Power struggle

Among the many things that Pakistan has failed at, failing to get its power policy right tops the list. The now-viral IPP contracts started as a solution to the country’s power crisis when depleting gas resources forced the move to coal-fuelled power plants to pull the nation out of the hour-long loadshedding mess – leadint to the era of ‘capacity payments’. What failed to be factored in then was the unavoidable cost of a volatile geopolitical situation and an unstable domestic political environment, which eventually made these energy deals unsustainable. As global events led to a sharp depreciation of the rupee, the price of imported LNG and coal (the lifeline of these power plants) became even more expensive, adding more strain on the already weak Pakistani economy. To offset the price, the two consecutive governments of Nawaz’s brother Shehbaz Sharif started increasing power prices periodically, which resulted in an increase in capacity payments and ballooned electricity bills for consumers. This increase has led the country to a point where its power prices have now become the highest in the region, with both commercial and residential consumers speaking up about their inability to cover the high cost. This started a month-long debate on the future of IPP contracts.

Weeks after the grand debate on IPPs, Pakistan has started to witness some positive signs. On Thursday (October 10), PM Shehbaz Sharif announced that five IPPs have agreed to ‘voluntarily’ end their power agreements with the government. The PM now hopes to save Rs114 billion. Electricity prices too will see a cut of Rs8-10. To its credit, the Pakistani government has handled the issue with maturity and has successfully ignored the political noise around it. B-to-G contracts carry sovereign guarantees where the state acts as a guarantor. Reneging on its commitments poses a great risk for a country, hurting investor confidence. At this crucial time, when foreign investors are showing keenness to finally place their bets on Pakistan, even the slightest fault in the renegotiation process could hit the country hard. In that regard, the fact that the Shehbaz Sharif government successfully brought five IPPs to the negotiation table to mutually decide to terminate the agreements is a big achievement.

Real relief, however, cannot come on the back of short-term or emergency measures. It requires a course correction to maintain stability. Pakistan’s energy infrastructure is in a mess. While over the years the government managed to increase its generation capacity, it has failed to build a robust distribution network. Today, the country has the capacity to meet the nation’s power needs, but it has no mechanism to illuminate all nooks and corners of the country. The second important thing for the government is to tap into the solar energy boom. Authorities have to introduce a mix of affordable solutions to allow the people to have access to affordable and uninterrupted power.