Pakistan terminates power purchase contracts to cut costs, saving £1.13bn

PAKISTAN’S government has ended power purchase contracts with five private companies, including one with the country’s largest utility that should have been in place until 2027, to cut costs, officials said last Thursday (10).

The news confirms comment from power minister Awais Leghari last month that the government was re-negotiating deals with independent power producers to lower electricity tariffs as households and businesses struggle to manage soaring energy costs.

“We studied these agreements and we decided what plants we need and what plants we don’t need,” Leghari said last Thursday, adding the termination of the take or pay agreements will save the nation nearly `411 billion (£1.13bn) in the coming years.

Take or pay is referred to as capacity payments in Pakistan where the government has to pay private companies irrespective of how much of the power they generate is transferred to its grid.

Negotiations have also begun with other power producers to revise their contracts, Leghari said, adding people would soon see the impact in their monthly bills.

“Our aim is to bring the tariff down,” he said.

The need to revisit the deals was an issue in talks for a critical staff-level pact in July with the International Monetary Fund (IMF) for a $7-bn (£5.3bn) bailout.

Earlier last Thursday, prime minister Shehbaz Sharif said Pakistan has agreed with five independent power producers to revisit contracts. He said that would save the country `60bn (£545.6m) a year.

Pakistan’s biggest private utility, Hub Power Company, also said the company agreed to prematurely end a contract with the government to buy power from a southwestern generation project.

In a note to the Pakistan Stock Exchange, it said the government had agreed to meet its commitments up to October 1, instead of an initial date of March 2027, in an action taken “in the greater national interest”.

A decade ago, Pakistan approved dozens of private projects by independent power producers (IPPs), financed mostly by foreign lenders, to tackle chronic shortages.

But the deals, featuring incentives, such as high guaranteed returns and commitments to pay even for unused power, resulted in excess capacity after economic crisis reduced consumption.

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