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Free the energy market

Development of a competitive energy market is imperative to solve the circular debt puzzle and to bring down energy prices in the medium to long term. The government has started dealing with higher costs on the generation side; but its benefit would be few in the absence of having multi-buyers and multi-sellers in the electricity market. In the Memoranda of Understanding (MoUs) signed with Independent Power Producers (IPPs), transitioning from ‘take or pay’ to ‘take and pay’ is contingent on implementation of competitive trading arrangements.

For long, the federal government has been the sole buyer and effectively sole seller of electricity. All risks in the value chain are assumed by the government. Talks on developing competitive markets have been going on since the 1990s; but in essence, however, the government is always too possessive about its control.

In the late 1990s, WAPDA was unbundled and nine distribution companies (discos) were formed. The plan was to privatize (or corporatize) them to have competition in selling. At the same time,  National Transmission and Dispatch Company (NTDC) was formed as transmission and dispatch company and a department within it (CPPA) was established to become an agent to purchase power on behalf of discos. Later, a separate company was spun as CPPP-G; but the control of NTDC, CPPA-G and discos is still concentrated in the ministry of energy (MoE).

All the changes were cosmetic, and it seems that the federal government (irrespective of who has been in power) has not relinquished control of the power supply. Since generation companies can only sell to CPPA-G, and discos’ management is being controlled by MoE (making broads of directors of discos ineffective), the control of both buying and selling is very much in the hands of bureaucracy.

The legacy of WAPDA’s bureaucracy does not want to let go of power in the power sector, and the government continues to control the load management and transmission supply to generate voting power. By having control on feeders, government can work on load management by reducing or enhancing grid capacity in any part on the map. Legislators influence government to provide better supply in their respective areas and connections to new consumers – that is how votes are associated with control. Just like gas pipeline laying is associated to garner votes.

This political fixation is well capitalized by the IPPs. Back in the 1990s and later in the 2000s and the 2010s, the fear of load shedding compelled the respective government to let IPPs make fantastic deals for themselves at the cost of population at large. This thinking has to go before any government could seriously think on competitive market development.

In late 90s, when discos were formed, PEPCO was established as a managing agent for all discos. HR management of discos was outsourced to PEPCO. The top management of discos was reporting to MoE through PEPCO, making board of directors of discos ineffective. Later in 2012, PEPCO was demolished in a cabinet decision as it was hindering corporatization in discos. But to date, a joint secretary level officer is controlling discos by having additional charge.

When WAPDA was disintegrated in the late 90s, NTDC was established. This was to manage 220KV and 500KV grid stations and transmission lines. NTDC is independent to an extent; but when an MD was flexing muscles (during the PML-N tenure), he was sacked (or forced to resign). There was a constant tussle between NTDC board and MoE. Now NTDC MD’s positon is given as an additional charge to joint secretary in MoE. There is an absolute bureaucratic capture on it.

The NTDC’s role is of management for grid and wire-laying of transmission lines and repairs, and management of grid code. Grid and wire business should remain with the NTDC (government). However, grid code needs to move to the system operator. The role includes what and when to dispatch as well as transmission modalities – what type of plants to run and who will run them. This should be in private hands. But by doing so, power supply— voting power—will go out of the hands of the government.

The role of clearing and settlement is with CPPA-G.  The independent company is functional since May 2015. It is doing all the clearing and settlement – like NCPPL in the stock market. It is the power purchaser – a sole agent of and on behalf of discos. It is doing the power purchase agreements with power generation companies and managing energy purchase and power purchase agreements. Since it is owned by the government; all the risk is of the government.

If any disco wants to buy from generation companies, CPPA-G does not let that happen. The company is opposing renewables as its officials say that grid is not stable to manage renewables; but it should not be an issue. The government and bureaucracy are micro managing this function. Again a control freak approach.

If the federal government continues to play this game to control votes, forget about any technical innovation in the supply chain. The country is not fully electrified yet. Balochistan has distance issues. Micro grid technology is getting cheaper day by day. This can be used in Balochistan, but cannot be done till government is in control.

The government has deregulated and privatized telecom. Back in the 1990s, all the functions –similar to the power sector – were in control of the government (via PTCL). Today, there is a vibrant regulator and several private companies in the value chain. The benefit needs no explanation.

In the power value chain, distribution has to be truly unbundled. Why is CPPA-G the sole buyer on behalf of discos? Why is the management of discos controlled by MoE? Why are discos in retailing business? If someone in Khuzdar is not paying the bill, it is eventually the federal government’s risk. This is absurd. It is not a multi-buyer market by any stretch of imagination.

All the payments should be automated. There should be escrow accounts for generation companies (including IPPs) and discos – like NCPPL. Any third party can come and buy on behalf of discos. The end consumer dealing of discos such as metering and billing should be split and private participants are asked to come in. Wire business which is usually a monopoly in the world, should remain with the government (discos).

The reason for separation is to take the risky part out of the government hands. Retailing is risky and there are high losses in it. Let the private hands manage it. Let them do R&D and come with innovative solutions. Once the government has a will, an electronic competitive market can be built. The government’s role should be to ensure transmission – by charging rent on wire and grids. The grid code has to be in the hands of system operator. Since it’s a single player, it can be structured as public private partnership. It can function as electronic depository – like CDC is doing in the stock market.

Traders, market operators and suppliers are to be introduced in the value chain with no direct link of the government whatsoever. A trader is like a broker in the stock market. His function would be bilateral contracting – selling from exchange – which will be managed by the market operator. For example, if you are a bulk buyer (or a supplier), and you want 20 MW, the broker’s job would be to arrange power from different sources. The government wants to give the role of market operator to CPPA-G to keep its control intact.

Suppliers would be directly dealing with end consumers for billing and metering. The discos’ job would be to provide current/voltage to consumers. Suppliers can buy directly from generation companies – IPPs, renewables, hydel, gencos etc, or from traders or market operators. Traders can buy directly from generation companies or through market operator. The system operator’s role would be to do system coordination between traders and market operators, and NTDC and discos- wire and grid businesses.

Once this is done; the generation licensing regime would become redundant. Generation companies would do their own demand assessment and take the risk of production, i.e., to move to ‘take and pay’. Since the government is the sole buyer right now, no one can come in generation without guaranteed buying or payment agreements.

Ali Khizar, "Free the energy market," Business Recorder. 2020-09-06.
Keywords: Social sciences , Energy market , Electricity market , Competitive markets , Pakistan , NTDC , CPPA-G , WAPDA , PTCL

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