he government has concluded a significant renegotiation of agreements with 14 independent power producers (IPPs). This is expected to yield savings of Rs 813 billion and reduce the circular debt by Rs 329 billion. The revised agreements mark a shift in the tariff structure, with IPPs agreeing to return Rs 31 billion in excess profits; waive claims for late-payment interest; and transition to a hybrid take-and-pay model. These adjustments, alongside the conversion of return on equity to rupees, mark an important intervention in addressing structural inefficiencies in the power sector.

At its core, the initiative is aimed at stabilising electricity tariffs, which have long burdened the consumers and businesses. The immediate impact is a marginal reduction in power bills, notably the Rs 1.03 per unit relief approved for December 2024 as part of fuel cost adjustments. While this reduction is modest, it signals an attempt to introduce fiscal discipline and operational efficiency in the sector.

By recalibrating IPPs’ returns based on actual power generation rather than installed capacity, the government is shifting away from rigid contractual obligations that have historically led to excessive payouts, contributing to the accumulation of circular debt.

These negotiations are part of a broad strategy adopted by the Task Force on Power Sector Structural Reforms, which deliberated on recommendations from the system operator. The task force renegotiated tariff structures for 10 IPPs under the 2002 Power Policy and four IPPs under the 1994 Power Policy.

Negotiations with three IPPs — Laraib Power Limited, Orient Power Company and Halmore Power Generation — are still in process. Additionally, the system operator has recommended terminating one IPP under the 1994 policy and incorporating KAPCO into the national grid.

One of the most consequential aspects of the new framework is the adoption of the hybrid take-and-pay model, which links IPP payments to actual energy generation rather than guaranteed capacity payments. This shift ensures that fixed operations and maintenance costs are reimbursed based on actual expenditures rather than assumptions. In practical terms, consumers will no longer bear the financial burden of idle capacity.

The dispute over excess savings by IPPs has also been addressed through a structured arbitration process, leading to the recovery of Rs 31.65 billion by the power purchaser. Simultaneously NAB and NEPRA investigations into abnormal profits have been closed.

While these measures mark a necessary course correction, they do not represent a comprehensive solution to the sector’s underlying challenges. The circular debt crisis remains a pressing concern. Without deeper structural reforms, any fiscal relief achieved through renegotiation could prove temporary.

The government must now ensure that these agreements translate into long-term sectoral stability by enforcing payment discipline, improving transmission infrastructure and addressing inefficiencies within distribution companies. The exclusion of lifeline consumers and K-Electric customers from the recent fuel cost adjustment relief raises concerns about equitable tariff reductions, an issue that needs to be rectified in future adjustments.

By recalibrating the IPPs’ returns based on actual power generation rather than installed capacity, the government is shifting away from rigid contractual obligations that have historically led to excessive payouts and contributed to the circular debt. 

The underutilisation of hydro and nuclear energy also presents an opportunity for cost-effective power generation. Nuclear energy accounted for 26.48 percent of the energy mix in December 2024. Further investment in this sector could provide a stable and low-cost alternative to fossil fuel-based power. The non-functioning Neelum-Jhelum hydropower project highlights the risks associated with over-reliance on specific energy sources, reinforcing the need for diversified energy investments.

Beyond renegotiating IPP contracts, the focus should be on attracting industrial consumers back to the grid by offering service-level agreements that ensure reliability. The recent initiative directing distribution companies to sign SLAs with captive power producers is a step in the right direction, as it mandates penalties for supply disruptions and sets clear service quality benchmarks. Enforcement remains key.

Distribution companies must be held accountable for maintaining voltage and frequency stability, ensuring planned outages remain within prescribed limits and investing in infrastructure upgrades to improve system reliability. Without these commitments, industrial consumers will continue to seek alternative energy solutions, exacerbating the strain on the formal power sector.

The task ahead is not just about immediate financial restructuring but also about ensuring the sustainability of Pakistan’s power sector. The government must institutionalise transparent contract enforcement mechanisms to maintain investor confidence while keeping consumer interests at the forefront.

The focus should shift toward long-term energy security by prioritising low-cost, indigenous energy sources and reducing dependence on expensive imported fuels. Simultaneously, public discourse around tariff adjustments needs to be better managed to prevent misinformation from undermining consumer trust in these policy measures.

What happens next will determine whether these reforms lead to lasting improvements or remain a stopgap measure. If successfully implemented, the renegotiation with IPPs could set a precedent for more rational agreements in the future, ensuring that energy affordability, fiscal responsibility and investment viability are aligned.

A failure to address governance challenges in distribution and transmission could undo much of the progress made. The path forward requires unwavering commitment to financial discipline, transparency and a sector-wide transformation that prioritises efficiency over short-term political considerations.

The writer is an associate research fellow at Sustainable Development Policy Institute and head of its Centre for Private Sector Engagement. He can be reached at ahad@sdpi.org. The article doesn’t necessarily represent the views of the organisation.