Key Takeaways:
- The government is buying electricity at up to Rs 750 per unit from certain IPPs, compared to Rs 200 from coal and Rs 50 from wind and solar sources.
- Pakistan pays Rs 370 billion in capacity payments to three plants operating at minimal load factors, worsening economic strain.
- Favorable IPP terms from the 1990s, including guaranteed capacity payments, have created unsustainable financial burdens and circular debt.
- Dr. Ejaz urges eliminating capacity payments and renegotiating contracts to pay only for electricity used, aiming to reduce costs and improve transparency.
In a recent tweet, former federal minister Dr. Gohar Ejaz revealed alarming data on Independent Power Producers (IPPs) and their financial impact on Pakistan. According to Ejaz, the cost discrepancies in power generation and the burden of capacity payments are significantly inflating electricity prices, causing widespread economic distress among industrial, commercial, and domestic consumers.
Dr. Gohar Ejaz’s Revelations
Ejaz shared a detailed analysis of the costs associated with different types of power plants. He highlighted that the government is purchasing electricity at staggering rates due to the agreements with IPPs. According to the data, the highest electricity unit cost from a power plant reaches Rs 750, while coal power plants average Rs 200 per unit. Wind and solar power costs exceed Rs 50 per unit, despite these renewable sources operating below 20% capacity.
Ejaz emphasized the colossal sums paid in capacity payments, which are the fixed costs paid to power plants irrespective of their actual electricity production. For instance, the government is making capacity payments totaling Rs 370 billion to just three plants running at 15%, 17%, and 22% load factors respectively. This includes Rs 140 billion to one plant, Rs 120 billion to another, and Rs 100 billion to a third, each operating at minimal capacity.
Also Read our earlier story: Pakistan’s Power Crisis: Cancel all IPPs contracts: Dr. Gohar Ijaz
The IPP Issue: Historical Context
Pakistan’s energy sector has been grappling with issues related to IPPs for decades. The chronic problem stems from the agreements made in the 1990s, which included favorable terms for IPPs, such as guaranteed capacity payments and high tariffs. These agreements were intended to attract foreign investment in Pakistan’s power sector during a time of severe energy shortages.
However, these contracts have led to an unsustainable financial burden. The guaranteed capacity payments mean that the government must pay IPPs regardless of whether their plants are producing electricity. This has resulted in the government paying huge sums for electricity that is not being utilized, exacerbating the country’s circular debt problem.
For instance, the government is making capacity payments totaling Rs 370 billion to just three plants running at 15%, 17%, and 22% load factors respectively. This includes Rs 140 billion to one plant, Rs 120 billion to another, and Rs 100 billion to a third, each operating at minimal capacity.
Financial Implications
Ejaz’s data indicates that the total payments to IPPs amount to Rs 1.95 trillion, with an additional Rs 160 billion under verification. This immense financial strain has several repercussions:
– Increased Electricity Bills: Consumers are facing exorbitant electricity prices, which are impacting their cost of living and operational costs for businesses.
– Economic Distress: High electricity costs are causing economic hardship, reducing industrial competitiveness, and contributing to inflation.
– Circular Debt: The payments to IPPs are a significant factor in Pakistan’s circular debt, a long-standing issue where the government owes money to power producers, who in turn owe money to fuel suppliers.
Proposed Solutions
Ejaz advocates for a fundamental shift in how the government deals with IPPs. He suggests eliminating capacity payments and adopting a pay-for-what-you-use model, treating IPPs as merchant plants. This approach would entail purchasing electricity only from the cheapest suppliers, thereby reducing overall costs.
Additionally, Ejaz notes that 80% of IPPs are owned by Pakistanis, with 52% owned by the government and 28% by the private sector. He argues that renegotiating these contracts and addressing issues of corruption, mismanagement, and incompetence could significantly lower electricity costs.
Also Read: Call for Overhaul of IPP Contracts
Conclusion
The revelations by Dr. Gohar Ejaz bring to light the urgent need for reform in Pakistan’s power sector. The current system, characterized by exorbitant capacity payments and high electricity costs, is unsustainable and detrimental to the nation’s economy. Addressing these issues requires a comprehensive overhaul of IPP agreements, prioritizing efficiency, transparency, and cost-effectiveness.
By tackling the root causes of these financial burdens, Pakistan can move towards a more stable and affordable energy future. The call to action from Ejaz underscores the necessity for collective efforts to renegotiate and restructure these contracts, ensuring that the nation’s energy sector serves the interests of its people and economy.
