Pakistani industrialists move top court for forensic audit of independent power producers

This file photo, taken on January 24, 2023, shows a power transmission tower in Karachi. (REUTERS/File)

• The development comes amid protests in Rawalpindi, Karachi for reduction in power tariffs and review of Pakistan’s loss-making agreements with IPPs
• Pakistan has highest tariffs in the region and the government is currently on track to pay Rs2.1 trillion to IPPs in capacity payments this fiscal year

ISLAMABAD: The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has moved the Supreme Court of Pakistan for a forensic audit of independent power producers (IPPs), amid a worsening cost-of-living crisis in the South Asian country.
The development comes amid protests in Rawalpindi and Karachi by thousands of supporters of the Jamaat-e-Islami (JI) religio-political party, who have been calling for a review of Pakistan’s loss-making agreements with IPPs, reduction in power tariffs, revocation of additional taxes introduced in the last budget and other similar measures.
Pakistan has the highest electricity tariffs in the region and the government is currently on track to pay Rs2.1 trillion to the IPPs in capacity payments this fiscal year, while circular debt for the energy sector in 2024 reached Rs. 5.422 trillion. At the same time, numerous IPPs are being paid billions despite not producing any electricity.
All IPP contracts for the sale of electricity are structured in two tiers. First, the power purchaser is required to make “capacity payments,” which are required to cover all fixed costs of the IPPs, including debt repayments as well as Operations and Management costs (O&M Costs) and return on equity (RoE) at a stipulated rate, according to the FPCCI.
These capacity payments are to be made by the power purchaser whether or not any electricity is actually purchased. In addition to capacity payments, there is a variable cost attributable to the production of energy above a certain plant capacity factor (normally 60 percent). In other words, if more than 60 percent of a plant’s capacity is utilized for electricity generation, then the relevant IPP is entitled to additional payments. Fuel cost is treated as a pass-through item.
“In the light of the foregoing, it is respectfully prayed that this Honourable Court may be graciously pleased to direct the Government of Pakistan to commission a detailed and thorough forensic audit of all IPPs,” the FPCCI prayed in its petition, urging for the recovery of excess profits earned by IPPs, renegotiating all IPP agreements, and removing anomalies regarding the calculation of Internal Rate of Returns (IRR) on equity investments in all IPP agreements.
The FPCCI referred to a 288-page report by Committee for Power Sector Audit, Circular Debt Resolution and Future Roadmap from 2020, which it said identified more than Rs100 billion worth of excess payments made to IPPs and recommended a number of steps to identify power sector problems, including conducting a forensic audit and the recovery of prior excess payments.
“Till date, no such audit has been conducted nor have any prior excess payments been recovered. More importantly, there is no public explanation for why the 2020 Report remains unimplemented,” it noted. “Pakistan’s power sector is a thus a paradigmatic example of regulatory capture, where year after year the people of Pakistan continue to suffer at the hands of predatory elites.”
The FPCCI said the current situation was not only placing an “unbearable burden” on domestic consumers, but it was also forcing industries to either go off-grid or shut down, while the government was trying to recover higher and higher tariffs from a smaller and smaller pool of customers.
One of the main reasons for Pakistan’s perennial economic crisis is its electricity sector. Pakistan is on track this year to pay approximately Rs3.58 trillion in payments to electricity generating companies. Out of this total amount, approximately Rs2.63 trillion is likely to be recovered, while the remainder will be subsidised by the government. This unrecovered amount will be added to already existing circular debt of Rs5.422 trillion, according to the petition.
Currently, Pakistan has installed generation capacity of 45,885MW. Out of this, 23,860MW (52 percent) has been installed by state-owned entities (both federal and provincial), while the remaining capacity of 22,043MW (48 percent) has been installed by IPPs. It is important to note that as against its installed generation capacity of 45,885MW, the maximum power demand during the summers is around 30,000MW while winter peak loads are closer to 12,000MW.
Notwithstanding this current oversupply of electricity, IPPs are scheduled to add another 7,460MW of electricity by 2032. This capacity is in addition to the 11,550MW due to be added through the government’s own projects (4,320MW Dasu Hydroelectric Project due for completion in 2026, 4,500MW Diamer-Basha Hydroelectric Project due in 2029, 1,530MW Tarbela 5 extension due in 2026, and 1,200 MW Chashma 5 nuclear plant due for completion in 2031.
“It is estimated that during the current financial year (i.e. 2024 – 2025), capacity payments will total Rs2.1 trillion (equal to about 1.9 percent of GDP). In FY 2023-24, 45 percent of capacity payments were made to the government-owned plants, 15 percent to private parties (mostly local) and 40 percent to IPPs set up under CPEC (China-Pakistan Economic Corridor),” the FPCCI said.
“Notwithstanding the trillions being paid as capacity charges to the IPPs, actual capacity utilization of the IPPs is very low. In some cases, IPPs are getting paid billions in capacity charges without generating a single unit.”
It said it was also important to note the exponential manner in which such charges had increased.
“In 2015, an average of 13,000MW electricity was being consumed with capacity charges of Rs200 bn (against an installed capacity of about 20,000 MW). Today, consumption still averages around 13,000MW but capacity charges have increased by more than 1000 percent to Rs2.1 tr (against an installed capacity of about 45,885 MW),” the FPCCI added.