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IPPs contracts and IMF conditionality; Root Causes for Escalating Electricity Prices

OpinionIPPs contracts and IMF conditionality; Root Causes for Escalating Electricity Prices
By: Faraz Ahmed

The recent surge in electricity prices has caused citizens to stage protests and sit-ins nationwide. People have expressed anguish and agony against the government and its authorities by tearing and burning electricity bills. This hike has worsened people’s lives, already surrounded by inflation and unemployment. The hike is so massive that it has compelled people to sell their assets to pay their bills. One of the protestors claimed that he had received an electricity bill beyond his means, and he was left with two options: either to pay the bill or to feed his family.

At first, the government and the interim prime minister assured people that emergency meetings would be called with relevant authorities and measures would be taken to reduce the burden upon ordinary citizens, but later on, they refused to take any measures and blamed the previous government for the surge. So far, no relief has been provided to people, and therefore, citizens, including local traders, have shut down markets across the country’s major cities in solidarity with affectees of the surge.

An analysis of electricity bill suggests that a significant chunk of the bill price include power tariffs collected by the state. Taxes include Fuel Charges Adjustment, Power Holding Limited (PHL) charges, Uniform Quarterly Adjustment, Electricity Duty, Sales Tax, Income Tax, and TVL Fee. The rise in taxes in the month of July has cost a consumer an amount of 50 rupees per electricity unit in the month of August.

The state utilizes a major component of power tariffs collected by distribution companies (Discos) to pay the amount guaranteed to IPPs (Independent Power Producers) under the head of capacity charges. A brief overview of IPPs is that, in 1994, Pakistan faced an acute power shortage crisis. In order to overcome this crisis, the country shaped a private power policy wherein independent or private power producers were contracted to develop new generating capacity. Power Purchase Agreements (PPAs) were signed, which were drafted based on the “take or pay” model. In order to attract foreign investors, some lucrative incentives, such as guaranteeing capacity payments, were inserted. It was agreed that in exchange, IPPs would be compensated with capacity payment paid by the Water and Power Development Authority (WAPDA) every month, whether or not it receives any electricity from the IPP that month. This capacity payment is paid in foreign currency, i.e., USD.

According to the representatives from the Power Division, who revealed on August 29 before the Senate Standing Committee on Power convened to address the pressing issue of unprecedented electric bills, the capacity payment to IPPs for the current fiscal year has reached a total of Rs1.3 trillion. As reported by Dawn, the charges will exceed 2 trillion rupees for the coming fiscal year, which further implies that the citizens will see more rise in electricity tariffs in the coming months.

Moreover, one of the conditions the International Monetary Fund (IMF) placed for the recent bailout package called the Stand-By Arrangement package is the reduction of mounting circular debt from the power sector. Circular debt is a public debt ramped up in the power sector due to subsidies given to power producers and purchasers’ inability to pay their bills. It is also caused by losses incurred by distribution companies because of their inefficiencies in the low recovery of bills. The circular debt of Pakistan stood at 2.63 trillion by the end of the previous fiscal year, and it is charged from end users, i.e., consumers, under the head of PHL charges at a cost of 3.23 per unit for anyone who consumes more than 300 units of electricity. In conclusion, the surge in electricity prices in Pakistan is a multifaceted problem influenced by IPP contracts, capacity charges, IMF conditionality, taxation, and the government’s response to the crisis. Addressing this issue requires a comprehensive approach that balances the need for fiscal responsibility with the protection of vulnerable consumers. Long-term solutions may involve renegotiating IPP contracts, improving the efficiency of the power sector, and finding ways to reduce circular debt without unduly burdening the public.

The writer is an LLM Scholar at the Postgraduate School of Legal Studies, University of Punjab, Lahore. He can be reached at [email protected]

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