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Competitive power market – II

Nepra (National Electric Power Regulatory Authority) plans to revisit its determination and a reasonable mid-way solution can be found. There is a USAID study carried out by independent consultants, which can be made a basis for determining the wheeling charges.

Discos’ role: the confusion

It has been proposed to do away with the electricity trade and supply function of Discos. Discos would be ‘wires only’, maintaining and expanding the distribution network. Independent private sector power suppliers would be marketing and retailing electricity to residential sector and perhaps also to industrial sector. On the other hands, it is planned under CTBCM (Competitive Trading Bilateral Contract Market) to transfer power supply contracts from CPPA-G to Discos. Doesn’t it contradict and counteract? Perhaps, another contract transfer would take place later? Why not maintain CPPA-G single buyer system till new market suppliers emerge as a viable entities and in good numbers.

Retail market

Retail Markets (RMs) means direct sales by marketing companies to consumers by marketing companies instead of Discos. However, Discos may remain as last resort suppliers. Initially, Discos’ monopoly is being removed under CTBCM. It would happen gradually. The European experience in this respect is still not very encouraging. 90 million consumers are still reluctant to switch to new companies. There is fear of the unknown and growing scepticism. Under CTBCM, RM is initially restricted to large consumers of 1 million or more. Eventually, it would be extended to all types of consumers, including residential and commercial ones. RM can be a good tool for creating price pressure on wholesale markets. In Pakistan, residential sector has a large market share of 40%. Without its involvement, market share of CTBCM may not be able to reach a reasonable level. In advanced countries, industrial sector has a larger share, approaching 40% and there is comparatively smaller share of residential sector.

Capacity expansion and contracting

Pakistan could not attract power capacity investments in the period 2007-2013 despite a high demand growth rate. Later on, CPEC (China Pakistan Economic Corridor) solved the problem along with public sector investments in LNG combined cycle power plants which now GoP wants to offload to clear its liabilities. Thus G-to-G agreements may remain to be a major stumbling block in the development of electricity markets. Due to recent current account deficits, budgetary issues and flood calamity, the attractiveness of Pakistan from traditional western investments may go down further. There is circular debt issue and payables to IPPs (Independent Power Producers).

There is capacity excess or deficit problem that is always there, but it is usually lesser in regulated markets. In competitive markets the problem is more pronounced. There have been capacity shortfalls in the US despite the existence of electricity markets. Capacity shortfall is not new. It still continues in California. California grid operator has recently predicted that there would be a shortfall of 1800MW in 2025. Electricity cannot be stored generally, although electricity storage is fast coming of age; it will take time to make an effective imprint on the market. Thus electric power capacity has been either in excess or in shortage. New England’s reserve margin has been recently projected between 27 and 40%, New York’s 2-30% and PJM’s 34-70%. Optimal economic reserve margins have been estimated to be 10-20% in the various regions.

In CTBCM, adequate care has been maintained by retaining the existing systems offered by: 1. PPIB (Private Power & Infrastructure Board) in power generation and transmission acquisition and; the role of NTDC (National Transmission & Dispatch Company) in preparing long-term generation capacity plans-IGCEP (Indicative Generation Capacity Expansion Plan). PPIB will act as capacity auctioneer by making procurement plans and inviting competitive bids. Provision of competitive bidding was already there in existing power policies under solicited projects. However, it could never be implemented for one reason or the other.

Lack of free un-contracted capacity

A major objection that has been raised by many is that all IPP capacity is under contract. There are firm fixed price contracts for 30 years. How can their supply be brought to open market with changing prices? Advanced countries have gone through this problem by adopting appropriate contract conversion mechanisms. A suitable formula can be developed for contract conversion of those plants which may have retired their debts. Debt period is often 10-12 years, but in this period overpayment has been made under cash-flow based tariff model. A workable formula can be developed for plants having passed 20 years and the ones `which are close to retirement. They can be offered an incentive of continuing beyond 25-30 years, whichever applies. Gencos and Wapda plants with or without power plants can be inducted into the CTBCM system. After all, Russia and China are following electricity market principles despite dominant public ownership.

More contracted capacity under IGCEP

The problem is that new tied up contracted capacity is coming up under IGCEP. New contracts can be designed under merchant plant principles of Take and Pay (TaP). There may a mix – part of the capacity under Take or Pay (ToP) and part on TaP. New solar capacity appears to be coming under G-to-G under CPEC. Some via media can be worked out and should be done on a fast track basis. If it is not done, more capacity would come under Take or Pay contracts and one would not be able to induct them into CTBCM system for the next 30 years.

