Grid defection: a looming challenge for Pakistan’s utilities—II

Previously we discussed the ingredients of Grid Defection and how all these are available in Pakistan. Resultantly, the demand is on the decline. In this part we will discuss some fundamental issues and propose potential solutions.

Traditional utility model, its drawbacks in context of evolving energy landscape

The traditional utility model, created in the early 20th century, was designed to provide reliable electricity to the maximum number of customers at the lowest feasible cost using the single grid. This vertically-integrated model, where public sector utilities handled generation, transmission, distribution, and retail, relied on large-scale centralised systems, economies of scale, and stable demand growth with predictive revenue stream. Regulators assured cost recovery for utilities, enabling long-term investments in physical assets like power plants and transmission networks. This model remains prevalent in Pakistan today.

Grid defection: a looming challenge for Pakistan’s utilities–I

However, modern technological innovations, such as distributed energy resources like solar and wind, and microgrids, challenge the foundations of this model. These innovations reduce the need for centralized systems, break down economies of scale, and empower consumers with more control over their energy use.

Digital technologies further enable greater consumer choice and decentralization, eroding the monopolistic market boundaries that utilities rely on for revenue. Thus, the intersection of technological innovation and shifting customer preferences is now driving a transformative shift, with the potential to disrupt the traditional utility business model entirely. Thus, the fundamental issue is that traditional utility model and rise of Distributed Energy Resources (DERs) cannot go hand in hand.

Think of this transformation as a game. Over time, some players, empowered by new tools and strategies, have gained undue advantage, tipping the balance of the system. The rules that once governed the game no longer ensure fair play. As a result, the system faces instability, with some players benefiting disproportionately while others bear the costs. To restore balance and sustain the system, the rules must evolve.

Thus, utilities must continue recovering costs for their long-lived assets, even if those assets lose value in the face of these disruptive technologies. This creates a growing tension between the traditional regulatory framework and the evolving energy landscape.

To adapt, we need to rethink the regulatory model that underpins the utility business model. Regulation must evolve to accommodate decentralized energy, incentivize innovation, and balance cost recovery with consumer benefits in a digital distributed energy future. The challenge is not just about utilities adapting but about transforming the rules that govern them to align with the realities of modern energy systems.

Potential solutions

1. Utilities to manage wire business

A viable solution for adapting utilities to the evolving energy landscape is transitioning them to focus on the wire business only i.e., managing the physical infrastructure only. This model enables the private sector to compete in the generation market, delivering cost-effective energy solutions and fostering the growth of distributed energy resources such as solar, wind, and battery energy storage systems. By separating infrastructure management from energy generation and supply, this approach supports innovation and ensures the sustainability of the grid.

In Pakistan, the government and regulator have introduced the Competitive Trading Bilateral Contract Market (CTBCM), a framework designed to restructure the energy market. Under CTBCM, distribution utilities are licensed to handle both the wire and supply business. However, a critical bottleneck in its commissioning remains in finalizing the Use of System Charges (UoSC), which are essential for utilities to recover the costs of maintaining and operating grid infrastructure. However, the delay in commissioning CTBCM is causing the consumers to defect partially if not fully.

1. Opening of market to consumers below 1MW

The CTBCM framework, while a progressive step for the energy sector, currently excludes consumers below the 1 MW category, which predominantly includes residential, commercial, agricultural, and other small-scale consumer categories. As a result, these regulated consumers remain reliant on centralized procurement for their energy needs.

This exclusivity has led to a significant challenge: over-procurement of generation capacity and the development of capital-intensive transmission infrastructure to cater to projected demand from these regulated categories. However, with the rise of DERs and demand defection, these projections risk becoming obsolete. The potential mismatch between planned infrastructure investments and actual demand could exacerbate two key issue, i.e., increase in sunk cost and resultantly increasing energy costs.

Furthermore, it must be noted that domestic residential consumption is approximately 50% while commercial and industrial consumption is 33.7%. Therefore, due to non-opening of energy market at retail level, the load defection may still occur giving little opportunity for utilities to recover.

To address the challenges posed by the CTBCM framework and the risk of over-procurement of generation and transmission infrastructure, several strategic measures are essential. First, expanding the CTBCM framework to include consumers below the 1 MW threshold can provide smaller users, such as residential, commercial, and agricultural categories, direct or aggregated access to the competitive market.

This would increase demand flexibility on the grid and reduce the dependency on centralized procurement while encouraging such consumers to stay on the grid. Proactive integration strategies are crucial to avoiding over-investment in traditional infrastructure, thereby reducing the risk of stranded assets.

