'Status quo can't be maintained': Energy minister confirms talks with IPPs to reduce power rates

Confirming the coalition government's efforts to renegotiate contracts with independent power producers (IPPs) to reduce "unsustainable" electricity tariffs, Energy Minister Awais Leghari said both sides have a clear understanding that the "status quo can't be maintained".

Rising power tariffs have stirred social unrest and shuttered industries in the $350 billion economy, which has contracted twice in recent years as inflation hit record highs.

"The existing price structure of power in this country is not sustainable," Leghari, the federal minister heading Power Division, told Reuters in an interview on Friday.

Leghari stressed that all stakeholders would have to "give in to a certain point" — though without compromising completely on business sustainability — and this would have to be done "as soon as possible".

Faced with chronic shortages a decade ago, Pakistan approved dozens of private projects by the IPPs, financed mostly by foreign lenders. The incentivised deals included high guaranteed returns and commitments to even pay for unused power.

However, a sustained economic crisis has slashed power consumption, leaving the country with excess capacity that it needs to pay for.

Short of funds, the government has built those fixed costs and capacity payments into consumer bills, sparking protests by domestic users and industrial associations.

Four sources in the power sector told Reuters changes to contracts demanded included slashing guaranteed returns, capping dollar rates and moving away from paying for unused power. The sources requested anonymity as they were not authorised to speak to the media.

Energy sector viability was the focus of a critical staff level pact in May with the International Monetary Fund (IMF) for a $7 billion bailout. The IMF's staff report stressed the need to revisit power deals.

Pakistan has already initiated talks on reprofiling power sector debt owed to China as well as negotiations on structural reforms, but progress has been slow. Pakistan has also committed to stop power sector subsidies.

Leghari said current rates were not affordable for domestic or commercial consumers and this was hurting growth because power prices were no longer regionally competitive, putting critical exports at a disadvantage.

He said the aim was to bring tariffs down to 9 US cents per unit for commercial users from about 28 cents currently.

Earlier this week, the minister had signalled that that a "permanent relief" for consumers was on the anvil.

Speaking on Geo News programme "Aaj Shahzeb Khanzada Kay Sath", Leghari said that a detailed review of matters related to IPPs had also been completed, and the nation would soon hear 'good news' in this regard,

However, any one-sided change in IPP contracts is unlikely, as Leghari stated last month that the government could not terminate agreements unilaterally, warning that such a move would create a "Reko Diq-like situation".

In the past 15 years, the country has suffered losses of nearly Rs5,082 billion due to the government's failure to control the menace of circular debt, leading to an annual loss of Rs370 billion.