Pakistan’s Transformation to Open Electricity Access

 

Pakistan’s Transformation to Open Electricity Access

Introduction

The power market in Pakistan is required to evolve to a new structure. Today’s wholesale power procurement model is based on Single Buyer Model where National Grid Company (NTDC) and Distribution Companies are mandated to procure power from generation companies. Primarily the power is procured through long term contracts by following Cost Plus tariff settings with limited incentives for generators to improve efficiency. It is the need of the time that desired power market structure of procumbent of power through Multiple Buyer Model e.g. each distribution company procuring for its own requirement, should be evolved. Suitable mix of long, medium and short term contracts should be promoted by allowing market forces in tariff settings and by benefitting the generators who produce electricity at lower rate with higher efficiency.

Under the competitive bidding route, the Regulator should in addition to regulating tariffs, also scrutinize and approve the process to be adopted for competitive bidding, with a view to ensure that competitive conditions do prevail in the power market.

The proposed Regulations states that NEPRA will be responsible for approval of Request for Proposal (RfP) and any amendment made in the RFP during bidding process. It also envisages that Final Evaluation of Bids shall also be submitted for approval of NEPRA.   The very purpose of having oversight on the bidding process can best be achieved through regulations and by providing standard bidding documents for procuring/relevant agency. However, in case the procuring agency wants to deviate or doesn’t wish to use standard bidding document for any reason, only then relevant agency should seek approval of the RFP from NEPRA. By providing standard bidding documents including RFQs/RFPs, it would be convenient for both, the relevant agency as well as Regulator to oversight the bidding process without compromising expediency and smoothness of process.

It is obvious that the proposed regulations would be subservient to primary legislation of federal and provincial PPRA Acts, so these regulations should be formulated in conformity to the primary legislation. Under Punjab PPRARules, 2014 procurement involves the following  

The previous government had started the process for transformation of Central Power Purchasing Agency-Guarantee (CPPA-G) as an independent operator of the country’s electricity market from its existing role of a billing and financial settlement agent of the distribution companies. An application to register CPPA as a ‘market operator’ was admitted by the National Electricity and Power Regulatory Authority (NEPRA) in July 2017

The move to a competitive trading bilateral contract market (CTBCM) is a good start towards a shift in the current model. Doing away with inflexible long term PPAs structured as take-or-pay contracts and encouraging competition in new capacity procurement opportunities are some of the objectives presented in the Central Power Purchase Agency’s (CPPA)  

As market operator, the transformed CPPA-G will be responsible for almost all buying and selling of electricity at market prices, from power generation to transmission and distribution companies and enable third-party private players as well. Pricing of electricity was supposed to become market based many years ago

The CPPA was originally a part of the National Transmission and Despatch Company (NTDC) and then separated as a CPPA-G licensee through a business transfer agreement (BTA). Under that agreement, NTDC became the transmission network operator or system operator, while CPPA-G took over the role of market operator although at a limited scale.

 Turkish Model

The plan and road map is heavily influenced by the   Turkish model and aims to to ensure that competitive electricity markets take shape by 2020 under various covenants from international lenders. As part of this, the CPPA-G has to develop and expand core functions like strategy, corporate planning, information technology, energy demand and supply forecasting mechanism and taxation.As part of the process, the National Electric Power Regulatory Authority (NEPRA) has accepted a petition from the CPPA-G for issuance of a formal license  

The authorities have been engaged with Turkish authorities at different levels to emulate their reform process. Turkish power market, according to CPPA-G, has been reformed with great success since 2001 when the Turkish electricity market was in doldrums like currently in Pakistan. The market conditions back in 2001 were very similar to Pakistani market conditions recognised with non-payments and cash flow issues, high losses, long-term generation contracts backed by government sovereign guarantees and fewer investments.

 Turkey created an independent market operator, and around two dozen distribution companies. At present, Turkey also have a private and independent market operator, a transmission or system operator, public and private generators and one regulator. About 30 per cent shares of the Turkish market operator were held by the stock exchange (Borsa Istanbul), another 30pc by the public sector and remaining 40pc shares are traded. The market operator is responsible for management of energy market through transparent operations of both, electricity and gas, by operating as power exchange of Turkey. It also provides the counterparty guarantee of all the transactions and billing and settlement of payments.

Until recently, the Turkish market had around 950 electricity market participants of various natures and trading is taking place on an intraday basis and what is called the Day Ahead Market. The prices are quoted for the intraday and for a day later.