Cost-based system – a saviour?

Is cost-based system a savior? Perhaps cost-based system has been introduced to deal with the IPP contracted capacity issue. What to do if our proposal regarding IPP contracts conversion doesn’t work out? Cost-based system is an extension of regulatory cost-plus system which is a major objection against it. Cost-based system is an old system mostly adopted by South American countries. Almost all developed countries have adopted price based system in which either one party-buyer or seller is allowed to place their price bid. Or there is two-sided bidding which allows both sides place their price bids. Price bidding system has been adopted by all new entrants into the market system like the Philippines, Vietnam, Turkey and India.

Separate spot market

There is a criticism that while a small share of market would be initially (till 2030) under competition, all contracted APPs and Gencos have been included in the system. A separate wholesale market could have been designed a la India, wherein competitive and regulated transactions are separate. There are pros and cons in this regard. An integrated system provides foundations for the eventual whole system. It may not require modifications later. A separate spot market may not reflect the energy products mix’s characteristics. On the other hand, separate spot market may not unnecessarily overload the start-up system. India could start a separate voluntary spot market exchange easily more than a decade earlier without much preparations or complications.

Issue of KE

Arguably, Karachi has been suffering under KE. A separate vertically integrated utility in earlier days played a good role having better supplies and running efficiency than the rest of the country under Wapda. Over time, KE has come down and the rest of the country has improved, at-least, in relation to supplies. Fortunately, KE’s monopoly will end next year. CTBCM has included in centralized dispatch. Earlier, KE used to operate its inefficient plants under its own merit order. However, CTBCM may remain ineffective until linking transmission infrastructure with NTDC system is installed. In Karachi and Lahore, there would be a strong case of implementing the wheeling scheme for supplies to industrial sector. Independent companies may be formed for this purpose. Another question is whether and when new retailers and generators would be allowed? Will PPIB as auctioneer function as elsewhere in bringing new generation? A lot remains still unclear. It is hoped that all other requirements and possible legal issues are sorted out.

Technology vs market fruits?

That the open market in Europe and the US has caused reduction in electricity prices is a debatable question. Market enthusiasts take the credit for it. There is another technology point of view: induction of high efficiency combined cycle power plants in Europe; and additionally, cheaper shale gas has caused reduction in electricity prices in the US. Also, in the US, 30% of the market is still under vertically integrated utilities a la KE in Pakistan. Most developing countries, including India, have not adopted an all-inclusive electricity market system. It is an open question if the sophisticated systems would work in developing countries lacking good governance. The risk of collusion and price manipulation is very much there. A risk analysis must be conducted before introducing any system of this nature.

Risk management

There is a so-called missing money problem. Often in such complex business models, cash-flows do not match. There may be many sources of error and glitches. Also, an enterprise of such nature and scope having potentially a large imprint on economy deserves a second opinion or review by a third party – call it risk review to make it more acceptable. There are considerable opportunities for improvement, some of which we have discussed in the afore-mentioned.

CTBCM seems to have evolved over time and appears to be not representing the full scope of the market design it seems to offer. Initial thought was to convert the single buyer contracts to bilateral contracts among Gencos – IPPs and Discos. All contracts are bilateral. However, bilateral markets have acquired a much extended meaning and implication. As per recent communication by Chairman Nepra, CTBCM is approaching closer to the Turkish model; the latter is almost a full scope electricity trade model.

The good news is that with the advent of CTBCM, there would be a beginning of the era of open and free electricity market which will eventually lead to cheaper electricity and sufficient power generation capacity. The role of government and politicians will be reduced while the say of consumers and businessmen and market players will increase. That is how the developed countries have grown and prospered.

The bad news is that CTBCM would take a lot of time to be effective and have a meaningful imprint on the market. The most optimist projection (made by CPPA and Nepra experts) is a 15% market share of CTBCM by the year 2030.Is that good enough? Will that bring prices down and more capacity in? Market share can be increased if the relevant recommendations mentioned earlier, are heeded to.

Syed Akhtar Ali, "Competitive power market – II," Business recorder. 2022-09-27.
Keywords: Political sciences , Economic Corridor , Budgetary issues , Creating price , Pakistan , New York , USAID , CTBCM , CPPA , IGCEP , LNG , KE

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