Pakistan Renegotiates Power Contracts

By Gibran Naiyyar Peshimam and Ariba Shahid

KARACHI (Reuters) – Pakistan is renegotiating contracts with independent power producers to rein in “unsustainable” electricity tariffs, as households and businesses bear the burden of soaring energy costs.

Rising power tariffs have stirred social unrest and shuttered industries in the $350 billion economy, which has contracted twice in recent years due to record-high inflation.

Awais Leghari, head of Pakistan’s Power Division, stated in an interview, “The existing price structure of power in this country is not sustainable.” He emphasized that discussions between power producers and the government are underway.

Leghari noted that all stakeholders would need to compromise, aiming for changes to contracts without undermining business sustainability, and stressed the urgency of these negotiations.

Faced with chronic shortages a decade ago, Pakistan approved numerous private projects by independent power producers (IPPs), mostly financed by foreign lenders. These incentivized deals included high guaranteed returns and commitments to pay for unused power.

However, an ongoing economic crisis has reduced power consumption, leading to excess capacity that the country still has to pay for. To mitigate this, the government has incorporated fixed costs and capacity payments into consumer bills, inciting protests from domestic users and industrial organizations.

Power sector sources indicated proposed changes include reducing guaranteed returns, capping dollar rates, and eliminating payment for unused power. Local media reported that 24 conditions have been suggested for transitioning to a take-and-pay model.

Leghari confirmed that no new draft agreements or specific demands have been made to power companies, asserting that discussions would occur in a civil manner and contractual obligations would be maintained.

The viability of the energy sector is crucial for Pakistan’s current negotiations for a $7 billion bailout with the International Monetary Fund (IMF), which has highlighted the need to revisit existing power deals.

Progress in these discussions has been slow, but Pakistan has committed to ceasing power sector subsidies and is negotiating debt reprofiling with China.

Leghari acknowledged that current prices are not affordable for domestic or commercial consumers, adversely affecting growth as power prices are no longer regionally competitive, undermining exports. He aims to reduce commercial rates from about 28 cents to 9 U.S. cents per unit.

($1 = 278.45 Pakistani rupees)