Following the National Electric Power Regulatory Authority (Nepra) tariff determination for FY25, discussions have resurfaced regarding capacity payments and profits of Independent Power Producers (IPPs). Capacity payments have risen from Rs16.22 per kWh in FY24 to Rs17.31 per kWh in FY25, sparking claims on social media that IPPs are earning excessive profits and calls for renegotiating power purchase agreements (PPAs) to convert them into take-or-pay or merchant plants.
Government-owned projects account for 52% of installed capacity, with the government’s share making up 49% of the projected capacity purchase price (CPP) for FY25. China-Pakistan Economic Corridor (CPEC) projects contribute 36%, while private projects, including those commissioned under older policies, make up the remaining 15%. Private projects from the 1994, 1995, 2002, and 2006 policies, primarily owned by 40 business groups, are part of ongoing discussions. Following the Power Sector Inquiry Report 2020, 46 IPPs, excluding CPEC projects, signed new PPAs, reducing their capacity payments as their debts were cleared.
The older IPPs, particularly those from the 1994 policy, are nearing retirement, reducing their impact unless their contracts are renewed. These projects have agreed to transition to a business-to-business market once the Competitive Trading Bilateral Contracts Market (CTBCM) is implemented, though its realization is uncertain due to challenges in determining reasonable wheeling costs.
CPEC projects, especially coal power plants indexed to the dollar, significantly impact the CPP, with higher unit costs compared to local coal plants. This results in increased pressure on tariffs and adds financial strain on the government and consumers due to excess capacity.
Renegotiating all IPPs as merchant plants presents challenges, given historical issues with international arbitrations and the impact on future investments. The drafting of PPAs is crucial and complex, requiring expertise often lacking in Pakistan’s bureaucratic circles.
Transparency issues in project selection and tariff ceilings, rather than competitive bidding, have plagued past decisions. There is also a lack of effective monitoring and verification of IPP power supply claims and invoicing, with the Central Power Purchasing Agency-Guarantee (CPPA-G) failing to address these issues.
The 2020 Report identified irregularities in IPP invoicing and PPAs, but comprehensive audits have not been conducted. The inclusion of capacity payments for government-owned projects, a legacy of pre-Nepra tariff settings, remains contentious.
Capacity payments for older, economically unviable plants continue despite their inefficiency, placing a financial burden on the system. While having excess capacity helps maintain balance, it can be financially burdensome and inefficient. Addressing these issues may involve reprofiling debts of newly commissioned projects, expanding the consumer base with new tariff designs, and developing a competitive market to mitigate the impact of capacity payments on consumers.
