KEY POINTS
- Pakistan’s electricity consumers are paying billions of rupees annually to private power plants that barely produce electricity.
- Capacity payments, fixed payments to Independent Power Producers (IPPs), are a major driver of high tariffs and circular debt.
- The rise of rooftop solar reduces grid demand but shifts costs to households relying on the national grid.
- Reform efforts aim to move from rigid take-or-pay contracts to performance-based arrangements, but challenges remain.
Pakistan’s electricity consumers face a paradox: they are paying for private power plants that are underutilised or idle, while rooftop solar growth shifts cost to those still reliant on the national grid.
The burden stems from the structure of power contracts, known as Power Purchase Agreements (PPAs), and fixed as well as guaranteed capacity payments that too in dollar terms that the government must honour regardless of actual electricity production.
The Capacity Payment Conundrum
Capacity payments are fixed fees paid to IPPs for being available to supply electricity, irrespective of output. Over the past five years, Pakistan has spent Rs 6 trillion in such payments, according to the Profit by Pakistan Today.
These payments are a major component of rising electricity tariffs and the circular debt crisis, which now exceeds Rs 2.3 trillion.
Expert Critique
A report by the Centre for Research and Security Studies (CRSS) highlights that “deliberate non-use or under-utilisation of the most efficient power plants … while running highly inefficient, dated power plants … continue to worsen the situation,” according to Dawn.
The Institute of Strategic Studies Islamabad (ISSI) also notes that some plants were commissioned at costs up to four times higher than similar projects internationally, increasing the financial strain on consumers, as per ISSI website.
The Solar Boom and Cost Shifting
Rooftop solar adoption has lowered grid demand but does not reduce fixed payments to IPPs. Local media projections indicate that moving to performance-based “take-and-pay” agreements could save consumers Rs 605 billion annually, according to The Nation.
Consumer Impact
According to NEPRA, some coal plants claimed Rs 69 billion in capacity payments in a single quarter despite minimal production, Express Tribune reported.
Capacity payments can account for nearly a third of a typical household’s electricity bill, while industrial users face even higher costs, undermining competitiveness.
Reform Efforts
The government has halted payments to 18 IPPs totalling 4,267 MW while renegotiating contracts to transition to take-and-pay arrangements, according to the Profit.
Analysts emphasise that true relief for consumers depends on converting rigid contracts to performance-based models, retiring inefficient plants, improving transparency, and fairly integrating rooftop solar.
Global Implications
Pakistan’s experience illustrates that private energy investment can attract capital but may also shift costs disproportionately onto consumers if contract terms are inflexible.
Emerging economies considering large-scale private IPP models must balance investor returns with consumer protection to ensure equitable, sustainable access to electricity.
