ISMO: A game-changer for Pakistan’s electricity market?

In a significant step toward reforming Pakistan’s power sector, the Cabinet Committee on Energy (CCoE) recently approved the formation of the Independent System and Market Operator (ISMO). This move is seen as crucial for addressing longstanding inefficiencies in the power sector and advancing the country’s Competitive Trading Bilateral Contract Market (CTBCM).

The creation of ISMO will bring a new era of market liberalization, potentially transforming how electricity is traded, distributed, and consumed across the nation.

At its core, the ISMO will serve as an independent body responsible for overseeing both the system operations and the electricity market, ensuring a level playing field for all participants.

Essentially, it merges the current functions of the Market Operator (MO) of Central Power Purchasing Agency (CPPA-G) and the National Power Control Center (NPCC) of National Transmission and Dispatch Company (NTDC) under one roof.

ISMO will have the critical role of managing and balancing supply and demand in the electricity grid while also facilitating transparent, market-based electricity trading between generators, distributors, and consumers.

By introducing competition into what has traditionally been a highly centralized and monopolistic system, ISMO will allow various market players to engage directly with one another, much like other wholesale electricity markets around the world.

One of the most pressing challenges Pakistan’s power sector has faced over the years is the issue of circular debt.

Simply put, the circular debt arises when distribution companies fail to collect revenues, leading to defaults in payments to generation companies. This cycle eventually affects fuel suppliers and can even stall the operations of power plants.

At present, the power sector functions through a single-buyer model, where all electricity is purchased by CPPA-G from various generation companies and then sold to distribution companies. The lack of direct competition and inefficiency in this system has contributed significantly to the build-up of circular debt.

Enter ISMO. The establishment of an independent market operator opens up the possibility for multiple buyers and sellers in the electricity market.

By moving to a more decentralized and competitive framework, ISMO aims to increase efficiency by allowing generators to sell electricity directly to distribution companies or even large industrial consumers, thereby encouraging competitive pricing.

This will encourage innovation as with competition comes the generation companies may find new ways to reduce costs and improve services to stay competitive in the market. It will also improve transparency by establishing a transparent trading platform that can minimize corruption and inefficiencies, as all transactions would be recorded and made public.

The idea is that a competitive environment will help reduce inefficiencies and ensure timely payments, ultimately helping reduce the burden of circular debt on the economy.

Pakistan has been gradually moving toward the implementation of the Competitive Trading Bilateral Contract Market (CTBCM), a framework that allows electricity to be traded bilaterally between buyers and sellers based on negotiated contracts.

This represents a major shift from the current model, where the central agency (CPPA-G) is responsible for all electricity procurement and distribution.

ISMO’s role in CTBCM is pivotal. In this new model, ISMO will act as the regulator of trade and transactions, ensuring that all market participants, from power producers to large-scale consumers, have a level playing field.

By maintaining grid stability and enforcing market rules, ISMO will help foster a marketplace where electricity can be bought and sold in a competitive manner.

Moreover, ISMO will oversee the dispatch of electricity based on merit order, which prioritizes the most cost-effective electricity sources. This will help reduce reliance on expensive thermal plants and encourage the adoption of renewable energy sources like solar and wind, which are becoming increasingly competitive in the global market.

In addition to establishing ISMO, the government should also restructure other key power sector entities. The Power Planning and Monitoring Company (PPMC) should also be merged into ISMO, as monitoring is inherently a sub-function of market control and operations.

Similarly, the Special Purpose Agent role of CPPA-G that handles legacy Independent Power Producer (IPP) contracts should transition to the Private Power & Infrastructure Board (PPIB), which will eventually dissolve as procurement shifts to individual Distribution Companies (DISCOs), similar to current K-Electric’s model.

The National Transmission and Dispatch Company (NTDC), which manages Pakistan’s national grid, should remain intact rather than being bifurcated, as ISMO will now ensure oversight over planning and performance across all entities.

This consolidation will streamline processes, reduce inefficiencies, and ensure comprehensive control over market operations, grid reliability, and procurement, paving the way for a more sustainable and well-regulated energy market.

While the formation of ISMO and the shift to CTBCM represent positive developments, they are not without challenges.

The success of ISMO will depend on various factors like 1. Regulatory oversight: Ensuring that the market operates fairly and transparently will require strong oversight from NEPRA (National Electric Power Regulatory Authority) and other relevant bodies. 2. Infrastructure improvements: Pakistan’s transmission and distribution networks will need to be upgraded to handle the complexities of a competitive market. 3. Capacity building: Both public and private sector stakeholders will require training and resources to navigate this new market environment. 4. Right human resource placement: It is essential to bring in the right talent from the market, particularly experts with knowledge of wholesale electricity markets, modern grid technologies, and efficient market operations. Proper leadership and experienced professionals will play a pivotal role in making ISMO functional and achieving its goals of efficiency and transparency.

The approval of ISMO marks a monumental step in Pakistan’s journey toward a more efficient, transparent and competitive electricity market. While the road ahead may be challenging, the long-term benefits of market liberalization, reduced circular debt, and improved energy security are well worth the effort.

If implemented effectively, ISMO and CTBCM could usher in a new era for Pakistan’s power sector, empowering consumers and driving economic growth through a more sustainable and reliable electricity supply.

Copyright Business Recorder, 2024