According to the Economic Survey (2023-24), Pakistan’s power production capacity stands at 42,131 MW – almost double its domestic electricity demand. Yet Pakistan remains the only South Asian country facing chronic power shortages, with load-shedding rampant even in major cities like Karachi. A Bloomberg report revealed that after electricity rates were sharply increased in May 2024 to secure an IMF bailout, powering a home in Pakistan can cost more than renting one.
The incongruity of ample energy supply amid persistent shortages and skyrocketing costs has reignited public criticism of Pakistan’s Independent Power Producers (IPPs), particularly Chinese IPPs under the China-Pakistan Economic Corridor (CPEC). At the heart of the issue are the high “capacity payments” mandated by Power Purchase Agreements (PPAs), which obligate the government to pay the IPPs regardless of electricity consumption or even production. The public has increasingly demanded renegotiation of these agreements, especially with CPEC power projects, to address inflated tariffs and reform Pakistan’s power sector.
Beginnings of Private Power Production in Pakistan
At its inception Pakistan harnessed hydropower, with U.S.-backed projects like the Mangal and Tarbela dams. By the 1980s, rising energy demands outpaced infrastructure capacity, particularly affecting the industrial sector. While Nawaz Sharif’s Pakistan Muslim League-Nawaz (PML-N) spearheaded economic liberalization in Pakistan and introduced the first power private power producer HUBCO, Benazir Bhutto of the Pakistan People’s Party (PPP) is credited with privatization of the power sector. The PPP rolled out the transformative 1994 Energy Policy. Titled “Policy Framework and Packages of Incentives for Private Sector Power Generation Projects in Pakistan,” it aimed to attract foreign investment with World Bank support, spurring the growth of Independent Power Projects.
Highlights of the policy were 15-18 percent dollarized returns on equity, capacity, and energy payments by Pakistan’s Water and Power Development Authority (WAPDA), low taxes, and Foreign Exchange Risk Insurance (FERI) from the state bank. These measures led to $6.5 billion in investments, adding 6,500 MW to the grid through the 19 IPPs commissioned under 1994 policy. The reforms were praised internationally as a model energy policy, even described as “the best power policy in the whole world” by the U.S. secretary of energy while visiting Pakistan in 1994.
By 1998, fulfilling contractual obligations became difficult for the PML-N government. Subsequent policies, like the 2002 Energy Policy, reduced returns to 12 percent and removed bulk tariffs but retained capacity payments. Over time, reliance on fossil fuels and dollar-indexed returns worsened Pakistan’s circular debt. By 2013, the energy deficit peaked at 5,500 MW, with costly imported thermal fuels straining reserves and deepening the sector’s financial crisis.
Enter CPEC
In 2014, the PML-N government facilitated China’s entry into Pakistan’s energy sector through the China-Pakistan Economic Corridor (CPEC), the flagship project of China’s Belt and Road Initiative (BRI) linking Gwadar to Kashgar. Initially valued at $48 billion and later expanded to $62 billion, CPEC was hailed as a “game changer” for Pakistan’s economy. Most investments targeted the power sector, aligning with Nawaz Sharif’s election promise to end electricity shortages.
Of the $62 billion, nearly $35 billion funded 21 power projects, most of them coal-fired, contributing a whopping 6,000 MW to Pakistan’s national grid. However, these projects increased national debt, with financing structures revealing a 75 percent debt-to-equity ratio. Many Chinese IPPs reportedly enjoy exorbitant returns on equity – 27-34 percent – guaranteed by the government, far exceeding the 1994 policy’s 15-18 percent rate.
While these projects addressed some energy deficits, load-shedding persists, even in major cities like Karachi. Critics argue that rather than investments, CPEC power projects burden Pakistan with unsustainable loans and high electricity costs. Despite significant capacity additions, affordable power remains elusive for households and industries, raising questions about the long-term benefits of CPEC’s energy deals.
