Introduction

The government of Pakistan has issued a stern warning to Independent Power Producers (IPPs), including wind power plants, regarding a forensic audit if they refuse to renegotiate agreements. This move comes as part of broader reforms aimed at reducing the financial burden on the power sector and ensuring fair pricing for consumers. Negotiations with power producers are expected to save the country approximately Rs1.4 trillion, while three power distribution companies are slated for privatization.

Govt’s Stand on IPPs and Forensic Audits

IPPs Under Scrutiny

Special Assistant to the Prime Minister on Power, Muhammad Ali, informed a parliamentary panel that contracts with six private power plants have been terminated, while others have agreed to revised terms. The new agreements involve rupee-based returns and a hybrid take-and-pay model, reducing government liabilities and increasing efficiency in the power sector.

Annual Payments and Financial Burden

Ali revealed that the government previously paid Rs70 billion to Rs80 billion annually to these power plants. Hubco alone received Rs30 billion per year. The ongoing scrutiny of IPPs aims to alleviate the excessive capacity payments and improve financial sustainability.

Senate Standing Committee’s Review

Senator’s Concerns on IPP Negotiations

During a session of the Senate Standing Committee on Power, chaired by Senator Mohsin Aziz, discussions focused on forensic audits, ongoing IPP negotiations, and the privatisation of power distribution companies.

Allegations of Coercion in Agreements

Senator Shibli Faraz questioned whether IPPs were pressured into renegotiations. Ali dismissed these claims, asserting that no coercion was involved. “We have not pressured or coerced any IPP into agreements. The inefficiencies of power producers became evident during negotiations,” he stated.

Addressing Fuel Inefficiencies and Circular Debt

The committee also examined allegations that IPPs had extracted massive sums through fuel inefficiencies and exaggerated efficiency claims. Ali acknowledged these concerns but cited a lack of expertise and funding as barriers to conducting forensic audits across all power plants.

Privatisation Strategy for Power Companies

Three Power Companies Set for Privatisation

Power Division Secretary Dr. Fakhre Alam Irfan confirmed that the government plans to privatise the following power distribution companies:

1. Islamabad Electric Supply Company (IESCO)
2. Gujranwala Electric Power Company (GEPCO)
3. Faisalabad Electric Supply Company (FESCO)

Financial advisors have been appointed to oversee the privatisation process.

Long-Term Concession Agreements for Other Companies

In addition to privatisation, the government will offer long-term concession agreements for:

1. Hyderabad Electric Supply Company (HESCO)
2. Sukkur Electric Power Company (SEPCO)
3. Peshawar Electric Supply Company (PESCO)

These agreements are intended to attract investment while ensuring improved service delivery.

Power Tariff Reduction and Tax Reforms

Electricity Tariff Reductions

Minister for Power Awais Leghari announced that electricity tariffs for domestic and industrial consumers have been reduced by Rs4 to Rs11 per unit since June 2024. Further reductions are expected as negotiations conclude.

Tax Reduction on Electricity Bills

Leghari confirmed that the government is working to lower taxes on electricity bills. However, any changes must first be approved by the International Monetary Fund (IMF). Discussions with the IMF are scheduled for the first or second week of March.

Renewable Energy and Solar Power Initiatives

Solar Power for Agricultural Tube Wells

The government has allocated Rs55 billion to transition agricultural tube wells in Balochistan to solar power. This initiative is expected to reduce energy costs for farmers and promote sustainable energy solutions.

No New Taxes on Solar Power

Refuting recent speculation, Leghari assured that the government has no plans to impose new taxes on solar power in the near future.

Efforts to Reduce Circular Debt and Improve Market Sustainability

Fixed Return for Power Plants

The government has fixed the return for power plants at 17%, down from the previous 35%, ensuring more reasonable profit margins. Additionally, Rs35 billion paid by the federal government for fuel has been recovered.

Competitive Power Market and ISMO Entity

Ali announced plans to establish an entity named ISMO, which will create a competitive power market and ensure long-term sustainability. The entity will also help manage circular debt by negotiating structured payments over five to seven years.

Consumer Relief and Future Expectations

Gradual Benefits for Consumers

While consumers have yet to see substantial relief, Senate Committee Chairman Mohsin Aziz urged that financial savings be passed on promptly. Adviser Muhammad Ali assured that as negotiations conclude, electricity cost reductions will be gradually reflected in consumer bills.

Expected Electricity Cost Reductions

• Rs4 per unit reduction for domestic consumers.
• Rs11.5 to Rs12 per unit reduction for industrial sectors.

Conclusion

The government’s efforts to renegotiate IPP agreements, privatise power distribution companies, and reduce circular debt are crucial steps toward improving Pakistan’s energy sector. While the reforms are expected to yield significant financial savings, consumers are eager to see tangible benefits in their electricity bills. The coming months will be pivotal in determining the success of these initiatives.

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FAQs

1. Why is the government renegotiating agreements with IPPs?

The government is renegotiating agreements to reduce excessive capacity payments, address inefficiencies, and lower electricity costs for consumers.

2. Which power companies are being privatised?

The Islamabad Electric Supply Company (IESCO), Gujranwala Electric Power Company (GEPCO), and Faisalabad Electric Supply Company (FESCO) are set for privatisation.

3. How much will electricity tariffs be reduced?

Electricity tariffs have already been reduced by Rs4 to Rs11 per unit, with further reductions expected as negotiations conclude.

4. Is the government planning new taxes on solar power?

No, the government has confirmed that there are no plans to introduce new taxes on solar power in the near future.

5. What is ISMO, and how will it benefit the power sector?

ISMO is a newly planned entity designed to create competitive power markets and ensure the long-term sustainability of Pakistan’s energy sector.