1. Revised tariff structures for retaining grid connected consumers

Utilities that design tariff structures in ways that discourage on-grid photovoltaic (PV) systems may unintentionally accelerate grid defection. Consumers, particularly in times of prolonged inflation, may turn to off-grid PV systems with batteries as a means to hedge against rising energy costs. To counteract this trend, utilities can implement dynamic time-of-use (TOU) tariffs to incentivize consumers to remain connected to the grid. For instance, reducing off-peak rates could encourage higher grid consumption during low-demand periods, thereby enhancing grid utilization while keeping consumers engaged with the system.

Additionally, imposing modest interconnection charges on grid-connected PV systems—whether fully on-grid or hybrid—could ensure that these systems contribute fairly to the costs of grid infrastructure, as they rely on input voltage from the grid for synchronization and backup. This approach would ensure that grid users, regardless of their energy setup, share the financial responsibility for maintaining grid reliability.

Moreover, it is essential to apply similar charges to non-net metered distributed generation that utilize grid input for stability. These charges, which could be rebranded as “grid interaction charges,” would reflect the value of grid connectivity and ensure fairness across all consumer categories. By implementing such balanced measures, utilities can encourage consumers to remain grid-connected while ensuring financial sustainability and equitable cost-sharing within the energy ecosystem.

1. Revising the policy framework for net metering

Many experts advocate in favor of revising the net metering regulations in an aggressive way. Though at first it may seem the right course of action; however, when carefully observing the pattern of installed solar across the country (you may read my piece here: https://www.brecorder.com/news/40329650/solar-showdown-the-untold-power-play-behind-pakistans-energy-revolutioni), one finds that the major contributor is the non-net metered grid connected solar which is the industrial scale solar. Therefore, the revision of net metered regulation may not help rather aggressively push such consumers towards grid defection by making the case of using batteries more viable.

Therefore, careful revision of net metering regulations is the need of hour. Decreases in buy-back rates will ensure limited feedback and a decrease in the sanctioned load allowed limit from 1.5 to 1 ensures that the consumer has to meet some portion of its need through the grid. The carry-forward mechanism of the excess units can remain as it is as this will enable non-defection from the grid and encourage the users to remain grid connected. In fact, it will encourage consumers to adopt measures of energy efficiency and may help in reduction in peak demand. However, DISCOs will need to improve the surveillance process to discourage extension of unauthorized solar PV capacity. Constraining all the net metering parameters at once will act as a catalyst for grid defection for consumers to shift to batteries. A step-wise process should be adopted to ensure consumers remain on grid for major parts of the day and offset portion of their energy.

1. Incentivizing the DERs on active participation in grid management

To ensure DERs remain connected to the grid, it is crucial to offer financial incentives for their active participation in grid management. This involves monetizing services such as reactive power support provided by DERs during the time when grid needs stability support. By staying connected, DERs can contribute to voltage and frequency stabilization, particularly during low-load and high generation periods. In return, utilities benefit by retaining consumers on the grid. This happens by recording the kVARh supplied or absorbed by the DERs during specific period of the day and accordingly incentivize the consumers who sign up their systems for provision of such support to the grid. Additionally, utilities can leverage the Battery Energy Storage Systems owned by consumers for active grid management roles, fostering a mutually beneficial relationship..

1. Policy support for other innovative business models (additional revenue streams)

The utilities can think of building modern revenue streams utilising the digital and smart grid technologies to its advantage. For example, the smart meters at consumer premises not only facilitate the remote energy readings and connection/disconnection, rather it can also provide the consumer with a real time record of its energy consumption. Through subscription service model, utilities can generate revenue by introducing various features and services. Since smart grids and other digital technologies generate large amounts of data on energy consumption, system performance, and customer behavior, which can be valuable for a variety of stakeholders, including energy retailers, marketers, researchers, and policymakers, data monetization can be an innovative business model for utilities.

The rapid installation of DERs, particularly rooftop solar, poses a significant challenge, as its growth may outpace the government’s reform efforts. This could lead to a drastic decline in grid energy demand. Most proposed measures are regulatory in nature and require immediate implementation. During the calendar year 2024, approximately 3000MW of distributed generation capacity has been added by consumers themself, accompanied by a notable reduction in grid energy consumption.

Had the CTBCM framework been fully operationalized earlier along with some of the above proposed solution, a part of the demand defection would have been delayed to some extent, giving some respite to the utilities. Nonetheless, even now, adopting the proposed approach would preserve grid revenues, allow the utilities to concentrate on their core wire business and adapt more effectively to the evolving energy landscape.

(Concluded)

Copyright Business Recorder, 2025