The Competitive Trading Bilateral Contract Model (CTBCM) is a highly intimidating, if not misleading, title.
A new electricity governance regime is being introduced. The name is so intimidating that most people tend to stay away from it.
All that CTBCM is offering is facilitation and institutionalising large consumer choice, wheeling and competitive tariff-based bidding for new investments. One would like to do more to be able to have a functioning and truly competitive market based on tools and systems as applied in many regions and countries.
The system, proposed by the Central Power Purchasing Agency-Guarantee (CPPA-G) and approved by Nepra, does not seem to offer even a beginning in that respect. We would make a case for an alternative market exchange system as per standard practice in international markets.
Proposed CTBCM
The CTBCM system has essentially the following roles or functions. Simply speaking, existing power purchase agreements (PPAs) are transferred from a single buyer – CPPA-G – to several buyers, essentially distribution companies (DISCOs) and possibly large buyers.
Capacity auction for new investments would be introduced based on competitive tariff bidding instead of regulatory pricing for new electricity investments. Roles of organisations would remain almost the same in the intervening period, which may be quite long as the life of existing PPAs is quite long.
Only recently more than 10,000 megawatts have been added. The Private Power and Infrastructure Board (PPIB) will continue to promote and facilitate investments but as an auctioneer.
CPPA-G will continue to do what it is doing now. It will have a new section. It will be facilitating the conversion of current PPAs into bilateral mode.
NEPRA will stop issuing tariffs and will oversee tariff-based competitive bidding undertaken by the PPIB. NTDC will continue to be a transmission company with possibilities of competition in transmission. National Power Control Centre (NPCC) would be an independent system operator with more independence. New market players would be introduced like wholesale traders? Wheeling would be promoted. Direct buying by large consumers would be promoted.
Taking govt out of market
The purported objective is to do away with “take or pay” liabilities, sovereign guarantees and government role in the electricity sector.
However, the proposed mechanism may not be able to lead to this destination in the foreseeable future. If nothing else, competitive bidding would be introduced, but in the meantime Nepra is issuing tariffs at a rather fast pace.
From single buyers to multi-buyers need not be such a compelling regime. It is working in India where electricity boards are buying and provisions for trading among large buyers and sellers are already there under wheeling arrangements in both the countries.
If there are government-controlled DISCOs, what difference does it make, whether it is CPPA-G or a distribution company. Establishment of market exchanges has a much greater potential than CTBCM.
End of uniform pricing?
The most important aspect or consequence of CTBCM will be differentiated tariffs of DISCOs as opposed to the uniform pricing to which Pakistan’s economic system is largely wedded.
In federations or even otherwise, electricity prices do vary across states, provinces and regions. The question is are we ready for such transformation and are we preparing for it.
I am not sure if people understand the implications of IPP-DISCO bilateral contracting as proposed in CTBCM. The issue should have been discussed by high-level policymakers than simply limited to the electricity or energy sector.
Contracts without spot market exchange?
In a country having a history of corruption and collusion, bilateral contracts without market exchange would be a recipe for catastrophe. CTBCM can be amended to have a hybrid configuration.
It is said that a major obstacle to having a market exchange is the longer-term PPAs. The solution may be a virtual market exchange with the following mechanism: PPA prices are taken as hedged prices and market players, as proposed in CTBCM, remain as these are.
The difference is, however, that market players buy and sell in a day-ahead market. Daily market clearing prices are obtained and billed to buyers. Money is credited into the IPPs and wholesalers’ account. Reconciliation is done monthly between PPA dues and market clearing prices. CPPA-G either receives or pays the residual.
There may be 25 DISCO buyer units and about 70 generators and 10 wholesalers. Derivative products such as forward prices and capacity auctions can also be introduced to guide new investments and capacity. IPPs may be encouraged under an accounting settlement mechanism to convert to market exchange.
A secondary market may be introduced for the underutilised capacity. It is a transition instrument, converts PPAs into market exchange and inducts new investments through market products like capacity or forward prices.
Alternatively, a small market exchange may be established wherein underutilised capacity and energy may be traded, like India’s IEX. Roughly, the same may be done for the gas market.
There are some 56 power plants of 35,000MW, some PPAs are to expire shortly, some have entered into PPA in the last few years, some have and some have not retired their debt.
It may be possible to develop and negotiate mechanism and financial arrangements for transferring PPAs into market domain. A policy would be required. It should be possible to acquire some liquidity for the market exchange for a period of two years or so.
Central Electricity Regulatory Commission (CERC) in India has announced similar proposals to bring all the electricity generated under one pooled market.
There is an intimidating misnomer that the market has to be very big in order to have market exchanges. Most large and small countries in Europe are members of one exchange or the other. There is an EU directive that most countries should have their own hubs and exchanges.
Will market deliver?
Will the market be able to function transparently? Will it be able to attract investment? Will it be captured by the elite or mafia? Will it be able to facilitate poorer segments’ access to energy?
The alternative is government and bureaucracy. Demo models can be run and there may be a phased approach, starting with a market of 10,000MW.
Expertise can be hired. There are exchange-operating companies in Europe, which have the software, knowhow and experience to run energy exchanges. They would be happy to have a business opportunity. Training activities can be initiated remotely even now on their software.
Concluding, market exchange is too important an institution to be ignored outright. Pakistan’s market is no small as the capacity of 35,000MW will double in less than two decades.
Bilateral DISCO contracting is a move in reverse direction when the world has long moved into pooled markets. Bilateral DISCO-IPP contracts would be shifting sector management from a larger stronger system to weaker DISCO organisations involving many risks.
Competitive pooled markets are the order of the day. One is not sure if Nepra has given sufficient thought to its determinations in his respect. Adequate consultation has not been made on all the available options and a prescription is being implemented as a fait accompli without considering and evaluating options.
Higher national bodies such as the Senate Standing Committee on Power and others should be consulted on the larger social and economic impacts. The issue is too big to be left to technicians alone.
The writer is former member energy of the Planning Commission
Published in The Express Tribune, March 2nd, 2020.
