Pakistan Seeks to Renegotiate Power Contracts

By Gibran Naiyyar Peshimam and Ariba Shahid
KARACHI (Reuters) – Pakistan is renegotiating contracts with independent power producers (IPPs) to control "unsustainable" electricity tariffs, as households and businesses struggle with soaring energy costs.

Rising power tariffs have sparked social unrest and caused industrial shutdowns in the $350 billion economy, which has contracted twice in recent years due to record inflation.

Awais Leghari, head of Pakistan's Power Division, stated, "The existing price structure of power in this country is not sustainable" in a Friday interview. Discussions between power producers and the government are ongoing, acknowledging that the current status quo cannot continue.

Leghari indicated that stakeholders must make concessions without undermining business viability, emphasizing the need for prompt action.

In response to chronic shortages a decade ago, Pakistan approved numerous IPP projects primarily financed by foreign lenders, featuring high guaranteed returns and agreements to pay for unused power. However, the economic crisis has reduced power consumption, leaving excess capacity that incurs costs.

The government has transferred these fixed costs into consumer bills, leading to protests by domestic users and industrial groups. Reportedly, proposed contract changes include reducing guaranteed returns, capping dollar rates, and eliminating payment for unused power. Four sources in the power sector, who requested anonymity, confirmed these discussions.

A local media outlet reported 24 proposed conditions aimed at shifting from a capacity-based payment model to a take-and-pay model. However, Leghari mentioned that no specific demands have been officially presented, and the government seeks a civil and professional dialogue with power companies, maintaining that contract revisions must be by "mutual consent".

The energy sector's viability is pivotal to a critical pact with the International Monetary Fund (IMF) for a $7 billion bailout, which emphasized the need to revisit power agreements. Pakistan is currently negotiating to reorganize power sector debt owed to China and has also committed to ending power sector subsidies.

Leghari pointed out that current rates are unaffordable for consumers, hindering growth as power prices become less competitive regionally, which negatively impacts vital exports. He aims to reduce tariffs for commercial users from about 28 cents to 9 U.S. cents per unit.

($1 = 278.45 Pakistani rupees)