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Complexities of electricity markets

Sugar, cement and flour scandals have shaken the confidence of people in markets. Regulations and government controls have not delivered either. In Karachi, people are suffering under the poor performance of KE – an example of privatisation. There are no formal and organized markets as we see WhatsApp sugar price manipulation groups instead of spot markets. Thus neither privatisation nor regulation has delivered; markets, too, have failed. Yet markets and privatisation have helped other regions in bringing about well supplied markets. Market works and should work on its own without bureaucratic or autocratic controls or intervention. Broad oversights and institutions should be enough. We will discuss here the issues involved in bringing about an electricity market instead of a regulated control regime.

There are three major issues faced by the power sector today on which major actions and decisions have to be taken by the government and the regulator. These are: circular debt; power plan (IGCEP-Indicative Generation Capacity Expansion Plan) and market (CTBCM-competitive trading bilateral contracts markets). The IPP report has identified issues with respect to circular debt and negotiations are being held with IPPs to neutralize the excessive payment and higher tariff issue. The problem is that worst has yet to land in this respect when very expensive tariff projects will be commissioned between now and the year 2025.The tragedy is that new projects and PPAs are being signed under the old framework against which there is complaint and negotiations are currently taking place. What would be the result, we do not know. Other aspects of circular debt are Disco restructuring and reforms and full-cost recovery from consumers. Technical people want cost recovery and higher tariff while politically sensitive leadership is opposing rise in tariff, in fact they want the opposite of it. Disco reforms have yet to be initiated in a major way which are stalled due to other related policy issues.

We will focus in this space on electricity market issues, while taking a brief overview of the power plan-IGCEP-Power Plan which is a related issue. Current installed generation capacity is 36,000MW, while demand is only 25,000MW or even less, while it was 26,000MW in 2017-18 and should have been 30,000MW by now. There is clearly a demand slowdown and the future is risky and unknown in the context of coronavirus. Power plan envisages a generation capacity of 75,000MW by 2030 by the addition of 50,000MW of new capacity and retirement of 10,000MW of old plants. Out of 50,000MW, there are committed projects of 25,000MW? and the remaining 25000 gap may be filled by yet undefined solar and wind power capacity.

The main issue or bottleneck in bringing about electricity market is the existing or inline power projects for which PPAs have been signed or are already in operation or are at an advanced stage of construction. These are under Take or Pay arrangements which are an anathema to competitive market. If there is some commitment why are new liabilities being created under old arrangement which has to be changed. Currently, there is 50,000MW capacity that is under Take or Pay. There has been a provision all along for solicited projects in various power policies under which competitive bidding could have taken place. However, easier said than done. Any competition in CPEC projects would have been a farce. Yet, other projects were there in which competitive bidding could have been organized. There have been talks of organizing some sort of competitive bidding, reverse auction or otherwise, which has not happened.

There are three types of projects and PPAs; one which are in early stage of operations and their debt has not been paid off; second, which are in the mid or later stage of debt pay-off; and the third, where debt has been paid off. It is in this last category of power projects where new market design and terms may be feasible. This is a capacity of 7,500MW. And there is 25,000MW of yet not sure solar and wind power capacity that may be brought under new market regime. In richer countries, where this market transformation took place, reportedly paid off the investors and started the same projects on the new slate of competitive market. In our financial situation and circular debt situation, this kind of financial undertaking is not feasible and is rather thinkable. There may be other solutions such as bond or conversion to forward markets which is beyond the scope of a newspaper article. It appears that regulated and market based projects may run side by side.

There are two types of market models; one is cost-based while the other bid-based. CTBCM has adopted the cost-based model, probably due to the bottlenecks created by existing PPAs. The like of cost-based model is already there in a rough form under the existing merit-order system wherein Nepra determines the costs and may continue to do so. For competitive market enthusiasts it is an anathema; to them price should be decided through bids by sellers and the buyers. They reject a system where all the trappings of a regulated system manage to survive.

Electricity market has essentially two components; wholesale market and retail markets. Retail markets often depend on wholesale market. Retail markets require open access to transmission and distribution, while wholesale markets require unrestricted investment activity and competitive generation tariff. A million dollar question is: Is it possible to have retail competition without wholesale market? Theoretically, the answer must be in the negative but practically something can possibly be done to bring about a functioning retail market without a wholesale market. But how?

By retail competition, one means, that there are electricity suppliers who could be independent traders or IPPs or a combination of both which sell electricity to the retail customers in the place of a Disco. Currently, Discos sell electricity, which is a monopoly. In the open access retail market, electricity suppliers use the infrastructure of Discos to distribute electricity to their customers. Suppliers pay a wheeling charge to the Discos who invest in physical infrastructure and maintain it. Discos have no connection with the consumers; suppliers market, sell and collect bills. Thus, there may be many suppliers creating a competitive situation whereby consumes have a choice of selecting their supplier company based on quality of service and price. Thus retail customers, in fact, throw up, the suppliers. Suppliers are thus forced to procure cheaper or competitive electricity. They may buy from a competitive wholesale market and in the absence of which may make bilateral arrangements with IPPs under prices which are essentially dictated by the retail market. This indicates that, indeed, retail market may function without a formal structure of a competitive wholesale markets working under an exchange system or the like.

A practical example is Mumbai where there are three suppliers and retail customers are free to select the supplier. Earlier, there was demarcation of customers which with the passage of time has gone away under a court decision in the framework of 2003 Electricity Law of the market in India. There is no formal wholesale market in India. There are two small market exchanges whose market share does not exceed more than a few percentage points.

In Pakistan, we can also have voluntary electric market exchanges wherein excess electricity may be traded; it may come from captive power plants, normal IPPs under arrangement with CPPA-G wherein a certain portion of PPA electricity may be traded under certain circumstances; new solar and wind projects and independent merchant IPPs may sell their output through such exchanges. A lot of work would, however, be required; establishing wheeling charges and Annual Revenue Requirement – ARR – of Discos. Upper ceiling of consumer tariff may also be enforced in order to prevent market manipulation and undue price increases.

Unfortunately, Privatisation Commission (PC) is moving ahead with privatization in a solo flight without getting itself informed of the proposed CTBCM-Electric Retail Market provisions. It would create many legal complications post-privatisation. Wires-only model and existing Disco models are two very different models having serious and severe business implications. PC would be well advised to get informed on the subject accordingly. Privatisation had been on the agendas of successive governments but did not happen for one reason or the other, mostly due to Unions’ and other insiders’ opposition. Retail market-Wires only model is a part privatisation reducing the existing Disco load and involvement to be significantly reduced reducing the rationale of privatisation itself or reducing the consequences of not privatizing.

Another relevant model is of ‘electricity cooperatives’ wherein users are the owners themselves. There are many cooperative models working efficiently in the US 5% of the electricity in the US is generated by cooperatives having a 13% market share in electricity sales.42% of electric distribution lines are owned by cooperatives; there are 831 distribution cooperatives and 62 generation and transmission cooperatives. Electric Cooperatives’ contributions to the US GDP are 88 billion USD and contribute 22 billion USD in taxes. In a no-owner and liquidating situation, Cooperative option deserves serious consideration.

An electric market should address issues of rural and unserved or underserved areas. In order to promote micro-grids ,cooperatives and self-initiatives, licensing requirements and other restrictions for generation and distribution businesses should not be there and should be eliminated that would promote informal markets.

Syed Akhtar Ali, "Complexities of electricity markets," Business Recorder. 2020-07-15.
Keywords: Economics , Economic issues , Electricity markets , Sugar price , Retail markets , Pakistan , PC , IPP , CTBCM , PPA

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