Suggested Model

The government claims that after the introduction of liberalized and transparent market following creation of a market operator, the private investments in the power sector increased manifold and no investment required sovereign guarantees from the government as was the case in the previous structure.

It said the Turkish electricity market was moving towards complete freedom for consumers where all the consumers have the liberty to make bilateral contracts for buying electricity from whichever retail company or generator they choose to. Before the liberalization and privatization of the distribution companies in Turkey, in some areas, losses due to non-payments were as high as 80pc. Non-collection was a prevalent culture. However, after the transition, Turkey has been able to substantially reduce power sector losses. Currently, the highest losses were below 40pc.

The CPPA-G has prepared its integrated business plan to lay out scope, time and cost of various initiatives necessary to facilitate a power market transition.   The objectives also include enforcing payment discipline, while an exchange based model will also create more competition in the form of new capacity procurement opportunities. As things are currently structured, power purchase agreements (PPAs) are inflexible long term arrangements and are taking or pay contracts.

This has resulted in excess capacity payments in times of power surplus and chronic deficits at other times due to a lack of generation capacity. This has ensued continuous pressure on the exchequer and frequent power breakdowns that end up hurting the end consumer eventually.

Therefore, another main objective would be also to create the requisite conditions to reduce government liabilities by reducing the need for sovereign guarantees and let market participants assume the risk and provide the financial resources for management of the power system. The market system will also ensure trading of firm or reliable capacity at competitive and efficient prices.

According to the plan demand participants such as DISCOs, K-Electric and BPC’s will have their capacity obligations in such a manner that they have in advance the capacity required to supply the forecasted system peaks as well as operational reserves. Overall, the move to a wholesale electricity market is the need of the hour for Pakistan’s power sector.   

·         Initiate RFQ/Pre-Qualification of Bidders

·         Shortlist bidders

·         Issuance of RFP

·         Pre-Bid Conference and clarification in the RFP

·         Submission of Bids

·         Evaluation of bids

·         Award of bid(s)

·         Post bid negotiations

·         Award of Contract

During the bidding process, at least at three different stages the RFQs/RFPs are modified, firstly in case procuring agency may make additions through issuing corrigendum, secondly upon queries of bidders after pre-bid conference and lastly while negotiation with the successful bidders before award of contract. So if NEPRA shall assume that at all these stages, the bidding documents will be approved by the regulator, it will result not only in inordinate delay but also entails procedural issues as per procurement laws. Furthermore, in case NEPRA will become the custodian of RFP, it is incumbent upon NEPRA to solely evaluate the bidders as upon rejection of certain bidders, a legal issue would arise that against whom the aggrieved bidders shall file the grievance after completion of bidding process, against procuring agency (as required under PPRA Rules) or the NEPRA.

To run the process of competitive bidding smoothly, it is appropriate that standard bidding documents are approved by NEPRA beforehand along with these regulations. The relevant/procuring agency should be made responsible to conduct the bidding as per standard documents and Regulations and then submit the final tariff proposed by successful bidder for approval of NEPRA.

Regulations also provide for declaring a “Benchmark Tariff” by NEPRA. However the regulations do not prescribe any procedure for arriving at benchmark tariff. By providing a benchmark tariff, the regulator shall have to determine the tariff twice, one while giving benchmark tariff and secondly at the time of final approval of tariff upon completion of bidding process. By giving benchmark tariff, there is the likelihood of receiving substantially lower bids as it was observed in government LNG plants which ended up with regulator’s withdrawal of upfront tariff for LNG power plants. Benchmark tariff therefore would not serve any useful purpose and should be removed from the regulations and bids should be evaluated on the basis of competition among the bidders and subsequently approved by NEPRA.It is also imperative that before commencement of bidding process for a specific technology or fuel, the regulator should conduct diligence regarding demand forecast of electricity and upon its satisfaction should allow the relevant agency to proceed with the competitive bidding process.

The government has started the process for transformation of Central Power Purchasing Agency-Guarantee (CPPA-G) as an independent operator of the country’s electricity market from its existing role of a billing and financial settlement agent of the distribution companies. An application to register CPPA as a ‘market operator’ was admitted by the National Electricity and Power Regulatory Authority (Nepra) in July 2017. Having taken stakeholder comments, NEPRA has held ta public hearing to be held on March 6.

As market operator, the transformed CPPA-G will be responsible for almost all buying and selling of electricity at market prices, from power generation to transmission and distribution companies and enable third-party private players as well.  The CPPA was originally a part of the National Transmission and Despatch Company (NTDC) and then separated as a CPPA-G licensee through a business transfer agreement (BTA). Under that agreement, NTDC became the transmission network operator or system operator, while CPPA-G took over the role of market operator although at a limited scale.

