Rising power tariffs, IPPs cause mass frustration

The debate around 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 alike are pointing fingers, often blaming the current mess in the power sector on capacity payments, which IPPs receive even when they do not produce electricity.

However, power sector stakeholders argue that the situation is far more complex. They believe that a host of factors—including intricate financial mechanisms, policy decisions, global economic forces, and above all, the volatile nature of the Pakistani rupee against the US dollar—are driving the increase in electricity bills.

Speaking to The Express Tribune, stakeholders stressed that while capacity payments are frequently mentioned as a factor, they are only one part of the equation. These payments were originally intended to ensure that power producers maintained energy production capacity, even during periods of fluctuating demand, to prevent blackouts during peak times.

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

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

One of the most alarming aspects of this situation is its deep connection to the broader financial instability facing the country. In the power sector, the already high costs of producing electricity—due to capacity payments and reliance on imported fuels—become even more untenable. When the government tries to keep tariffs low to avoid public outcry, the gap between the cost of production and the price consumers pay widens. "This gap has to be filled somehow," noted another stakeholder, "and even though the government has been paying billions of rupees in subsidies to power sector consumers, more often than not, it's filled by piling on more debt."

Taxes also play a significant role in inflating electricity bills. Tariffs in Pakistan are a complex mix of various charges, including an 18% General Sales Tax (GST) and provincial Electricity Duties of 1.5% to 2%. "These taxes add to the final cost that consumers have to pay, further inflating bills that are already sky-high due to capacity payments and dollar fluctuations," the stakeholders added.

They cautioned that the issue of rising electricity tariffs in Pakistan isn't as simple as blaming IPPs. "The true drivers behind these increases are the result of a complex interplay among theft of electricity, capacity payments, dollar-denominated costs, circular debt, and a tariff structure that hasn't kept pace with the realities of the global economy," one stakeholder explained. "While IPPs are often an easy target in this debate, the truth is that they're just one part of a much larger, much more intricate puzzle."

Power sector stakeholders believe that understanding this broader context is crucial if Pakistan is ever going to find a way out of this crisis. "Scapegoating IPPs will not resolve this problem, as capacity payments to private IPPs make up less than 15% of the total, with the rest relating to government and CPEC IPPs," they argued. "Even if all the older power plants (from the 1994 to 2002 power policy) were shut down, it would only result in a Rs2.40 reduction in the power tariff, which is insignificant."

"It is imperative that the energies and resources currently being spent on this blame game are redirected towards implementing much-needed reforms in the power sector so that the issue of higher bills can be resolved," they concluded.