The power sector of Pakistan is integrated as
the single buyer model of energy trade, where the centralized dispatch of power
is implemented. From the vertically integrated and centralized structure of the
power sector of Pakistan, now the transformation is being made towards the
competitive trading model of the electric markets. The concept of the new regime of
power markets shall be transiting to involve low-cost energy into the
integrated mix of energy and shall allow the competitiveness in the context of
tariff and type of source. The Energy Desk of IPS has prepared an issue brief
that demonstrates the roadway towards the transition and importance of the new
model in catering to the long associated issues with the power sector of Pakistan.
National Electric
Power Regulatory Authority (NEPRA) has approved
the detailed design and implementation roadmap for the Competitive
Trading Bilateral Contract Market which is aimed to be operational by
April 2022 in Pakistan. The prospects of the new market design are projected to
ensure competitiveness, transparency, reliability, predictability, and
creditability. The new market regime undertakes energy to be traded as a commodity.
This policy brief ushers the review on transition and transformation, a generic
restructuring, and the requirement of new players to be incorporated.
1.Background and Menace of
Circular Debt
The
power sector in Pakistan requires a transition towards the competitiveness of
generation, transmission, and distribution business amid the proliferation of
circular debt and high inefficiencies in the distribution network. There is an echo
of voices to evolve the power sector towards liberalization of the market so that cheap sources of energy could be
integrated. The exigency of competitiveness and deregulation in power the market is a compelling exposition for a twofold agenda; to optimize the generation cost of energy, and secondly to
improve efficiencies of the power distribution network. In an overview, the power sector of Pakistan was
initiated with the design of bundled and single entity authority. Water and
Power Development Authority(WAPDA) was solely responsible for generation,
transmission and distribution of power. On the other hand, Karachi Electric Supply Company (KESC)remained a public entity
for electrification of the mega-urban center of Karachi. The performance of
both the entities remained satisfactory till the decade of 1980s, while with
the rising demand and deterioration of generation capacity, the “Strategic Plan
for Restructuring of Pakistan Power Sector
(PPRSP)” was
approved
to unbundle WAPDA and restructure it into fourteen public limited companies.
These companies were then responsible for dedicated functionality of
generation, transmission, and distribution with the existence of the regulator, National Electric Power Regulatory
Authority (NEPRA). With this restructuring,
the inclusion of independent power producers (IPPs)
was allowed to maintain generation
up to the demand of the country. The IPPs’ policies of 1994 and 2002 allowed their formation of the sector
with the private generation facilities under the “take or pay” arrangement of tariff.
The
government guarantees were promised to be provided against the un-utilized capacity, which created the problem of circular debt on the
whole. The implausible financial management of the capacity payments with these private power producers accumulated the chronic shortfall between cash flows
due to which it has risen to Rest. 2.3 trillion. Their solution of this financial
debt remained at the disposal of the end consumers in the context of tariff
increase, Andon the other side renegotiations on tariff indexations with the
independent power producers. The end consumers tariff has to
incorporate the high generation cost factor
as well as capacity payment transfer factor through the Transfer Pricing
[2]
Methodology.
1
On, On the other hand, the billing procedure practiced by the distribution companies fails to collect the targeted amount due to
inefficiencies in the recovery of the bills. Amid the inadequacy in the cash
flows, the government has to influx subsidies to lower the end-consumers tariff and it also
piles up the fiscal deficit between
the government and independent power producers. Concerning structural amendments in the power
sector, NEPRA has been vigorously emphasizing deregulated and liberalized power
markets in Pakistan. The single-seller and single-buyer model of the market did
create complications in maintaining financial adequacy as to immediately cater to the shortfall in the country, generation facilities with high generation costs
were erected in the past. Besides, the low efficiencies in transmission
and distribution network, and the very low
recovery rate than the benchmark, constituted loss for the distribution
companies. All these factors have simultaneously contributed to the high pile of circular debt.
2.Prospects of
Competitiveness in Energy Trading
Market competitiveness enables optimal operation of the drivers
within the market forces which procure the most competitive and most secure
investment options. Globally, the power markets are being reformed with the
inclusion of private partnerships with the public entities, based on competition
and cost optimization. In the case of
Pakistan, cost optimization was not focused on enabling the
public-private partnership to achieve the
targets in the context of generation capacity and renewable power. The prospects of
the competitiveness has been realized by the governing bodies who have allowed the new projections of generation facilities based on bidding for renewable
energy sources. On the other hand, the allowance of renewable energy-based
net-metering, business-to-business model, power wheeling, and independent power purchase
agreements are some of the courses the government of Pakistan has achieved is remarkable
progress in widening up the window of the liberalized power market. Yet, the model
of multiple sellers and multiple buyers would drive more options
1
The
Transfer Pricing Methodology for the distribution companies requires the DISCOs
to charge capacity payments from the end-users through capacity transfer rates.
