It was the advent of independent power producers (IPP) two decades ago that led to the branching of the Water and Power Development Authority into independent transmission and distribution entities. A much larger transformation is about to take place in the form of the competitive trading bilateral contracts market (CTBCM), which will herald the start of a fully competitive electricity market in Pakistan.
Expected to be launched in early 2022, the CTBCM will allow the suppliers and consumers the freedom to enter into direct contracts with one another as the market forces play out.
At present, the electricity transactions are done under a single-buyer model whereby the Central Power Purchase Authority Guarantee Limited (CPPA-G), an entity that was created out of the National Transmission and Dispatch Company (NTDC), buys power from all the producers whether government-owned generation companies (Gencos) or the IPPs as an agent of and on behalf of the power distribution companies (Discos). The CPPA-G also plays the role of system operator whereby it matches supply with the demand of various Discos. It also acts as the market operator and in this role it carries out the billing and settlement functions. The long-term demand forecasting function lies with the NTDC at a macro-level while the Discos are responsible for assessing the short-term demand for their respective regions.
The challenges of moving from a single-buyer to a multi-buyer regime are huge but the resulting benefits will be in the form of a vastly improved quality of electricity service at far more competitive rates than at present
With a mushroom growth in the electricity system, especially over the last two decades, not only do the roles and responsibilities of the various entities need to be realigned but new rules of engagement must also be defined. This has become important because the burden of the continued inefficiencies of the system eventually falls on the end-consumer in the form of exorbitant electricity bills.
To do this, a transition is going to take place soon from the existing single-buyer business model to a multi-buyer model for which the Economic Coordination Committee had given the go-ahead several years ago. After several years of preparation, in early 2022, the wholesale electricity market will be launched in which all the power-producing entities will start selling their output. The wholesale market will evolve into a fully-competitive retail market in a few years in which all consumers will be free to buy from the seller(s) of their own choice that participates in the market.
On the demand side, Discos that have 2.7 million consumers and, additionally, another 2000-odd eligible consumer, mainly comprised of industrial and commercial entities, will be the market participants. A real-time electricity market will put the onus on Discos to make accurate demand estimates as they will be signing fully commercial-based contracts with suppliers. The Discos operating efficiencies will need to be improved by investing in upgrading of their networks and undertaking large-scale system automation because, in a competitive environment, the Discos will be able to retain their market share only by offering a reliable and affordable service.
For the customers of Discos, the new model will result in a lower unit cost of electricity. This is because any new production brought into the market will be through the holding of an auction by an independent body and only the least-cost supplier will win the contract. The output from existing plants will be procured on the basis of the marginal price of production which will be contracted on an hourly or daily basis and producers will be forced to offer output at the most competitive price.
The transition from a single-buyer to a multi-buyer contracts model means that the multiple roles that CPPA-G currently plays — system operator, market operator and agent — will be assigned to new entities. The wheeling of electricity will gain in importance and either NTDC or possibly a separate entity will assume this role.
The existing power purchase contracts between the producers and the CPPA-G will be assigned to Discos which will result in hundreds of new bilateral contracts that will apportion a share of production of each generating entity to the Discos. The flexibility offered to the eligible consumers and the producers to enter into bilateral contracts will displace some of the power demand that is currently included in Disco’s forecasts. The market operator will require an adequate credit cover for meeting the financial obligations, which will mean that a robust financial facility will have to be arranged by the Discos with commercial banks.
Making reliable demand forecasts, ensuring that the end-to-end distribution infrastructure is dependable, providing adequate customer service, system automation, etc, are only some areas requiring focus. The integrated, real-time market having many players also raises concerns about cyber security which will be another area of concentration.
The challenges of moving from a single-buyer to a multi-buyer regime are huge but the resulting benefits will be in the form of a vastly improved quality of electricity service at far more competitive rates than at present.
The author is a former Group Director of Energy at the Islamic Development Bank and currently works as a consultant on sustainable energy issues.
Published in Dawn, The Business and Finance Weekly, November 29th, 2021