Key takeaways
- Dollar-indexed 1990s power purchase agreements inflated capacity payments.
- Circular debt had passed Rs5 trillion, spreading liquidity stress across the sector.
- The government moved 17 IPPs to a hybrid take-and-pay model after forensic audits.
- South Africa, India's UDAY and Denmark's community ownership offer reform templates.
- Renegotiation must come with regulatory strength, loss reduction and renewables.
In this Business Recorder column (December 2024), Dr. Ghulam Mohey-ud-din looks at the crisis around Pakistan’s Independent Power Producers and what other countries have done to fix similar problems.
The argument
The roots lie in power purchase agreements signed from the 1990s onward that guaranteed high, dollar-indexed returns. As the rupee weakened and demand fell short of projections, capacity payments ballooned and fed circular debt, which the column puts at more than Rs5 trillion. Unpaid bills cascade through the sector as liquidity crises and payment delays.
The government’s recent agreements with 17 IPPs, moving them to a hybrid take-and-pay model after forensic audits and Senate review, are a start. The author argues that a durable solution needs a wider set of reforms drawn from international experience.
South Africa extended contract terms in exchange for lower tariffs, protecting investor returns while easing costs for consumers. India’s UDAY scheme restructured the debts of distribution companies and tied relief to efficiency targets. Denmark’s community ownership of renewables reduced grid burdens and transmission losses, while Germany’s energy transition and Japan’s efficiency regulations show how to cut fossil-fuel dependence over time.
What needs to change
- Renegotiate power purchase agreements using proven international models.
- Accelerate hydropower, wind and solar to reduce fuel import costs.
- Strengthen NEPRA’s authority and transparency.
- Restructure distribution companies, deploy smart grids and tackle electricity theft.
- Use debt securitisation and dedicated energy funds to clear arrears.
- Invest in demand-side efficiency.