Separately, the government is working on market development on the Turkish model to ensure that competitive electricity markets take shape by 2020 under various covenants from international lenders. As part of this, the CPPA-G has to develop and expand core functions like strategy, corporate planning, information technology, energy demand and supply forecasting mechanism and taxation. As part of the process, the National Electric Power Regulatory Authority (NEPRA) has accepted a petition from the CPPA-G for issuance of a formal license and market structure and will be holding a public hearing process early next month.

Roadmap

The roadmap, presents a detailed plan towards formation of a liberalized market in Pakistan.  The first step which is the sharing of the CTBCM with NEPRA has been done in May 18   this will be followed by stakeholder and public consultations and approval by the regulator.
The next step would be to make the necessary amendments to the legal framework, which will mean modifying the NEPRA Act to incorporate the approved market development policy. However, as this could be a time consuming process, the plan notes that the market could possibly start in a transitory mode before enactment of amendments is completed.

This will be followed by the Ministry of Water and Power (MoWP) modifying and replacing the relevant power policies such as generation and transmission policies to comply with the market development policy.

The next step would be the modifications to the power sector regulatory framework and assignment of pre-existing power purchase agreements done by CPPA among the DISCOs. After these steps, the CPPA will then be able to be separated into a Market Operator and Special Wholesale Supplier Business Unit. However, this is only the sixth milestone in a roadmap comprising of seventeen steps  

Background

The Economic Coordination Committee (ECC) of the Cabinet approved the creation of a competitive electricity market in April 2015. The development and implementation of a competitive electric power market in Pakistan, as one of the main goals of the NEPRA Act (Amendment) 2017, envisages the role of market participants i.e. generators, distributors, traders, suppliers and bulk power consumers to sell and buy in a competitive marketplace. It also delineates the role of service providers i.e. the network operator, system operator and market operator which will enable the selling and buying in the market.

Turkish Model

The authorities have been engaged with Turkish authorities at different levels to emulate their reform process. Turkish power market, according to CPPA-G, has been reformed with great success since 2001 when the Turkish electricity market was in doldrums like currently in Pakistan. The market conditions back in 2001 were very similar to Pakistani market conditions recognised with non-payments and cash flow issues, high losses, long-term generation contracts backed by government sovereign guarantees and fewer investments.

Until recently, the Turkish market had around 950 electricity market participants of various natures and trading is taking place on an intraday basis and what is called the Day Ahead Market. The prices are quoted for the intraday and for a day later.

The government claims that after the introduction of liberalised and transparent market following operationalisation of a market operator, the private investments in the power sector increased manifold and no investment required sovereign guarantees from the government as was the case in the previous structure.

It said the Turkish electricity market was moving towards complete freedom for consumers where all the consumers have the liberty to make bilateral contracts for buying electricity from whichever retail company or generator they choose to. Before the liberalisation and privatisation of the distribution companies in Turkey, in some areas, losses due to non-payments were as high as 80pc.

Non-collection was a prevalent culture. However, after the transition, Turkey has been able to substantially reduce power sector losses. Currently, the highest losses were below 40pc.

Present Status

A wholesale market model is being developed which will lead to the setting up of the first competitive wholesale target market by mid-2021. The design of the wholesale market, will allow, through simple regulatory adjustments, the future evolution towards increasing competition for and in the market. More specifically, the first target market design will also note certain conditions and whenever those conditions are met, the future evolution towards more competitive and sophisticated trading environment (such as spot market, electronic trading platforms, etc.) will be made through simple regulatory adjustments. The policy envisages that the design of competitive wholesale market for Pakistan will pursue the achievement of the following particular-objectives to enhance power sector security of supply, generation adequacy and contribute in developing power sector sustainability in the short, medium and long term:

i.               Create the conditions for a fair allocation of risk and benefit sharing between investors/sellers and buyers/consumers

ii.             Provide level playing field by removing conflict of interest to facilitate entry of new investors and participation of private players, including Bulk Power Customers

iii.           Create the conditions to attract investments based on credit cover provided by market participants, by eliminating the need of the government providing sovereign guarantees overtime

iv.            Improve efficiency arising from competition for the market (new capacity procurement) and in the market (optimization through centralized economic dispatch within system security constraints, to maximize the economic benefits of available resources and promote efficiency)

v.              Create the proper conditions to facilitate and be part of a regional electricity market

