Ground realities ignored: Nepra set to begin public consultation on CTBCM today

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) is all set to start public consultation on Tuesday (Dec 22) on Competitive Trading Bilateral Contract Market (CTBCM) without taking account of domestic ground realities.

An overview of the design and implementation of the CTBCM which was approved last month predominantly focuses on developing a Wholesale Electricity Market (WEM) at a time when there is excess generation capacity and significantly high value committed capacity additions and structural challenges in the Transmission and Distribution (T&D) segment.

The stakeholders including the Planning Commission, KE, Fatima Energy and others submitted their detailed analysis on the proposed CTBCM model with the observation that the proposed model may prove to be inadequate to address the sector issues.

Long-term capacity commitments already entered into by the government on behalf of DISCOs may further exacerbate under CTBCM by allowing generators and competitive suppliers/traders to cherry pick good consumers of DISCOs, thus exposing DISCOs to the risk of idle capacity payments and stranded costs.

Background interviews with the sector experts, indicate that DISCOs with adverse consumer mix and low recovery will always create an imbalance in the market because they had contracted capacity and energy keeping in view their load based on total consumers and annual growth. However, a market environment where bulk consumers would be allowed to make contracts with generators, DISCOs would be left with regulated consumers, and thus, their load factor would be low which would also adversely affect their payment capacity.

High system losses have continued to hamper the performance of Pakistan's power sector and is one of the major contributing factors towards circular debt. Under the proposed CTBCM model, bulk consumers having load greater than 1 MW are allowed to participate in the open market and procure power directly from the market.

The existing tariff regime in the country is based on a cost-plus mechanism, wherein the allowed cost component includes T&D losses. However, allowing bulk consumers to procure directly from the market would result in loss of high tariff consumers, leaving DISCOs with low-paying consumers and high loss areas, thus increasing T&D losses and ultimately the cost of service. The issue of increase in T&D losses as a consequence of opening up of markets was also recognized by NEPRA during the public hearing, however, no clear roadmap on how the same will be addressed was presented, which perhaps indicates lack of preparedness in transitioning towards an open market regime.

Under the GoP's existing policy for tariff structure, high-end consumers including bulk consumers cross-subsidize the low-end consumers. By allowing bulk consumers to procure power directly from the market, they will be able to avoid cross-subsidy payments. This will impair the competitive landscape for DISCOs, which would be obligated to supply power to regulated consumers whose tariff Terms and Conditions will be determined by NEPRA and accordingly, DISCOs cannot commercially set their tariff to compete, defeating the very purpose of introducing competition.

The issue of cross-subsidization whilst recognized by CPPA and Nepra, has been left to policy makers to decide. Lack of clarity on key policy issues such as cross-subsidization and recovery of capacity commitments may put sector's sustainability in jeopardy, and therefore a clear roadmap must be presented to stakeholders on key issues, as the sector may not be able to stand further experiments. Evaluating the preparedness of DISCOs, it was also submitted that DISCOs with weak financial position would get funds at higher rates which in turn would be reflected in high consumer-end tariff. The weak financial position of DISCOs forces the government to intervene so as to maintain the average price all over the country. In order to end this, DISCOs have to improve their performance for which timeframe has to be fixed which should not be later than the commencement of the market.

Surprisingly, some key stakeholders including representatives from Wapda highlighted during the public hearing that they have not been taken on board on this major change to Pakistan's power sector which also raises questions of capacity of entities operating in the sector as well as the consultation process. The reforms do not address current sectoral challenges, including circular debt, which stands at over Rs 2.3 trillion.

Copyright Business Recorder, 2020