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ADB to help introduce market mechanism in electricity

Updated December 23, 2018

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ADB Country Director for Pakistan, Xiaohong Yang and Secretary Economic Affairs Division Noor Ahmed at a ceremony. — File photo
ADB Country Director for Pakistan, Xiaohong Yang and Secretary Economic Affairs Division Noor Ahmed at a ceremony. — File photo

ISLAMABAD: The Asian Development Bank (ADB) will provide technical assistance to Pakistan to support the introduction of market mechanisms for electricity sales and purchases based on the Competitive Trading Bilateral Contract Model (CTBCM) developed with ADB assistance for strengthening the Central Power Purchasing Agency (CPPA).

The technical assistance for developing an electricity market is estimated to cost $750,000, of which $700,000 will be financed on a grant basis by ADB’s Technical Assistance Special Fund.

In the long run, a market model will need to evolve and lead to competitive processes of electricity sales and purchases. This means that the most efficient generators will be at an advantage while the inefficient ones will gradually cease to exist. Competition will also help signal excess or shortage of capacity, according to the project document. Competitive trading will also help create a transparent and fair mechanism of price settlement.

The CPPA has developed a high-level market development roadmap with support of another ADB technical assistance. The plan will need to be updated based on revisions to the design through the public consultation process of CTBCM concept and requirements of new regulations and will also need to be endorsed by market participants.

Among the new regulations, the fresh ADB technical assistance will mainly focus on the updates and revisions to the commercial code, which will govern activities of market participants. Along with these, the development of competitive market contracts and transition plans from the current long-term power purchasing agreement (PPA) regime to a bilateral contract model will also be a key element in the roadmap.

The country’s electricity subsector is suffering from a chronic shortage of cash. This is largely attributable to tariff levels, collections and system losses including both technical and commercial, which have led to the inability of distribution companies to provide required payments to CPPA. In turn, the CPPA only has cash for partial payment of electricity, supplied by generation companies, independent power producers (IPPs), Water and Power Development Authority (Wapda) and some fuel suppliers.

The accrued delayed payment to these entities, generally referred to as circular debt, was about Rs500 billion when the previous government came to power in 2013. With an initial clearance of Rs480bn and subsequent efforts to limit new accumulation, circular debt gradually grew to about Rs700bn by mid-2017. However, it increased rapidly during the general elections period, surging to more than Rs1,100bn by August.

Furthermore, while the country has lacked generation capacity to meet growing demand for at least the past seven years, new power generation capacity to be installed through the China-Pakistan Economic Corridor (CPEC) initiative will likely lead the country into capacity surplus by 2021. However, CPEC and other IPPs are all established based on long-term PPAs, which means that Discos and end consumers need to pay for contracted capacity and supply even when there is not enough demand for electricity supply or insufficient capacity.

The mechanism of take-or-pay PPAs, guaranteed by the government, was necessary when there was insufficient generation capacity, and other subsector entities lacked creditworthiness to attract private investors. However, the anticipated capacity surplus turns them into a new threat to financial sustainability of the sector, report says.

While near-term solutions to these issues still need to be devised by the new government, Pakistan has envisioned the introduction of a market-oriented model in the electricity subsector since the early 2000s. Unbundling of Wapda, then a vertically-integrated utility, in 2002 was the first step.

Published in Dawn, December 23rd, 2018