Electricity market stuck in limbo

Pakistan’s electricity sector reform has been a topic of discussion for over three decades, with the ambition to transition from a monopoly-based single-buyer model to a competitive multi-buyer, multi-seller market.

The initial vision of introducing market-driven reforms was articulated as early as 1992 in the Strategic Plan, which outlined the unbundling, corporatization, and eventual privatization of the power sector.

This reform was supposed to shift the sector from a government-controlled system to one driven by competition, efficiency, and transparent pricing. Despite this early promise, however, Pakistan finds itself, in 2024, still grappling with inefficiencies in the power sector, with reforms stalled and the electricity market stuck in limbo.

One of the first major steps towards reform was the establishment of the National Electric Power Regulatory Authority (Nepra) in 1997. Nepra’s mission statement emphasized the creation of a “safe, reliable, affordable, modern, efficient and market-driven environment for the provision of electric power.”

However, the lofty goals set out in Nepra’s mandate have been difficult to realize in practice. While the regulatory body has made significant strides in overseeing the sector and laying down the groundwork for market reforms, the competitive market it was meant to regulate is still a distant reality.

The concept of a Competitive Trading Bilateral Contract Market (CTBCM) emerged in the early 2000s as a means to introduce competition in the electricity market.

The CTBCM was designed to allow power generation companies to sell electricity directly to distribution companies or bulk consumers through bilateral contracts, with pricing determined by market forces rather than by government mandates. The National Transmission and Dispatch Company (NTDC) was tasked with developing and implementing this model by 2012, but more than a decade later, the market remains largely underdeveloped.

In 2022, there seemed to be renewed hope when NEPRA granted the Central Power Purchasing Agency-Guaranteed (CPPA-G) the Market Operator License and approved the Market Commercial Code (MCC), mandating CPPA-G to test and implement it over a six-month period.

Nepra also granted the System Operator License to NTDC and began to entertain applications from the Private Power and Infrastructure Board (PPIB) and the Alternative Energy Development Board (AEDB) to serve as Independent Auction Administrators to facilitate the CTBCM. These steps signalled a long-awaited movement towards the establishment of a competitive wholesale electricity market.

However, the execution of these reforms has been fraught with challenges, the most critical being a conflict of interest among the key players involved. NEPRA has been overly reliant on government-owned entities like CPPA-G and NTDC to introduce and manage the CTBCM.

These companies were designed and operated under the single-buyer model, and their institutional makeup has left them ill-prepared for the market transformation required to implement competitive trading.

Their entrenched positions and interests in the existing system have slowed down the progress towards reform, as these entities are neither equipped nor incentivized to create an environment where competition threatens their survival.

The reform efforts took a significant turn last week, when the Cabinet Committee on Energy approved the formation of a new company, the Independent System and Market Operator (ISMO). This new entity is supposed to act as an independent platform for electricity sale and procurement in Pakistan.

The roles of the Market Operator, previously held by CPPA-G, and the System Operator, previously managed by NTDC, will now be transferred to ISMO. The creation of ISMO has the potential to finally break the deadlock, as it is expected to operate free from the conflicts of interest that have plagued the sector thus far.

However, while the formation of ISMO might seem like a step forward, it also represents a major reversal of the progress made over the last three decades. The introduction of yet another state-owned enterprise (SOE) to manage the electricity market raises concerns about the government’s ability to implement true market-based reforms.

The reliance on SOEs has often led to inefficiencies, and there is skepticism about whether ISMO can deliver on its mandate without becoming mired in the same bureaucratic and political constraints that have hindered previous reform efforts.

The stakes could not be higher. Pakistan’s electricity sector remains burdened by inefficiencies, with high costs, frequent outages, and an unreliable supply.

The absence of a competitive market has left consumers paying inflated prices for electricity, while power generation, transmission and distribution companies continue to operate inefficiently, shielded from the pressures of market competition. The government’s inability to push through the necessary reforms has not only cost the economy billions but has also delayed the benefits that a well-functioning competitive market could bring: lower prices, improved efficiency, and greater innovation.

Pakistan’s electricity demand is projected to continue growing in the coming years, and the country cannot afford to remain stuck in the status quo. Without meaningful reform, the electricity sector will continue to weigh heavily on the national economy, stifling growth and development.

The creation of ISMO, while a significant step, must be accompanied by a genuine commitment to market principles. This means allowing private sector participation, encouraging competition among power generators, and ensuring that consumers have access to affordable electricity through transparent pricing mechanisms.

In conclusion, the long-overdue transition from a single-buyer model to a competitive electricity market in Pakistan has been a tortuous journey. Despite early ambitions and decades of effort, the country finds itself back at square one, with the promise of reform yet to be realized.

The introduction of ISMO offers a glimmer of hope, but only time will tell whether this new entity can finally break the cycle of inefficiency and deliver a competitive, market-driven electricity sector. The government must act decisively to ensure that this new chapter in the reform process does not become another missed opportunity.

Copyright Business Recorder, 2024