The common formulation for CTR has been demonstrated in Annexure I.
2
Oligopoly
refers to the abnormality in the market about the monopoly of sellers
in the determination of market dynamics. If the markets are dominated by a small group of
large sellers, they are interdependent in their output policies and pricing
mechanisms.
for
the electricity consumers with low cost and more clean energy diffusion into
the integrated mix.
3.Concept of Competitive
Trading Bilateral Contract Market Structure
The competitive trading and bilateral contracts in the power
market allow upthrust of competition between
the parties in the respective business of generation, transmission and
distribution. The business entities are allowed and provided an enabling
environment to make returns on their investments based on the competition
between the other market players. The instances of “oligopoly”
2
into
the market is being minimized where the free market forces would decide the
tariff settlements, economic dispatch, demand forecast, and generation costs of
the units. The objectives of the CTBCM model of the market should focus on the
following significant aspects:
Maintaining an improvised efficiency from the competitive players of
the market.
Enabling attractive
investment returns on the business.
Creating
a fair allocation of risks and benefits between the stakeholders while minimizing the role of government stakes in providing the risk
guarantees.
Maximizing
transparency in cash flows.
Enhancing
predictability in the market dynamics.
Streamlining
more robust demand and supply forecast.
Power
security and adequacy in power generation, transmission, and distribution
with efficient operations.
Attract
new emerging technologies to enhance technological competitiveness and advantages.
A consensus has been developed between the major governing bodies in Pakistan
to reform the conventional market into bilateral trading-based contract
markets. In this regard, Central Power Purchasing Authority (CPPA) is
developing a roadmap towards the transition.
NEPRA has been monitoring the regulations for the “deregulated market structure” where the interventions of the regulators
indetermination of tariffs, interconnection
settlements, benchmarks, and indexations would be minimal.
4.Vertical Integrated
Utility Structure of Power Sector
Transiting from the vertically
integrated utility (or single buyer model)
towards the multiple seller-buyer models of the market requires an adequate and robust
adjustment of codes, regulations, agreements, and procedures. The conventional power system in Pakistan needs to incorporate some potential
external players and technological reforms to execute a smooth conversion to competitive operations. To
conceptualize how this transition can be developed, this policy issue brief
demonstrates some of the potential restructurings of the power sector. Some of the salient features of the conventional power in the sector of Pakistan has been mentioned and demonstrated as follows:
1.
The
power generation business administrated by private entities is
allowed on two tariff structures; take or pay (IPP
mode); and take and pay (CPP mode).
Other than these two, net metering has been allowed at the utility
scale.
2.
Central
Power Purchasing Agency (CPPA) is the sole market operator which deals with the National Electricity Policy and cash flows between the public-private entities of the power sector.
3.
IPPs
and CPPs, on contractual arrangement with CPPA, provide power to National Transmission
and Dispatch Company (NTDC) which acts as the national grid and have the mandate of dispatch and transmission, economic dispatch, developing merit order based on generation tariff and central
control of power flow.
4.
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distribution companies are fed by NTDC and Discos distributes the energy to the
consumers through their networks.
5.
Cash
flow in the power sector has the trajectory opposite to power flow, where the
DISCOs collect the bills from the consumers and the amount is paid to CPPA amid energy transfer, capacity transfer, distribution margin, and use of the system
charges (for NTDC). CPPA disperses the funds' tithe IPPs, CPPs, and NTDC
according to their tariff settlement.
Captive
Power Generation facilities have a generation capacity of around 400 MW in
Pakistan, and based on bagasse (biomass residue left after crushing of sugar
cane in sugar industries).
Current Market Operation of
CPPA:
The
operation of CPPA is concentrated on managing the financial transactions
between the distribution companies, NTDC
and power generation facilities. The role defined for the CPPA is further elaborated
with twofold agenda; to procure power from the generation facilities on behalf
of the distribution companies as an agent, and settles
the power purchase agreements with its guarantee
with the generation facilities as a market operator. So, CPPA has the mandate for centralized settlement of payments,
billing, procurement of power, managing payment system and invoicing
to DISCOs and KE, paying for the procured
amount to generation facilities, payments to NTDC as per
NEPRA’s tariff determination, and
collecting its market fee as
per NEPRA’s determination. CPPA settlement for each the distribution company, as well as KE, uses the same methodology of wholesale
transfer price.
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