

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