The question marks persist

Updated 21 Sep 2020

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The National Electric Power Regulatory Authority (Nepra) approved Central Power Purchasing Agency-Guarantee (CPPA-G) proposed governance regime for the planned wholesale electricity market where multiple generators/suppliers could sell power to bulk buyers, including distribution companies (Discos), through bilateral contracts leaves key issues unaddressed and raises questions over its effectiveness.

The government has been trying to implement power-sector reforms to bring competition in the market and reduce its role through the development of a competitive electricity market since the early 1990s. The development of a competitive market is expected to stimulate private infrastructure investments, give consumers a choice, ease pressure on prices and create conditions for a fair allocation of risks.

The overarching objective is to get rid of capacity payments under the long-term contracts with power producers, do away with sovereign guarantees to market players, and replace existing ‘take or pay’ contracts between CPPA-G and producers with ‘take and pay’ deals following commencement of the Competitive Trading Bilateral Contract Market (CTBCM) framework approved by the power-sector regulator in December last year.

CPPA-G Strategy Marketing Development Deputy General Manager Omer Haroon Malik told a Nepra webinar late last month that it will take a year and a half before the new plan is actually implemented. Hence, Nepra’s decision to initiate the proceedings for bringing competition to the Karachi market long before addressing the key public concerns and preparations of a CTBCM implementation plan has surprised many.

Nepra and CPPA-G aside, few have confidence in the success of the plan, which largely ignores the concerns of the industry and the public

However, the discussions during the CTBCM webinar left many wondering if the new, proposed power-sector governance regime, which gives the large consumers a choice to buy electricity bilaterally from the generator(s) at a negotiated price besides providing for wheeling services and competitive tariff-based bidding for new investments in the sector, has what it takes to deliver a functioning competitive market without affecting the low-middle-income consumers.

Nepra and CPPA-G aside, few have confidence in the success of the plan, which largely ignores the industry and public concerns over issues related to price volatility, new investments in transmission and distribution infrastructure to cut extremely high system losses, cross-subsidy for the poorer segments, possible cartelisation by generators, inefficient governance of Discos, demand-side management mechanism, accumulation of circular debt and so on.

Some webinar participants questioned the wisdom of introduction of the competitive electricity market without privatisation of distribution companies or without tackling their management and governance inefficiencies as well as strengthening transmission and distribution infrastructure to bring down their exorbitantly high system losses as the CTBCM plan seeks transfer of existing power purchase agreements of the independent power producers (IPPs) from CPPA-G to Discos.

With new suppliers cherry-picking their customers, Discos, which are bound to supply electricity to the regulated consumers at the Nepra-determined rates, will find their transmission and distribution losses spike and their ability to reinvest in the distribution network squeezed. This is especially true in areas where losses are higher than the Nepra-determined benchmarks.

If Discos also get the option to cherry-pick their customers, who is going to supply electricity to areas with high losses and theft? In Turkey, a senior Lahore Electric Supply Company official pointed out while talking to this correspondent, the state-owned enterprises continued to incur high transmission and distribution (T&D) losses after market reforms and the government had to eventually allow them an increase in the T&D loss target. “Such a move makes electricity more expensive for their consumers and results in an additional subsidy burden.”

He feels that the purposed model will shift the financial burden of government/CPPA-G to Discos only on paper without bringing any qualitative change in the regulated market or achieve its objectives. “These public-sector entities will suffer more losses once they lose their high-end customers to their competitors, further affecting their ability to cross-subsidise their low-end users.”

The most overriding concern about the proposed regime is related to its financial impact on the poorer consumers of Discos. The end of uniform power pricing gives an unfair advantage to the high-income consumers like industrial, commercial and bulk buyers, and high-end residential consumers — whose number is estimated by Mr Malik to be in the range of 2,000 and 2,500 — instead of supporting vulnerable groups because sellers can charge different prices from different buyers, resulting in price discrimination.

With high-end bulk consumers, who cross-subsidise lower-end users of Discos opting out of their networks to avoid cross-subsidy charges, the distribution companies would find them exposed to the risk of stranded costs and capacity payments. India has included cross-subsidy charges in wheeling and network payments of suppliers to ensure the burden is not transferred on to the poorer segments of society.

Then, price volatility because of the introduction of a spot market and removal of price cap is a major potential risk for both Discos and their consumers. Uncertainties in production costs and the sudden spikes or drops in demand make it hard to forecast prices in the market. Possible collusion between power producers could also bring uncertainty in the markets and push electricity rates at the peril of Discos and their customers. This has happened in the US and Europe after the deregulation of the industry. Yet no mechanism is suggested in the plan to avert such a possibility.

Mr Malik brushes aside the majority of criticism about the proposed model. “We need to move towards a self-sustaining market to provide affordable electricity to consumers,” he told Dawn from Islamabad by telephone a few days ago. According to him, regulations are being aligned and legal policy framework developed to govern the new competitive market. “Initially, we will have a competitive wholesale market for large buyers, including Discos, and later move towards opening up the retail markets for competition (for the benefit of smaller consumers).”

He asserted all large consumers will keep paying charges for cross-subsidising poorer segments. Therefore, good consumers leaving Discos will not affect the regulated end-users or burden distribution companies. Yet he didn’t explain the mechanism through which bulk consumers will be made to pick the cross-subsidy burden.

Mr Mailk, who was reluctant to speak in detail, claimed that the distribution system will be completely privatised before the implementation of the proposed model but didn’t explain how the government plans to sell Discos by the end of 2021 when the new wholesale competitive electricity market commences. He also didn’t say anything on the plans to fix the T&D losses of Discos before the plan is executed.

He was quite clear that the long-term agreements with IPPs would not be altered when these get transferred to Discos. “We cannot afford to change existing deals because such changes send a negative signal to potential investors. Hence, only those producers whose contracts have already expired or are expiring will in the first phase to enter into bilateral agreements with bulk buyers.

“India implemented this model in 1996. Yet only 10-15 per cent of their entire market segment comprises of bilateral agreements. In developing countries like Pakistan, such a big transition toward competitive markets is not possible in a short period.” This is exactly why the stakeholders are asking the regulator and CPPA-G to effectively address the issues that directly bear on low-middle-income consumers, or affect the financial viability of Discos and future investments in distribution, and market risk/volatility concerns before the execution of the plan.

Published in Dawn, The Business and Finance Weekly, September 21st, 2020