Introduction

Renewable energy has become the cheapest electricity source globally on a levelised cost basis, yet its adoption is restricted by institutional barriers. Approximately 90% of global coal-based electricity is sold through rigid, long-term bilateral contracts known as power purchase agreements (PPAs) instead of dynamic wholesale markets. Without these rigid contracts, many fossil fuel assets would retire faster due to market forces. This report leverages case studies from India, Indonesia, and Pakistan—nations representing a quarter of the world’s population and one-fifth of global coal demand—to examine how PPAs delay the transition to cleaner energy.

The true economic costs of PPA contracts locking in fossil fuel infrastructure

Standard PPA contracts in India, Indonesia, and Pakistan typically provide independent power producers (IPPs) with inflation-indexed tariffs over 25–30 years, fixed monthly capacity payments regardless of electricity sales, and 100% pass-through of input cost increases. This “cost-plus” model offers little incentive for IPPs to reduce costs or phase out fossil fuel infrastructure. Over 50% of global coal is currently under long-term PPAs, making their premature unwinding essential for reaching global net zero targets.

In Pakistan, new coal capacity inaugurated under the 2015 China Pakistan Economic Corridor (CPEC) was not competitively procured, raising questions about whether the most competitive technology was chosen. The economic costs are significant: electricity from China Power Hub Generation costs 11.4 US cents per kWh, while solar-based electricity in Pakistan costs 3.7 US cents per kWh. Furthermore, coal PPAs create foreign exchange risks because payments are made in US dollars; as the Pakistani rupee depreciates, electricity costs increase. Consequently, grid-based power consumption shrank by 10% between 2022 and 2024 as consumers turned to self-generation via rooftop solar.

Long-duration PPAs are locking in coal for decades to come, even when renewables are cheaper

In Indonesia, the President vowed in 2024 to terminate all coal capacity within 15 years and replace it with 75 GW of renewable power. Similarly, in India, renewables now cost around 2 US cents per kWh, whereas coal tariffs range from 4 to 6 US cents per kWh. Despite these lower costs, renewable energy cannot enter the system at the necessary rate due to the overhang of existing coal PPAs that insulate assets from market dynamics.

Capacity payments made to keep coal running exceed some countries’ annual health budgets

Capacity payments intended to ensure system reliability have led to excess entry and inefficiently low exit, creating massive levels of indebtedness. In 2023, Pakistan’s capacity payments to IPPs reached 4.5 billion USD, representing 4% of the national budget and outstripping the annual health budget by nine times. These payments support plants used less than 20% of the time. In Indonesia, an estimated 16.2 billion USD will be paid over the next 25 years for idle coal capacity in the Java-Bali region, which maintains 60% more capacity than peak demand. In India, exiting old coal PPAs could save an estimated 7 billion USD annually.

Cost-plus contracting leads to inefficient operations and renders carbon pricing ineffective

Cost-plus contracting allows IPPs to pass all fuel cost increases to the utility, removing incentives to optimise efficiency or switch to cheaper suppliers. This rigidity renders carbon pricing ineffective, as there is no tax incidence on the IPP. It also leads to adverse selection; for instance, the Sahiwal Power Plant in Pakistan used coal priced 40% higher than market rates. Similar issues have been noted in India regarding Adani-operated coal-fired power plants.

Policy approaches

The report outlines three primary strategies to “break the coal contract trap”: pay-outs and technology swaps, renegotiation, and litigation. What works largely depends on the institutional context and the policymakers involved.

Pay-outs and technology swaps

Managed transitions could involve compensating IPPs for a contract’s residual value plus an early termination fee, funded through climate or domestic finance. Pay-outs should be conditional on total closure. Alternatively, PPA terms could be maintained while providing subsidies to replace coal with renewables or certified biofuels. In Pakistan, five PPAs were terminated early in exchange for lump-sum payments covering remaining capacity charges.

Renegotiation

Pakistan has halted capacity payments for 18 IPPs and terminated five others. However, renegotiation is difficult when the counterparty is a foreign nation; Chinese creditors hold one-fifth of Pakistan’s power sector debt and have resisted calls for renegotiation as of July 2026. Systematic international pressure is required to address these “financed emissions”.

Litigation

Where renegotiation fails, litigation may be used to terminate a PPA. A Delhi utility successfully exited a 25-year-old PPA by arguing that the coal plant was “fully depreciated”. Furthermore, human rights arguments related to the right to life or a clean environment could be used to nullify contracts causing significant harm, such as Indonesia’s Banten-Suralaya complex, which imposes annual health costs of 1 billion USD.

Conclusion

Fossil fuel PPAs have created severely misaligned incentives, resulting in rising debt, unreliability, and pollution. Many of these contracts were signed due to regulatory capture or lack of competitive procurement. Finding ways to exit these rigid agreements is essential for a just energy transition that reduces greenhouse gas emissions, national debt, and household electricity bills.