Minister says Pakistan renegotiates energy deals to cut costs

Energy costs burden the economy
Energy Minister says current costs are ‘unsustainable’
The minister says no specific demands have been made yet

KARACHI, Sept 7 (Reuters) – Pakistan will renegotiate deals with independent power producers to curb “unsustainable” electricity tariffs, the power minister said, as households and businesses buckle under the weight of rising energy costs.

Rising electricity rates have sparked social unrest and led to the closure of many industries in a $350 billion economy that has shrunk by half in recent years as inflation has hit record highs.

“The current energy pricing structure in the country is unsustainable,” Awais Leghari, a federal minister in charge of Pakistan’s Energy Department, told Reuters in an interview on Friday.

He said discussions were ongoing between energy producers and the government because “there is a clear understanding on both sides that the status quo cannot be maintained.”

Leghari stressed that all stakeholders would have to “give in at some point” – but without completely compromising the company’s sustainability – and that this had to happen “as quickly as possible”.

Faced with chronic shortages, Pakistan approved dozens of private independent power producer (IPP) projects a decade ago, financed mostly by foreign lenders. The deals were encouraged by high guaranteed returns and commitments to pay even for unused power.

However, the long-term economic crisis has caused a significant drop in energy consumption, leaving the country with excess generating capacity to pay for.

Due to a lack of funds, the government included fixed costs and capacity charges in consumers’ bills, sparking protests from home users and industry associations.

Four energy sector sources told Reuters that the contract changes sought included cutting guaranteed returns, capping dollar rates and ending payments for unused energy. The sources asked not to be identified because they were not authorized to speak to the media.

On Saturday, local news outlet Business Recorder reported in a report, citing sources, that 24 conditions had been proposed for switching from a capacity-based model to a take-and-pay model.

Leghari, however, told Reuters that no new draft contracts or specific demands had been officially sent to energy companies, adding that the government would not force them to sign new, weakened contracts.

“We sat down and talked to them in a civil and professional manner,” he said, adding that the government has always maintained contractual obligations to investors, both foreign and local. He said changes to the agreements would be made by “mutual consent.”

Energy sector viability was the subject of a key staff-level pact reached in May with the International Monetary Fund (IMF) on a $7 billion rescue package. An IMF staff report underscored the need to reconsider energy agreements.

Pakistan has already started talks on reprofiling energy sector debt to China, as well as negotiations on structural reforms, but progress has been slow. Pakistan has also pledged to end subsidies to the energy sector.

Leghari said current rates are not affordable for domestic and commercial consumers, and this is negatively impacting economic growth as energy prices are no longer competitive on a regional scale, putting key export sectors at a disadvantage.

He added that the goal is to lower tariff rates to 9 U.S. cents per unit for commercial users from around 28 cents currently.

(1 dollar = 278.45 Pakistani rupees)

Reporting: Gibran Peshimam; Editing: Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.opens a new tab

Purchase of license rights

Ariba Shahid is a journalist based in Karachi, Pakistan. She mainly covers economic and financial news from Pakistan, as well as stories about Karachi. Ariba previously worked at DealStreetAsia and Profit Magazine.