In Your View, What is the Single Most Important Structural Reform Pakistan Must Undertake to Resolve its Energy Crisis Sustainably? Justify Your Answer.

CSS Current Affairs | Single Most Important Structural Reform to Sustainably Resolve Pakistan’s Energy Crisis

Pakistan’s energy crisis is a recurring CSS Current Affairs topic because it directly affects economic stability, national security, climate commitments, and governance. This question argues that comprehensive power sector governance reform is the single most important step toward ensuring sustainable energy security, eliminating circular debt, and enabling a clean energy transition.

Outline

1-Introduction

2-A bird’s eye view of Pakistan’s energy outlook

3-Overview of restructuring and rationalization of energy mix (IPP contracts) as a structural reform

4-How restructuring and rationalization of energy mix(IPP contracts) is the most important structural reform that Pakistan must undertake to resolve its energy crisis sustainably?

• Ending capacity payments through golden handshakes( one time exit) 
• Escaping from circular debt trap caused by oil-dependent energy generation through redirection of new IPPs toward domestic renewable
• Ensuring beneficial spending from national exchequer through conversion to take-and-pay model for remaining contracts
• Generating energy supply stability through IPPs restructuring leading to immunity from external market shocks
• Improvement of financial distress on power sector by revising the tariff structure  for power purchase from IPPs
• Shift of  IPPs to renewables  leading to low-cost green electricity and diversification of energy mix

5-Conclusion

Answer to the Question

Introduction

The energy crisis is a critical issue in Pakistan. Various factors including unfavourable energy mix, lagging recover bills, capacity payments to IPPs, prioritisation of short term political capital over long-term structural reform , blanket tariff subsidies , cause this energy crises. However, the leading cause is lack of structural reforms in IPP contracts that can be resolved by rationalization and restructuring of energy mix(IPP contracts). By shifting to domestic renewable resources for electricity generation, shifting take-or-pay IPP model to Take-and pay , and ending capacity payments through golden handshakes can provide foundational solution to energy problems in Pakistan. Therefore, energy supply stability and immuniy from external market shocks can be attained through restructuring and rationalization of energy mix.

A bird’s eyeview of Pakistan’s energy outlook

Pakistan has installed capacity of Hydel at 11,368 MW, thermal at 25,937 MW, nuclear at 3,545 MW, and renewables at 5,680, which contribute 24 %,55%, 7%, and 12 % respectively. This makes a total installed capacity of 46,605.In  July-March, FY 2024-25,electricity genration was at 90, 145,in which maximum generation at 41,734 was through thermal resources. Despite such huge installed capacity and electricity generation, maximum supply capacity is around 25,000 MW and peak demand is around 30,000 MW, leading to a shortfall at peak at approximately 3,000-6,000MW.

Overview of restructuring and rationalization of energy mix (IPP contracts) as a sructural reform

Restructuring and rationalization of energy mix is a policy reform where unfavourable contracts with IPPs are renegotiated, take-or-pay models are converted into take-and –pay , and  one-time exit(golden handshakes are done with IPPs that have costly energy or unfavourable terms. Moreover, new IPPs are redirected toward domestic renewables so that indigenous energy resources are put to use.

How restructuring and rationalization of energy mix(IPP contracts) is the most important structural reform that Pakistan must undertake to resolve its energy crisis sustainably?

• Ending capacity payments through golden handshakes( one time exit) 

First and foremost, paying IPPs without buying electricity from them causes a huge burden on national exchequer which can only be dealt with golden handshakes with IPPs.Contract buy-out provisions, transitinal financing and market rule change can lead to ending of unfavourable IPP contracts while maintaining investor confidence.  In 2024 , the government terminated PPAs with six IPPs (Hub Power, Lalpir, Pakgen, Roush power, Saba Power, Atlas power).Only golden handshakes with unaffordable IPPs can get the country out of vicious cycle of capacity payments. Continuing this policy is essential to ensure contracts with only those IPPs that generate energy on favourable terms. Therefore, to shift status of IPPs from liability on government to an asset , restructuring of payments process is essential.

