‘Landscaping IPPs in Pakistan’
Government’s IPP capacity expansion plan likely to worsen circular debt crisis: IPS’ study
The government aims to expand power generation capacity by adding 7,500 MW by 2034 and extending independent power producer (IPP) licenses, potentially worsening the circular debt crisis in the sector. In FY 2022-2023, capacity payments to 17 of the 100 IPPs with a combined capacity of 12,847 MW reached Rs472.12 billion, while heavy interest payments to nine notable IPPs amounted to Rs133.5 billion. In some cases, interest payments exceed both capacity and electricity purchase prices.
With the current installed capacity of 45,000 MW surpassing peak demand of around 30,000 MW, further expansion and license renewals risk increasing financial obligations. Therefore, the government should adopt a balanced energy strategy, focusing on fiscal sustainability and reassessing both capacity expansion and IPP license renewals.
These findings were part of a major research study by the Institute of Policy Studies (IPS) on IPPs presented during a session titled ‘Landscaping IPPs in Pakistan’ held at IPS on September 11, 2024. The findings were presented by Muhammad Wali Farooqi, research officer IPS, while the session was addressed by Khalid Rahman, chairman IPS, Ameena Sohail, energy advocate and senior research associate IPS, Asad Mahmood, renewable energy and energy efficiency expert, and Mirza Hamid Hasan, former federal secretary water and power.
The study noted that the National Electric Power Regulatory Authority (NEPRA) has issued a total of 232 generation licenses to IPPs, with only 100 of these commissioned by the Private Power & Infrastructure Board (PPIB) contributing 24,958 MW to the national grid. Notably, 53% of this capacity, i.e., 13,106 MW, is provided by just ten IPPs, representing 30% of Pakistan’s total capacity.
Two major IPPs, KAPCO and HUBCO, will see their licenses expire in 2024 and 2025 respectively, potentially reducing capacity by 2,930 MW. These IPPs have aged infrastructure and rely on fossil fuels. Given the previous trend of renewing licenses, the study recommended that no new negotiations be conducted with IPPs once the current power purchase agreements expire.
The government is planning to add 7,500 MW by 2034, as indicated by PPIB, out of which 916 MW will be introduced in the system by the end of 2024 through two newly constructed mega projects Suki Kinari Hydel Power Project on River Kunhar with a capacity of 884 MW and a bagasse power plant by Shah Taj Sugar Mills with a capacity of 32 MW.
The findings suggest that the focus should shift to upgrading transmission systems, broadening the consumer base, and renegotiating terms for government-owned plants to reduce capacity payments and regulate interest payments. Moreover, there is a need for a balanced approach to energy strategy, emphasizing fiscal sustainability and a reconsideration of capacity expansion plans.
Endorsing this, Ameena Sohail emphasized that peak demand does not fully exhaust the available power. She recommended optimizing this capacity by releasing excess and reducing capacity payments. For IPPs with expiring agreements, she suggested encouraging them to find their own buyers instead of renewing licenses, which could streamline the sector and reduce financial strain on the government.
Asad Mahmood highlighted the absence of audits for IPPs and called for implementing rational profit structures for the private sector. He stressed that improved oversight and a well-structured incentive system are essential for ensuring transparency and efficiency in the energy industry.
Khalid Rahman noted that, despite widespread polarization, there is a strong consensus on the challenges and financial issues related to IPPs. This underscores the need for a coordinated approach to address these concerns effectively and the significance of the research study.
The speakers criticized outdated market analysis, ineffective law enforcement, exaggerated capital investment, and the adverse effects of privatization. They stressed the importance of developing restorative justice, managing interest payments, addressing profit exploitation, and reforming tax and banking systems for a sustainable energy sector. The experts also highlighted the need for the government to develop a plan to stimulate demand, which could help broaden the consumption base.
In his closing remarks, Hamid Hassan emphasized the necessity for a multi-step approach to resolve the issue of IPPs. This will require a complete system overhaul, including the establishment of effective scrutiny and monitoring mechanisms, which are currently lacking. He pinpointed flawed planning, poor policy implementation, and other systemic issues as core problems and called for the formation of an expert commission to tackle these challenges.
