IPP Agreements: The Economic Injustice Inflicted on Electricity Consumers

Economic Analysis: Muhammad Sarfraz Alam

Pakistan’s energy crisis is not simply a shortage of electricity. It is the result of decades of flawed policies, weak regulation, financial mismanagement and power-sector agreements that have shifted excessive financial risks from investors to consumers and taxpayers.
Independent Power Producers (IPPs) played an important role in expanding Pakistan’s generation capacity and attracting private investment under the power policies of 1994, 2002, 2006 and 2015. At a time when the country urgently needed electricity, encouraging private investment was understandable. The problem was the structure of many long-term agreements, which guaranteed payments and returns while leaving consumers to bear much of the financial burden.
The Burden of Capacity Payments
The most controversial feature of the IPP system is the capacity payment mechanism. Under such arrangements, the government may be required to pay for the availability of generation capacity even when electricity from a plant is not actually required or generated.
In simple terms, it is like paying the full annual rent for a machine even when it is used only half the time. Pakistan’s power sector has faced a similar problem on a much larger scale.
Capacity payments reportedly reached around Rs2.1 trillion in fiscal year 2024. These costs ultimately find their way into electricity tariffs. Consumers therefore pay not only for the electricity they actually use but also for generation capacity that may remain idle or underutilised.
This raises a fundamental question: why were such large long-term financial guarantees approved without sufficiently accurate projections of electricity demand, economic growth, industrial production and consumers’ purchasing capacity?
Were Contracts Structured in the Public Interest?
Pakistan offered IPPs significant incentives, including guaranteed returns, sovereign guarantees and dollar-linked payments. These measures helped attract investment but also exposed the power sector to currency depreciation, imported fuel costs and other financial risks.
It would be unfair and legally questionable to accuse investors of wrongdoing merely because they received payments under legally approved contracts. If agreements were properly signed under government policies, investors have a legitimate right to enforce them.
The deeper question is therefore: Who designed these contracts, who approved them, and who was responsible for protecting the public interest?
The responsibility cannot rest exclusively with IPPs. Successive governments, policymakers and regulatory institutions must also be examined for designing, approving and supervising agreements that created substantial long-term liabilities.
NEPRA and the Question of Accountability
Concerns raised by parliamentary forums regarding capacity payments to non-operational plants, tariff determination and the transparency of regulatory decisions have intensified the debate over the role of the National Electric Power Regulatory Authority (NEPRA).
Regulatory independence is essential, but independence cannot mean freedom from accountability. Parliament, audit institutions and the public have a legitimate right to know how tariffs were calculated, what the actual project costs were, how profits were determined and whether consumers received value for money.
Payments to Non-Operational Plants
Perhaps the most troubling issue is the payment of substantial capacity charges to plants that are non-operational or underutilised.
Every IPP should undergo a comprehensive forensic and financial review covering its original investment, debt exposure, approved profit margin, capacity utilisation, fuel costs and total payments recovered from consumers.
Such scrutiny is not an attack on private investment. Rather, it is necessary to establish whether the public is paying a reasonable price for electricity and whether contractual obligations remain economically justified.
Government Savings: A Positive but Incomplete Reform
The government has reported that negotiations and revisions of IPP agreements are expected to generate approximately Rs1.571 trillion in future savings. According to government figures, termination of five IPP agreements could save Rs411 billion, revisions involving eight bagasse-based plants Rs238 billion, and tariff reductions for 14 thermal power plants another Rs922 billion.
These are substantial figures. However, the critical question is whether these savings will actually reduce electricity bills.
If government liabilities decline while consumers continue paying unaffordable tariffs, the reform will remain incomplete. The government should publicly disclose how much has been saved, how those savings affect public finances and what proportion will ultimately benefit electricity consumers.
Circular Debt: A Broader Structural Problem
The IPP issue is closely linked with Pakistan’s circular-debt crisis, which reportedly stood at approximately Rs2.39 trillion by June 2024.
However, IPPs alone cannot be blamed. Electricity theft, poor bill recovery, transmission and distribution losses, an outdated grid, political interference and weak governance have also contributed significantly.
Therefore, renegotiating IPP agreements will not by itself solve the power crisis. Unless theft is controlled, recoveries improve and system losses decline, financial savings could once again disappear.
Transparency Is the Real Test
The greatest injustice to consumers is perhaps the lack of complete transparency. Citizens have the right to know what contracts were signed in their name, what tariffs were guaranteed, what profits were approved and how capacity payments were calculated.
Pakistan should establish a Public Contract Dashboard for every IPP, disclosing contract duration, original investment, tariff, capacity payments, actual generation, fuel costs, total payments, profits and outstanding government liabilities.
If consumers can see every charge on their electricity bills, billions and trillions of rupees paid from public resources should also be open to public scrutiny.
The Way Forward
Pakistan does not need a confrontation with private investors or unilateral cancellation of every existing contract. It needs transparent, legally sound and mutually agreed reform.
Future power projects should be awarded through genuine competitive bidding rather than expensive cost-plus arrangements. Solar, wind, battery storage and indigenous energy resources should receive greater priority. New generation capacity required up to 2030 should be procured at the lowest possible cost through transparent competition.
A gradual transition from Take-or-Pay to Take-and-Pay arrangements could also reduce unnecessary financial burdens, provided demand forecasting and the transmission system are substantially improved.
The fundamental principle should be clear: investors have a legitimate right to earn a reasonable return, but excessive and unnecessary risks should not be transferred to the public.
Pakistan needs better contracts, not hostility toward IPPs. Investor confidence and consumer protection are not mutually exclusive. Both can be achieved through competition, transparency, sound economic planning and strong regulation.
The history of IPP agreements offers a crucial lesson: when the state enters into long-term financial commitments, the burden is inherited not only by the government that signs the contract but also by future governments and generations.
The real question is therefore not simply how many contracts can be terminated today. It is why Pakistan should ever again sign agreements in which profits are private while risks are ultimately borne by the public.
True energy reform will come when electricity bills reflect the genuine cost of electricity rather than decades of policy mistakes, unnecessary capacity payments, weak recoveries and governance failures.
Pakistan’s consumers need affordable electricity—but above all, they need a power system in which every rupee collected from them is transparent, justified and accountable.
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The writer and analyst holds an MSc in Economics from the University of Karachi and is a journalist. His articles and analytical pieces are regularly published in newspapers and magazines.