The PML-N’s electoral promise and soaring energy demands in Pakistan catalyzed China’s entry into Pakistan’s power sector. CPEC signed in 2014 had power generation as one of the key components alongside a network of roads, rails, and business parks. China’s priority was in the connectivity projects, but Pakistan’s government wanted much of the initial CPEC financing to go toward energy. The energy-starved Pakistan under the PML N government was about to add 30,000 MW to the national grid by 2022 and almost 11 projects were commissioned by then, providing well over 6,000 MW to the national grid.
Beijing has poured billions into Pakistan in the past two decades; as a result, Pakistan has the biggest China-funded energy portfolio in the world. AidData, a research institute in the United States, found Pakistan’s debt exposure to Beijing was a whopping $67.2 billion for the period from 2000-2021. CPEC has added almost $26 billion to Pakistan’s government debt. CPEC-related foreign and foreign-supported investments are largely, if not almost exclusively, in the form of loans. This caused a balance of payments crisis in Pakistan.
The government of Pakistan Tehreek-e-Insaf (PTI) Prime Minister Imran Khan is often touted for slowing down the pace of CPEC projects. Khan’s government has been critical of the CPEC project since its inception. While he approached Beijing for a bailout when faced with shrinking FDI, China’s refusal forced Khan to approach the IMF, securing the first bailout worth $6 billion.
During Sharif’s administration, CPEC acquired the status of a larger-than-life economic project. But under Khan, a Cabinet minister was openly critical of CPEC and accused the PML-N of signing unfair contracts with Chinese firms. Khan even established a nine-member committee to evaluate CPEC projects. Some publications like the Singapore Post reported that the Chinese leadership is more comfortable working with the PML-N’s Shehbaz Sharif than Imran Khan.
Chinese IPPs and Pakistan’s Energy Woes
Amid broader debates about CPEC and Pakistan’s financial situation, IPPs have emerged as a lightning rod. The IPP debate in Pakistan is not new, and the media has highlighted it, but criticisms reached new heights as energy prices soared. Last year saw the former caretaker minister and textile lobby leader Gohar Ejaz calling to scrap the IPP contracts, which were responsible for exorbitant electricity prices in Pakistan.
The contracts with IPPs, which also include capacity payments and guaranteed returns, add to the circular debt in Pakistan’s power sector. Ejaz highlighted the capacity payments – fixed payments made to power producers, whether or not the electricity is used – paid in a month to IPPs were costing Pakistan 150 billion rupees (around $540 million) per month. Some power plants in Pakistan have received capacity payments despite generating zero power supply, according to Ejaz. Some plants like Sahiwal power plant and Port Qasim Electric Power Company Limited inflated their set up cost, taking advantage of the Power Purchase Agreements (PPAs) that also allows the power generators to self-invoice. The capacity payments to IPPs represent Pakistan’s third-largest debt obligation after defense and foreign debt.
In an interview with Voice of America, Pakistan’s power minister, Awais Leghari, admitted that contracts with Chinese power producers that built and run power plants in Pakistan need to be revised. Before the CPEC power projects kicked off, Pakistan in 2015 paid 384 billion rupees in capacity payments to the IPPs. However, after the addition of CPEC IPPs, Pakistan’s capacity payments bill has risen to 2124 billion rupees a year. Today, the Pakistan government pays more in capacity payments to the Sahiwal coal power plant – jointly built and owned by two state-owned Chinese power generation companies – than it paid to all of the IPPs combined in 2002..
The energy policies and CPEC power projects did help Pakistan achieve overcapacity in power generation, but they couldn’t deliver on the electoral promises made by Nawaz Sharif. The excessive debt that piled up – especially the Chinese debt – has made Pakistan buy electricity at high tariffs, despite a power surplus. Yet the repeated calls by Islamabad in 2024 to restructure its $15 billion energy debt have fallen on deaf ears in Beijing.