Rising energy tariffs, IPPs cause mass frustration

LAHORE:

The debate surrounding Pakistan’s rising electricity tariffs and the role of Independent Power Producers (IPPs) has sparked widespread public frustration in recent months. Businessmen, policymakers and politicians point the finger, often blaming the current chaos in the electricity sector on capacity payments, which IPPs receive even when they are not generating electricity.

However, energy stakeholders argue that the situation is much more complex. They believe that many factors – including complex economic mechanisms, political decisions, global economic forces and above all, the volatile nature of the Pakistani rupee against the US dollar – are leading to rising electricity bills.

Speaking to The Express Tribune, stakeholders pointed out that while capacity payments are often cited as a factor, they are only one part of the equation. These payments were originally intended to ensure that power producers maintained the capacity to produce power, even during periods of fluctuating demand, to prevent blackouts during peak hours.

“Over time, the fixed nature of these payments has turned them into a financial burden, especially as the cost of generating electricity continues to rise and the dollar has depreciated by nearly 186% from 2013 to 2024,” one stakeholder said. . “Since a significant portion of electricity payments in Pakistan are in dollars, this devaluation has made electricity more expensive to produce, with the cost ultimately being passed on to consumers in the form of higher bills.”

Stakeholders also pointed to rising cyclical debt as a major complicating factor. This debt is the cumulative result of electricity theft in distribution companies (DISCOs), governance issues in generation companies (GENCOs), rising fuel costs, tariffs that do not keep pace with costs and an economic structure that has strained the nation for decades.

One of the most worrying aspects of this situation is its deep connection to the wider financial instability facing the country. In the electricity sector, the already high cost of generating electricity—due to capacity payments and dependence on imported fuels—is becoming even more untenable. When the government tries to keep tariffs low to avoid public outcry, the gap between production costs and the price consumers pay widens. “This gap has to be filled somehow,” noted another stakeholder, “and even though the government is paying billions of rupees in subsidies to consumers of the electricity sector, it is most often covered by piling on more debt.”

Taxes also play a major role in inflating electricity bills. Tariffs in Pakistan are a complex mix of various charges, including General Sales Tax (GST) of 18% and provincial electricity charges of 1.5% to 2%. “These taxes add to the bottom line costs consumers have to pay, further inflating bills that are already sky high due to capacity payments and dollar fluctuations,” the stakeholders added.

They warned that the issue of power tariff hike in Pakistan is not as simple as blaming the IPPs. “The real drivers behind these increases are the result of a complex interplay between electricity theft, capacity payments, dollar costs, cyclical debt and a tariff structure that is out of step with the realities of the global economy,” the stakeholder explained. “While IPPs are often an easy target in this debate, the truth is that they are only one part of a much larger, much more complex puzzle.”

Energy stakeholders believe that understanding this larger context is crucial if Pakistan is ever to find a way out of this crisis. “IPPs paying obfuscation will not solve this problem as capacity payments to private IPPs are less than 15% of the total, with the rest related to government and CPEC IPPs,” they argued. “Even if all the older power plants (from 1994 to 2002) are closed, it would only result in a reduction of Rs 2.40 crore in the electricity tariff, which is insignificant.”

“It is imperative that the energy and resources currently spent on this blame game be redirected towards implementing much-needed reforms in the electricity sector to resolve the issue of higher bills,” they concluded.