Nepra (National Electric Power Regulatory Authority) has introduced a Competitive Electricity Market framework, which has been christened as CTBCM-Competitive Trading in Bilateral Contract Market. The objective is to reduce cost and prices of electricity supply while continuing to attract capacity investments.
An oft-repeated lamentation has been that IPPs (independent power producers) indulged in excessive profiteering under Nepra’s nose. To be fair, it is more of a systemic problem. Perhaps Nepra is now doing its bid to compensate by launching this initiative. In the following, we will discuss a few issues that may add to the usefulness of the CTBCM framework.
Pakistan seems to be lurching from one crisis to another. Currently, we have fuel price and supply problem (although this problem is not unique to Pakistan; growing reliance on imported fuel made it worse) while we had almost recovered from the capacity problem earlier.
Pakistan has come a long way since the Wapda monolith days. A lot has been done to change the structure closer to market liberalisation. Institutions have been created. CTBCM had to redefine their roles without creating new entities. Efforts are now being made to introduce a competitive element to the power sector. CTBCM is a step in that direction.
Elements of Competitive Electricity Market
3 . Competitive Electricity Market (CEM) has two parts: 1. Wholesale market wherein generators and other electricity suppliers sell electricity to Retailers including Discos; 2. Retail Market (RM) connects retailers with consumers. Wholesale market is of two types: (a) bilateral and; (b) pool/exchange. Pool/exchange type market is a traditional stock exchange-like institution that brings electricity buyers and sellers come together to make electricity trade transactions.
Market Clearing Price (MCP) is determined through price-demands and price-supply curves. Spot price of day-ahead, hour ahead and Real Time (RTM) is determined by the exchange. There are usually 24 hours market time segments for which prices are announced. Spot prices can be used as a reference for negotiating OTC and bilateral contracts. Purchases can be made through spot exchanges as well. There are cost-based supply curves called ‘single-sides’ wherein demand projections are made by the system operator.
There is centralized dispatch based on economic dispatch order. Practically, in this system buyer does not have any influence on the price. Buyer is a price taker. However, there is a scientific calculation of MCP.
All buyers get the same price and all sellers get the same price. CTBCM has adopted this approach. There is double-side bidding as well in which buyer specifies price and demand for every hour and similarly seller specifies price –supply requirements. Matching buyer’s and seller’s input, MCP is worked out for every hour.
The pool system can be mandatory or voluntary. In order to accommodate bilateral contracts, usually, spot/pools are kept voluntary. There are many exchanges/pools in the world. In Europe, Nord-Pool, EEX, EPX, and EEPX are prominent.
In the US, PJM, California ISO, NYISO, ERCOT (Texas) are more prominent. There are similar exchanges in Australia, Japan and South Korea. India and the Philippines have voluntary exchanges as well. However, trade in IEX and others is limited to only 5-6% of market share. The Indian government has decided to take policy measures to increase this share to 25%.
The opening of Bilateral Market
Bilateral contracting has come of age. ‘Bilateral’ is now more general and can include pool features. Under bilateral contracts, generator and consumer are the parties. There is a master contract and a running contract. It can be for a few months to 15 or even more years.
Bilateral contracts prescribe price and demand curves. These are usually confidential but their main features are registered with the system operator. Regulators normally prescribe capacity contracts of 115% of the peak demand of the contracts total of a market supplier.
Perhaps the most practical and useful aspect of CTBCM is opening up of the bilateral market. Large industrial consumers (consuming 1MW or more) would be allowed to have direct bilateral contacts with the power generators (IPPs and Gencos, etc.,) paying transmission and distribution charges to NTDC (National Transmission and Despatch Company) and Discos.
It can attract new capacity investments in many ways and encourage better utilization of existing power investments. Industrialists may install larger capacity power plants to meet the demand of their widely dispersed industrial units. Currently, they have to install smaller uneconomic and less efficient power plants. In KPK, KP Hydro would like to sell its cheaper electricity to the nearby industries in KPK.
Emergence of Power Marketers
What is totally new under CTBCM are the emergence and role of power marketers (PMs). PMs would be the intermediaries between generators and consumers; would buy electricity from generators and sell it to the consumers, taking away the energy trading function of DISCOs. Such companies would have to be very large companies having adequate cash and liquidity. Selling 150,000 GWh of electricity, say by 6-10 PMs, is a major business.
These new institutions in private sector would be the riskiest part of CTBCM. It may create mafias and price manipulation causing supply and price bottlenecks. One cannot regulate them; otherwise, the whole idea of competitive market goes away. What to do? Risk has to be taken along with adequate safeguards. Competition Commission of Pakistan (CCP) may have to be energized and special regulations be developed in this respect. Initially, upper roof prices may have to be introduced.
Wheeling-the first step
9 . Wheeling of electricity on transmission and distribution network is the first step towards market liberalization. It would enable direct deal between generator and larger consumer. Disco is paid a suitably calculated service charge for handing the distribution contracting with NTDC for transmission. Thus Discos would be off the trading and supply, although, it may take a long time that Disco is totally removed from electricity trading.
Unfortunately, Nepra underestimated the wheeling charge and issued an unreasonable determination allowing about Rs 1.50 per kWh. Discos opposed it and went to Court for adjudication. The issue is probably under litigation. DISCOs are demanding compensation for cross subsidy, stranded costs, losses and NTDC charges. This comes out to be under their calculations to be Rs 7.0-8.0 under older costs.
The low wheeling charge determined by Nepra would have brought all the inefficient captive power plants to the market. The argument is who will finance the expenses incurred by Discos. All the cost elements cannot be denied on the charge of inefficiency. Has the KE under private sector been able to reduce the power losses to 5%? Low wheeling charges would reward inefficiency. Fortunately, better sense has prevailed. There is a rapprochement on the issue.
(To be continued)
Copyright Business Recorder, 2022