vi.            Ensure accountability of all Participants and Service Providers

vii.          Ensure transparency and predictability

viii.        Open access to information

Roadmap to Open Access

The Market Operations Roadmap envisages that the design of the first CTBCM market (a bilateral contract market with balancing mechanism) and a plan to implement it will be finalized by CPPA-G (in the role of Market Operator (MO)), to be approved by NEPRA. In the future, the MO will work with market participants and service providers to lead in making proposals to transition the market to more advanced stages through simple regulatory adjustments as approved by NEPRA. The role of the Regulator will be to ensure efficient competitive market design and promote competition through effective stakeholder consultation process and in-line with effective market monitoring and enforcement models. Following are some key considerations in the design of the market model:

i.               The existence of take or pay, both capacity and energy contracts (Power Purchase and Energy Purchase Agreements) is a reality and all current contractual obligations will be honored.

ii.             The existing contracts will be seamlessly transitioned to the new wholesale market.

iii.           Commercial trading in the new market will be based on bilateral contracts for the purpose of creation of wholesale power market.

iv.           Future capacity procurement shall be based on competitive mechanism.

v.             Efficiency will be improved by ensuring economic dispatch run by System Operator.

vi.           Steps for the gradual evolution to increase competition for and in the market will be undertaken leading to sophisticated trading mechanisms in the future.

Organizational arrangements

Currently, the CPPA-G performs two functions simultaneously – the agency function on behalf of DISCOs and Market Operator function. The transition to wholesale market will see the separation of the two functions that is required to maintain independence and autonomy to function as an independent Market Operator. The System Operator will ensure that generation scheduling and dispatch, demand control and real time system operator are transparent and predictable. The NPCC (National Power Control Centre) will implement the software, systems, procedures and practices for the full implementation of the Grid Code, staffing and capacity building. DISCOs will implement functions and systems for the participation in the electricity market and function as retail suppliers. The BOD of NTDC will oversee implementation of standard transmission connection agreements as required in the Grid Code, to clarify limits, rights and obligations of power plants, distribution licensees and bulk power consumers connected to transmission for power to be exchanged freely in the balancing market.

Regulatory Measures

The transition to competitive wholesale power market regulatory framework including applicable NEPRA rules, regulations, guidelines and procedures (and if necessary (new) standard templates for licenses and registration) will be carried out by NEPRA to meet timelines envisaged under the ECC decision. NEPRA will ensure that sufficient stakeholder consensus is generated which will allow a market regime to develop which is fair and equitable to all stakeholders. In particular, NEPRA shall develop regulations / guidelines for the monitoring of competitive process for new contracts of DISCOs, the monitoring of dispatch and balancing mechanism, and the monitoring of the retail/supplier’s market. Some of the major milestones for the implementation of the roadmap to a competitive wholesale market are presented below:

The following tasks are identified for implementation of National Electricity Policy 2018 for development of CTBCM market by mid-2021:

                                i.            The NEPRA shall approve the “First Competitive Wholesale Target Market” design and roadmap by October 2018.

                              ii.            CPPA-G is assisting the Ministry of Energy to achieve finalization of market development framework (in-line with the approved market model) by January 2019.

                            iii.            A Market Implementation Monitoring Group (MIMG) has been created to facilitate the implementation of roadmap by mid-2021; MIMG is providing resources and capacity building support.

                             iv.            Legal and regulatory framework including the Grid Code and Commercial Codes will be amended to reflect the approved market model by January 2021.

                               v.            Strengthening of the System Operator, the Planning function of NTDC and the Market Operator will be completed by January 2020 for which NTDC and CPPA will prepare plans to be approved by their respective BODs.

                             vi.            Re-structuring of CPPA to remove the conflict of interest (i.e. keeping MO and SO at arm’s length) will be completed by June of 2020.

                           vii.            DISCOs’ market interface departments shall be established by mid of 2019.

                         viii.            The wholesale metering project for acquiring data remotely through secured and reliable AMR systems shall be completed by NTDC by January 2020.

         Federal Government will devise a mechanism with support from NEPRA to charge the             capacity charges payable to generators for committed long-term take or pay contracts, in-case BPCs opt for open access. Such mechanism shall be enacted by December 2018 for charging capacity 

Concluding Remarks

CPPA has prepared an elaborate plan with road map and detailed steps to be taken. The new federal government needs to evaluate all this and enact as per requirements.

The fact that the power sector is beset with financial problems suggests that the first steps should include: elimination of circular debt; removal of tax and other issues that impact upon financial health; and introduction of competition for procurement of any capacity. After these initial steps the open market structure can be embraced.