THE government expects the ongoing ‘negotiations’ with power producers aimed at revising the terms of sovereign contracts with them to conclude in the next three to six months, a Senate panel was informed on Tuesday. Five IPPs have already terminated their contracts under pressure followed by tariff reduction by eight bagasse-based IPPs. These revised agreements are claimed by the authorities to have resulted in savings of over Rs500bn for the remaining life of these plants and a cumulative generation tariff reduction of Rs1.27 per unit. The IPP owners have privately accused the government team of using high-handed tactics to force them to agree to the new terms to forgo their ‘legitimate’ profits.

The entire exercise is based on the premise that IPPs have made ‘excess’ profits through questionable practices over and above the massive returns on equity built in their generation tariffs. It also anticipates that the downward revision in their tariffs, and elimination or reduction in fixed costs will help the government slash retail electricity prices and the subsidy burden. Indeed, IPPs are a part of the power sector problem that weighs heavily on the economy. But they are not the sole reason why electricity has become unaffordable for most consumers. The contract revisions will provide only short-term relief to the budget and none to end-consumers. This is the fourth time the government is revising sovereign contracts with IPPs since 1997. Each time the same high-handed tactics were used to force them to cut their generation tariffs. None of these contract revisions translated into relief for the consumers. Rather, the violation of sovereign contracts resulted in higher generation costs each time and frightened away investors. The collapsing power sector needs more than this: reduction in system losses and widespread theft; investment in transmission network; a shift towards cheaper renewable energy sources; and privatisation of distribution companies. Short of these reforms, nothing will work to make electricity affordable for households or industry.

Published in Dawn, November 7th, 2024