Global lenders warn Pakistan to keep hands off renewable power deals

ISLAMABAD: A warning has been issued to Pakistan’s government by a coalition of top international lenders, cautioning that its move to unilaterally renegotiate power purchase agreements (PPAs) with wind and solar independent power producers (IPPs) could erode investor confidence and disrupt future energy sector financing.

Development finance institutions (DFIs), including the Asian Development Bank (ADB), KfW, FMO, and the Islamic Development Bank (IsDB), cautioned in a strongly worded joint-DFI letter sent to key government ministers that bypassing lenders in amending renewable energy contracts could lead to serious consequences.

“We believe that renegotiating PPAs in a non-consultative manner will be detrimental to the long-term development of the sector, undermining investor confidence and discouraging much-needed future private investment,” the DFIs said in the letter, a copy of which was obtained by The News.

The warning follows the Energy Taskforce’s January 10, 2025, proposal to revise PPAs with IPPs financed by DFIs. The government has since held meetings with each IPP to discuss the proposed changes and push for their implementation.

The lenders, who have collectively invested $2.7 billion in Pakistan’s power sector, warned that forcing IPPs to accept new terms could deter foreign investment, violate existing agreements, and erode trust in the country’s financial commitments.

The warning comes as Pakistan’s government, grappling with a worsening energy crisis and mounting fiscal pressures, seeks to amend contracts with renewable energy producers to lower power tariffs. 

However, lenders argue that Pakistan must honour its existing agreements, adding that any changes require prior approval from financiers.

“Under the terms of their financing and investment agreements, the IPPs we have financed are not permitted to agree to changes to any major project document, including the PPA, without a prior written approval from the lenders,” the letter stated.

The DFIs urged the government to reconsider its stance and instead pursue “a sustainable, fair approach” to resolving the power sector’s structural issues.

The letter highlights growing concerns among foreign investors over policy reversals and contract breaches, which have already slowed foreign direct investment in Pakistan’s power sector.