In a strong response to the government’s handling of private sector power generators, ten Independent Power Producers (IPPs) established under the Generation Policy 2002 have approached Prime Minister Shehbaz Sharif with a set of conditions to terminate their sovereign contracts. This move comes as frustration mounts over claims that capacity payments to IPPs have made consumer tariffs unaffordable.

In a joint letter addressed to the Prime Minister, the IPPs—comprising Pakgen Power, Nishat Power, Nishat Chunian, Sapphire, Hubco Narowal, Kohinoor Energy, Liberty FSD, Halmore, Laraib, and Orient Power highlighted ongoing discussions leading up to negotiations aimed at converting their Power Purchase Agreements (PPAs) from a “take or pay” to a “take and pay” model.

The Special Assistant to the Prime Minister on Power, Muhammad Ali, confirmed that negotiations with the 2002 Policy IPPs would commence on Monday.

While the IPPs acknowledged that the current consumer tariff is high, they argue that attributing the primary cause solely to capacity payments is misleading. They provided several key points to support their stance:

• The average generation tariff stands at Rs 27/kWh, while the average consumer tariff exceeds Rs 60/kWh—an increase attributed to substantial taxes and transmission and distribution costs, as well as losses and theft.
• Capacity payments for all IPPs amount to Rs 17/kWh of the generation tariff, with more than half of that going to government-owned IPPs.
• Power demand has dropped over 22% in the past two years, leading to a PKR 5/kWh increase in capacity tariffs.
• The exchange rate has devalued significantly over the last three years, resulting in over a 40% increase in capacity payments.

Former Prime Minister Shahid Khaqan Abbasi recently noted that it is the weak economy, rather than the IPPs, that has harmed the sector.

Sources indicated that the Task Force on Power Reforms, led by Minister for Power Sardar Awais Khan Leghari, aims to terminate “take or pay” contracts with the 2002 Policy IPPs and replace them with new “take and pay” agreements. However, the IPPs argue that such a proposal is financially unviable and could lead to their bankruptcy, as they would be required to cover fixed costs without a guaranteed purchase agreement from the government.

The IPPs emphasized that the current approach is discriminatory, particularly as the government has recently issued a new tariff indexed to the US dollar at a 14% return, which still includes a “take or pay” mechanism.

In their letter, the IPPs outlined conditions for terminating their contracts, including:

• Payment of all past due amounts at the time of termination.
• Termination of all “take or pay” contracts to eliminate capacity payments.
• Permission to sell their power to private buyers while utilizing the existing transmission and distribution system.
• Continued supply of LNG from SNGPL to IPPs reliant on this fuel until private importation is allowed.

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The IPPs warned that forced renegotiations of sovereign power contracts could severely damage the privatization process and investor confidence. They stressed that any meaningful reduction in consumer tariffs would require increased power sales, significant reforms in the transmission and distribution system, and a reduction in the heavy tax burden.

The IPPs have requested an urgent meeting with all stakeholders to reassess the government’s strategy and consider their proposed actions.