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.
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.