5 IPPs ready to terminate power purchase agreements

In an expected move, five IPPs that were established under Pakistan’s 1994 and 2002 Power Policies have agreed to end their long-term Power Purchase Agreements (PPAs). These contracts originally allowed the IPPs to sell electricity to the government at predetermined rates. However, the decision to terminate the agreements is part of a broader effort by the government to restructure the power sector and reduce the financial burden on the state.

A top official from the Power Sector Task Force confirmed that the agreements are in the final stages of termination. Once the remaining details are sorted out, the IPPs will sign the official contract termination documents. These IPPs will no longer be paid for future electricity production, but they will receive payments for past dues—excluding any interest on the delayed payments.

Financial Implications for the Government

One of the key financial concerns in the power sector has been the issue of capacity payments—fees that the government must pay to IPPs regardless of whether the electricity is consumed. These payments have significantly contributed to the country’s financial challenges in the energy sector.

According to the official, Pakistan currently owes the five IPPs between Rs 80 billion and Rs 100 billion in past capacity payments. Negotiations are ongoing to finalize the exact size of these dues. The government hopes that by ending these PPAs, it can save up to Rs 300 billion in capacity charges over the next three to ten years.

This move will result in direct relief to consumers, with electricity tariffs expected to decrease by 0.60 paisa per unit, translating to savings of Rs 60 billion annually.

Future of the Power Sector

These five IPPs were operating under the Build, Operate, Own, and Transfer (BOOT) model, which means their assets will eventually be handed over to the government. However, IPPs that were not established under the BOOT agreements will continue to remain with their private owners.

In addition to these five IPPs, the government has identified 17 more IPPs that were formed under the same 1994 and 2002 policies. These IPPs are expected to be shifted to a "take-and-pay" model, which will further reduce costs. Under this model, the government will only pay for the electricity that is actually used, as opposed to paying for capacity that goes unutilized.

Capacity Charges and Consumer Relief

One of the biggest burdens on Pakistan’s power sector is the capacity charges, which are paid to IPPs even when their electricity is not being consumed. By renegotiating and terminating these agreements, the government expects to provide some financial relief to consumers.

In total, the termination of these agreements is expected to save Rs 300 billion in capacity charges. This will lead to a reduction of electricity costs for consumers, lowering prices by 0.60 paisa per unit, and saving the public Rs 60 billion annually.

Furthermore, the official noted that as the Competitive Trading Bilateral Contract Market (CTBCM) is established in the next 1.5 to 2 years, IPPs will have the ability to sell electricity at market-based rates directly to consumers, instead of relying on fixed, government-backed contracts.

Conclusion

The termination of Power Purchase Agreements with five IPPs represents a significant shift in Pakistan’s power sector. The move aims to alleviate the financial burden of capacity payments on the government and provide relief to consumers by lowering electricity tariffs. Although negotiations are still ongoing, the overall financial benefits could be substantial, with savings of up to Rs 300 billion expected over the next few years. The future of Pakistan’s power market is also likely to shift towards a more competitive, market-driven system as the country works towards establishing the CTBCM.

FAQs About the IPP Agreement Termination

Q1: Why are the Power Purchase Agreements being terminated?

The agreements are being terminated to reduce the financial burden on the government caused by high capacity payments and to shift to a more efficient, competitive power market.

Q2: How much does the government owe the five IPPs?

The government owes the five IPPs between Rs 80 billion and Rs 100 billion in past capacity payments, and these dues are currently under negotiation.

Q3: How much money will the government save by terminating these agreements?

The government expects to save up to Rs 300 billion in capacity charges over the next 3 to 10 years.

Q4: Will consumers benefit from these terminations?

Yes, consumers will benefit from reduced electricity costs, with prices expected to decrease by 0.60 paisa per unit, resulting in annual savings of Rs 60 billion.

Q5: What is the future of Pakistan’s power market?

The government is working towards establishing a Competitive Trading Bilateral Contract Market (CTBCM), where IPPs can sell electricity directly to consumers at market-based rates.