Govt moves to terminate five IPPs contracts

ISLAMABAD:

In a significant move, the government on Thursday initiated the termination of agreements with five Independent Power Producers (IPPs), a move expected to save Rs411 billion annually and reduce the burden on electricity consumers by Rs60 billion.

The decision was taken during a federal cabinet meeting chaired by Prime Minister Shehbaz Sharif. Addressing the meeting, the prime minister expressed the hope that the termination of these agreements would help lower electricity tariffs.

In the first phase, agreements with Hubco, Lalpir, Saba Power, Rousch Power, and Atlas Power will be terminated. These efforts will not only save consumers Rs60 billion annually but also result in significant savings for the national treasury without any additional payments to the IPPs for outstanding dues.

The prime minister told his cabinet ministers that these five IPPs had voluntarily agreed to end their contracts in the national interest. He lauded their role in setting a precedent for further reforms in the energy sector.

"These five IPPs have played a crucial role in initiating the much-needed public relief," Prime Minister Shehbaz said, adding that the cabinet and the Task Force on Power Sector Reforms deserved praise for its efforts.

Shehbaz emphasised that the country's economy was on the path to recovery. "The national economy is stabilising swiftly," he said. He reiterated the government's commitment to the people, stating that they had fulfilled their promise of providing relief through hard work and dedication.

An official statement from Prime Minister House stated that further reforms in the power sector were being planned, including the review of other IPP agreements which would help gradually lower electricity tariffs.

The Rousch Power, which was established under a Build-Operate-Transfer agreement, would be transferred to the government for privatisation through the Privatization Commission. The other four IPPs would retain ownership, but the government would not make any additional payments post-agreement termination.

Noting a rise in remittances to a record $8.8 billion last quarter, the prime minister expressed gratitude to the overseas Pakistanis for their trust in the government policies. "We are thankful to our hardworking compatriots abroad who continue to send their earnings back to Pakistan," he said.

The prime minister concluded by reaffirming his commitment to fulfilling all promises made to the public and addressing their concerns in the wake of rising inflation. He underscored that inflation, which once exceeded 30%, has now reduced to 6.9%, providing much-needed relief to the people.

The government believes that the termination of the IPP agreements marks the beginning of broader reforms aimed at providing economic relief to the public while ensuring the sustainability of the energy sector.

Power Minister Awais Leghari told a news conference, "We studied these agreements and we decided what plants we need and what plants we don't need."

He added the termination of the take or pay agreements will save the nation nearly Rs411 billion in the coming years.

Take or pay is referred to as capacity payments in Pakistan where the government has to pay private companies irrespective of how much of the power they generate is transferred to its grid.

Negotiations have also begun with other power producers to revise their contracts, Leghari said, adding people would soon see the impact in their monthly bills. "Our aim is to bring the tariff down," he said.

The need to revisit the deals was an issue in talks for a critical staff-level pact in July with the International Monetary Fund (IMF) for a $7-billion bailout.

The Hub Power Company Ltd also said the company agreed to prematurely end a contract with the government to buy power from a southwestern generation project.

In a note to the Pakistan Stock Exchange, it said the

government had agreed to meet its commitments up to Oct 1, instead of an initial date of March 2027, in an action taken "in the greater national interest".

A decade ago, Pakistan approved dozens of private projects by independent power producers (IPPs), financed mostly by foreign lenders, to tackle chronic shortages. But the deals, featuring incentives, such as high guaranteed returns and commitments to pay even for unused power, resulted in excess capacity after a sustained economic crisis reduced consumption.

Short of funds, the government has built those fixed costs and capacity payments into consumer bills, sparking protests by domestic users and industry bodies. Pakistan has begun talks on re-profiling power sector debt owed to China and structural reforms, but progress has been slow. It has also said it will stop power sector subsidies.

With additional input from Reuters