Pakistan paid Rs6,405 billion to IPPs in capacity payments over five years

Pakistan’s federal government paid a total of Rs6,405 billion to Independent Power Producers (IPPs) in capacity payments between 2020

ISLAMABAD: Pakistan’s federal government paid a total of Rs6,405 billion to Independent Power Producers (IPPs) in capacity payments between 2020 and 2025, the National Assembly has been informed, highlighting the growing financial burden associated with the country’s power sector.

According to a written response submitted by Federal Minister for Energy Awais Ahmad Leghari, capacity payments increased significantly during the five-year period despite government efforts to renegotiate power purchase agreements and reduce electricity costs.

The figures presented to the National Assembly show that capacity payments rose from Rs613.9 billion in FY2020-21 to Rs1,807 billion in FY2024-25. This represents an increase of approximately 194% over the period.

The government paid Rs613.9 billion in capacity charges during FY2020-21. The amount increased to Rs775.9 billion in FY2021-22 before rising sharply to Rs1,307 billion in FY2022-23.

Capacity payments reached their highest level during FY2023-24, when the government paid around Rs1.902 trillion to IPPs. Although the amount declined slightly in FY2024-25 to Rs1.807 trillion it remained almost three times higher than the amount paid in FY2020-21.

Capacity payments are charges made to power producers for keeping their generating plants available to supply electricity, regardless of whether the full generation capacity is actually utilised. These payments are part of the contractual arrangements between the government and IPPs and have frequently been identified as one of the factors contributing to Pakistan’s expensive electricity system and growing circular debt.

Responding to questions in the National Assembly, Energy Minister Awais Ahmad Leghari said the government has taken several measures to reduce the financial pressure created by existing power agreements.

According to the minister, a government task force has terminated power purchase agreements with six IPPs, while agreements with several other producers have also been revised. The objective of these measures is to reduce electricity costs and limit the financial burden on the national power sector.

The Ministry of Energy estimates that the changes made to the agreements could result in savings of approximately Rs4.3 trillion over the remaining life of the contracts.

Leghari also clarified that payments made to power producers are based on tariffs determined by the National Electric Power Regulatory Authority (Nepra) and the terms agreed under the relevant power purchase agreements. He rejected the impression that generators were receiving payments outside the approved contractual and regulatory framework, stating that there were no additional payments beyond the applicable arrangements.

Despite the government’s renegotiation efforts, the figures show that capacity payments continue to represent a major financial obligation for Pakistan. The Rs1.807 trillion paid in FY2024-25 alone demonstrates the scale of the challenge facing the country’s power sector.

The government’s efforts to terminate and revise agreements are expected to provide substantial savings in the coming years. However, reducing capacity payments and addressing the broader issues of electricity pricing, power utilisation and circular debt remain critical challenges for Pakistan’s energy sector.