Major power sector reforms in Pakistan began in the 1990s with the introduction of the 1994 power policy incentivizing private local and foreign investment in the sector, the unbundling of the national vertically integrated power and water utility body, the Water and Power Development Authority (“WAPDA”) and the establishment of the National Electric Power Regulatory Authority ("NEPRA”), the entity responsible for regulating the power sector. The restructuring of WAPDA involved separating the generation, transmission and distribution functions of the entity into four thermal power generation companies (“GENCOs”) for power generation, nine distribution companies (“DISCOs”) for the distribution of electricity in their allocated areas (other than Karachi) and the National Transmission and Despatch Company Limited (“NTDC”) to act as the national grid operator. In Karachi and certain adjoining areas, K-Electric Limited (formerly the Karachi Electric Supply Company) remains the sole electricity supply company and also currently holds the distinction of being the only vertically integrated electricity supply company in Pakistan performing all three core power supply functions of generation, transmission and distribution.
In 2015, the Central Power Purchasing Agency (Guarantee) Limited (“CPPAG”) assumed the business of NTDC to act as the primary off-taker for electricity from power generation entities. The legislative landscape was clarified with the promulgation of the Commercial Code which primarily sets out the functions of CPPAG and introduced, inter alia, a new settlement and billing system which differed substantially from the settlement and billing mechanics set out under the long-term power purchase contracts entered into by state-owned power purchasers i.e. NTDC and WAPDA. Mounting pressure from the stakeholders led to amendments in the Commercial Code pursuant to which power generation companies were legally permitted to be governed solely by the terms of their long-term power purchase contracts.
Proposed framework for a wholesale electricity market
In 2020, NEPRA approved the detailed design for the wholesale supply of electricity model called the Competitive Trading Bilateral Contract Market (“CTBCM”). The CTBCM proposes a shift from the single buyer model to a wholesale electricity market.
The market structure proposed under the CTBCM categorizes the main players in the market into: (i) “Market Participants” which are entities buying and selling electricity and includes generators, suppliers, bulk power consumers and traders and; (ii) “Service Providers” which are entities providing non-discriminatory services to all Market Participants such as the market operator, the network system operator, the metering service provider, the transmission service provider, distribution network service provider and the independent auction administrator. It envisages CPPAG to act as a ‘Market Operator’ primarily responsible for registration of the Market Participants and administering and supervising the operations of the competitive market. The existing power procurement functions of CPPAG shall be transferred to a new entity to act as a ‘Special Purpose Trader’ (“SPT”).
The two products traded in the competitive market shall be: (i) energy and; (ii) capacity. “Energy” is the actual electrical energy generated or sold by the generators/traders and consumed from the grid by consumers whereas “Capacity” is the sale of available or committed capacity of the generator and the purchase of the capacity by the purchaser to cater to its capacity obligations. The imbalances of energy and capacity are settled as per the balancing mechanism developed by the Market Operator and approved by NEPRA. The balancing mechanism for energy is designed to cater for any imbalances that may arise due to the differences between contracted energy and energy actually generated/consumed. Bilateral contracts in the future will include references to the balancing mechanism and the Market Participants shall be required to sign a balancing agreement with the Market Operator to regulate their participation in the competitive market.
All future procurements for market participants will be subject to competitive procurements through the independent auction administrator, which will conduct competitive auctions, against the forecasted demand of DISCOs. Another main component of the market is the introduction of the “Bilateral Contract Market” which essentially contemplates electricity to be traded mainly through bilateral contracts (standardised contracts to be signed directly between the generator and the DISCO or bulk power consumer). The pre-existing long term power purchase contracts are proposed to be commercially allocated to DISCOs and K-Electric Limited i.e. the capacity and energy will be allocated but the contracts will continue to be administered by the SPT.
It was proposed that commercial operations of the CTBCM would commence from March 2022. However, the shift to the wholesale market has not yet transpired and a new date for the commencement of the CTBCM has not been issued by NEPRA till date.
Challenges in Implementation of CTBCM
Stakeholders question the viability of the CTBCM and query whether the ground realities of Pakistan’s energy sector support the introduction of the CTBCM. The main reasoning offered by the detractors of the CTBCM for their lack of support is the fact that the national grid is unreliable and there are significant issues pertaining to transmission losses caused by the lack of investment in the transmission network infrastructure. In order to successfully transition to a wholesale market, the transmission and distribution networks require a complete overhaul along with operational improvements to support the bilateral trading market.
There is also a lack of clarity or certainty under the CTBCM for the stakeholders due to the proposed eventual shift from the “take or pay” model. Although the balancing mechanism may assist in ensuring that available capacity may be sold, there appears to be no long-term security of supply in the event of a capacity imbalance.
The CTBCM does not seek to address critical issues plaguing the power sector such as the circular debt. Traditionally distribution utilities struggle to collect revenues from consumers resulting in default of their payments to power generators and creating “circular debt” in the power sector, and the sector is periodically bailed out by the government as the payment obligations for the off-taker vis-à-vis the private generators are back-stopped by sovereign guarantees. This dynamic has undermined incentives for distribution utilities to improve their efficiency, while discouraging generators from investing in new capacity to address supply shortages.
Transmission and distribution entities lament the bias under the CTBCM in favour of generation companies incentivizing them by allowing them to sell directly to bulk power consumers whilst majority of the risk still lies with distribution companies responsible for the supply of power to the regulated consumers along with having to bear the risk of transmission and distribution losses.
An overwhelming observation by independent power producers is the lack of clarity in the CTBCM model with respect to the legal requirement to enter into a bilateral contract with the corresponding DISCO to whom their capacity and energy has been allocated to and if such allocation will, in any way, hamper, affect or diminish the rights of such generators to receive payments, dispatch and deliver net electrical output.
The CTBCM leaves many questions unanswered, such as (i) if the weaker organized DISCOs be in a position to enter into the bilateral contracts and provide credit cover to the generators without government intervention, (ii) if the unreliable national grid will be able to cater to the competitive market, and (iii) if the model will prove to be attractive for private foreign or local investors. The power sector in Pakistan is in a state of evolution and there is reform underway to bring low cost and affordable electricity to consumers, however it is important for the regulators and the policy makers to balance the needs of the consumers with the needs of the investors and to ensure that their goals are carefully considered in light of the realities of the existing power sector infrastructure.