Calls for renegotiating the contracts with the Independent Power Producers (IPPs) are getting louder due to the increasing energy tariffs, but even if the contracts are reconsidered, they won’t result in significant savings or affect overall power costs.

Talking to WealthPK, Dr Omer Siddique, a senior research economist at Pakistan Institute of Development Economics (PIDE), recalled that severe energy shortages in the 1990s and early 2000s led to the establishment of IPPs in the country. “These agreements came with long-term financial obligations, but they were crucial in increasing the country’s capacity to generate electricity.”

He pointed out that a large number of these agreements were made with long-term goals, and they contained fixed prices that account for the producers’ operational risks as well as the cost of infrastructure and financing. “As a result, there is little room for these established contracts’ rates to drop significantly.”

He said a number of factors, including fuel pricing, regulatory changes, and variations in market demand, had a substantial impact on the final price of electricity. “Consequently, concentrating primarily on renegotiating IPP contracts may provide temporary relief but not a long-term solution to the problem of growing energy prices.”

Omer suggested that focusing on alternative approaches like increasing grid efficiency, diversifying energy sources, or funding technology advancements would decrease the cost of electricity.
Talking to WealthPK, Shah Jahan Mirza, Managing Director of the Private Power and Infrastructure Board (PPIB), said that reducing the exorbitant rates paid to IPPs, which are based on foreign fuel and exchange rates, was the focus of the discussions nowadays. “This seems a good way to save costs to some extent.”

However, he highlighted that the contracts contained provisions that shielded the IPPs from economic fluctuations. “The nature of the agreements limits the fiscal consequences of renegotiation. Significant rate reductions have been restricted by the set payment arrangements and ensured returns. “Even if some compromises are made, the savings may be insignificant in relation to the overall cost of energy. Therefore, there may not be much expected effect on consumers’ electricity prices.”

Mirza added that the impact of renegotiation on IPPs’ financial health was another important consideration. “Based on the conditions of the original contracts, which were made to ensure an adequate return on investment, these businesses made significant infrastructure investments. 

Lowering contract rates might put their financial sustainability in jeopardy, which could result in lower investments in upcoming projects. This might, therefore, have an adverse effect on the stability of the power supply, which would be bad for both consumers and the energy sector as a whole,” he explained. 

The PPIB managing director explained that contracts that were regularly renegotiated caused investors to lose faith in the country’s economic policies. “This could deter future energy infrastructure investments, which could result in limited supply and price rises.” 

He said that negotiations with IPPs might offer an opportunity to insert clauses that are more adaptable or that support modern energy objectives like boosting the capacity of renewable energy sources or enhancing efficiency. “Even though there may not be much of an immediate cash savings, updating contracts to reflect new energy goals may have significant long-term benefits.”