• Escaping from  circular debt trap caused by caused by oil dependent energy generation through redirection of new IPPs toward domestic renewable

Currently, thermal IPPs run on imported fuel which leads to circular debt through problems like electricity theft at the end-user terminal. Once, electricity generation is shifted to domestic renewable and imported fuel is not used for electricity generation, the circular debt would be resolved. Moreover, shifting IPPs to domestic renewables like energy generation from bio-waste would lead suficient energy production.According to Energy Policies of Pakistan :A Comparative analysis (1994-2013) by Bibi Saira(Journal of politics and International Studies) currently thermal IPPs are responsible for 95 percent of thermal debt stock , while almost 83 sugar mills’ bio-waste has the potential of 3000 MW  of energy generation. In 2008, the government announced generation policy encouraging co-generation of energy projects from bagasse in sugar plants. Therefore, using this 2008 co-generation policy as a model and filling policy implementation gaps can strengthen local energy manufacturing and reduce deendence on external market, thereby resolving root cause of circular debt.

• Ensuring beneficial spending from national exchequer through conversion to take-and-pay model for remaining contracts

Through market liberalization, trading hubs, risk sharing and renegotiating frameworks  and contract clauses , Pakistan can shift to take-and-pay models. Moreover, To stop wastage of government revenue into payments of unconsumed electricity, the remaining contracts with IPPs must be converted to take-and-pay , where payments are made only for electrcity that is supplied to end-consumer .As USA  transitioned to spot market  and hub-based pricing thorugh Henry Hub, Pakistan can also shift short term trading that weakens take-or-pay contracts. Through this, Pakistan can gain multiple suppliers, and LNG can also be shipped globally. Therefore, shifting to take-and-pay agreements reduces burden on national exchequer leading to balanced spending across important sectors.

• Generating energy supply stability through IPPs restructuring leading to immunity from external market shocks

Furthermore, reducing energy dependence on external market through restructuring of IPPs is crucial for stable production and sustained supply of energy to end-users. In addition, vulnerability of local energy sector to  global oil shocks ,which is primarily due to dominance of Gas/RLNG and imported coal in the IPP portfolio, can be minimized through government-devised plans for IPP energy production.According to the  Energy Policies of Pakistan:A comparative Analysis (1994-2013) by Bibi Saira,”Due to thermal IPPs , the country’s petroleum import has increased and exposed the country to external market volaitility. The country is in dire need of exploitation of indigenous resources such as Hydel(45,000 MW potential), coal(7^th biggest reserve) , which would protect country from shocks like 1973 oil crises” This proves that government needs to make policy changes to correct IPP course. Therefore, diversifying energy mix is important for immunity againts global oil shocks.

• Improvement of financial distress on power sector by revising the tariff structure  for power purchase from IPPs

Further, removing financial distress from power sector requires removal of tax exemptions given to IPPs . Moreover, government also provides targeted subsidies that elite cannot exploit . According to Renegotiating Contracts of IPPs in Pakistan by Muhammad Usama Amir, the tariffs should be moved from cost-plus to performance based, setting high standards following examples like India’s electricity Act 2003. Like India, Pakistan can improve performance standards by hodling utilities accountable. Therefore, linking profits to performance would lead to better recovery rates and improved reliability.

• Shift of  IPPs to renewables  leading to low-cost green electricity and diversification of energy mix

Moreover, shift of Independent power producers (IPPs) from thermal imported fuel based electricity generation to renewable energy including hydel and solar would help in generation of cheaper and environmentally –friendly electricity. Frthermore, the inclusion of hydel, wind, and other renewable enrgy sources would co-incide with the global shift toward green electricity . According to PACRA Distribution Energy sector study(february 2024) published by The Pakistan Credit Rating Agency Limited , “In Pakistan, the share of thermal as a dominant source has declined over the past few years. Against total electricity generation of approximately 1,38,028 GWh, the share of hydel and renewable cumulatively recorded at approximately 31 percent during FY23(SPLY:approximately 27 percent). ” This positive trend represents the first structural shift in three decades. Therefore, to accelerate Pakistan ’s growth as a green economy, IPPs must be compelled to use renewable energy sources as primary electricity generators.

 Conclusion

In conclusion, restructuring and rationalizing the energy mix has the potential to transform the energy sector into a properly functioning one . This structural reform can not only increase energy supply but also provide low cost green electricity that is beneficial for climate restoration. In contrast , if this policy remains unimplemented , the energy crises will not only worsen and Pakistan’s vulnerability to external market oil shocks would increase.Hence, restructuring and rationalizing the energy mix is crucial for sustaining a properly functional power sector.

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