Over the past decade, Pakistan’s power sector has witnessed an alarming surge in capacity payments, escalating from Rs384 billion in FY2017 to a staggering Rs2,142 billion. This increase has been driven primarily by the addition of new independent power producers (IPPs), which have significantly expanded the country’s power generation capacity. However, despite the substantial rise in capacity, average demand remains stagnant at around 13,000 megawatts, leading to an underutilization of available capacity and a subsequent burden on consumers.
In 2015, with a consumption of 13,000 megawatts, the total generation capacity was 20,000 MWs, costing Rs200 billion in capacity payments. By 2024, production capacity soared to over 43,000 MWs, with 23,400 MWs coming from new IPPs. This expansion, coupled with factors such as the massive devaluation of the Pakistani rupee and the hike in global interest rates, particularly the London Interbank Offered Rate (LIBOR) and Karachi Interbank Offered Rate (KIBOR), has resulted in a tenfold increase in capacity payments to Rs2,142 billion.
The capacity tariff for IPPs has also surged from Rs2.78 per unit in 2015-16 to an anticipated Rs18.39 per unit for FY2025. This sharp increase is a direct consequence of the addition of new power plants under the 2015 power policy and the steep depreciation of the rupee from Rs97 to Rs278 against the US dollar. Debt servicing for loans, which primarily funded the new power generation under the 2015 policy, now accounts for Rs1,083 billion of the total capacity payments, adding further strain on consumers.
The government-owned power plants, including RLNG-based, nuclear, and hydropower projects, which generate 52% of the total electricity, are responsible for a significant portion of the capacity payments, amounting to Rs840 billion per annum. On the other hand, the IPPs established under the 1994 and 2002 policies are now receiving significantly reduced payments, with their capacity payments amounting to Rs130 billion due to the capping of the dollar value at Rs148 and the repayment of the majority of their loans.
Given this scenario, the government faces crucial decisions regarding the future of power purchase agreements (PPAs). There is a pressing need to consider altering the PPAs of government-owned plants to convert their dollar-based internal rate of return (IRR) into rupee-based IRR, capping the US dollar value at Rs148, similar to the agreements with IPPs under the 1994 and 2002 policies. Additionally, reducing the capacity payments of government power plants from Rs840 billion to Rs400 billion, including the reduction of return on equity (RoE) from Rs235 billion, could provide substantial relief to the inflation-stricken masses.
Addressing these issues, coupled with efforts to reduce electricity theft, currently at Rs589 billion per annum, and the losses in transmission, distribution, and recovery, could lead to a reduction of Rs4 per unit in the power tariff. Furthermore, diplomatic efforts to reprofile Chinese loans for CPEC projects could provide an additional relief of Rs4 per unit, while ensuring the availability of cheaper electricity from Sindh to Punjab could offer a further reduction of Rs1.90 per unit.
In conclusion, a comprehensive review and restructuring of capacity payments, along with addressing inefficiencies in the power sector, are essential steps toward providing much-needed relief to consumers and stabilizing Pakistan’s energy landscape.
