In the last article of this series, we demonstrated through the case study of a wind power project the inadequacies in the current regulatory practices. Some problems are operational, while the others are of more structural nature implicit in the cost-plus approaches that are employed in the existing regulatory practices. We will make a case for bring some competition in the energy supply industry, if not the distribution.
First of all, bringing reforms in the existing cost-plus practices is in order, till the proposed competition and market mechanisms are brought in. The most important in this respect is to bring the procurement process of all cost-plus projects under Pakistan Public Procurement Regulatory Authority (PPRA) framework. Currently, only government procurement or perhaps of listed companies are under the PPRA purview. All cost-plus projects are practically government projects. Government and consumers pay for the follies and conspiracies of the project promoters. Currently, one hardly sees any tendering or advertisement by the proponent IPPs with respect to their procurements especially the EPC contracts.
Nepra could also invest in commissioning third-party evaluations. Currently, Nepra makes savings and profit from the processing fee it collects from the proponents and is busy in building plazas for itself. Nepra should be restrained from making such savings in order to discourage it from spending inadequately on the processing of the cases. They do not spend money which they have plenty of in subscribing to data sources and in properly equipping their library. Almost all serial publications are not current and are several years old. Perhaps the donor agencies, which assisted in establishing these agencies, made the procurements of all that they have. Pakistani masters certainly do not need these niceties and extras. In a country that suffers under the notoriety of being acquired one of the top positions in the Transparency International's list and persistently at that irrespective of the civil or military regimes, leaving the cost issues of millions and billions of dollars of projects to the whims of individuals, businesses and agencies, without the opportunity of a due process and scrutiny is a serious neglect on the part of those who ought to do something in this respect.
And for Ogra, it is even worse. It hardly does any regulation at all, except for the annual tariff determination of the two gas companies, SNGPL and SSGC. It used to indulge in Petrol and LDO tariff only, while Diesel prices (HSD the most used one) were surreptitiously posted on PSO's website. Reportedly, it has withdrawn from this pretense lately under the garb of deregulating the petroleum prices. Reportedly, OCAC (Oil Companies Advisory Committee) is doing the arithmetics for them. After all OGRA used to calculate the prices and not scrutinise. Readers may recall the fanfare in the early euphoria of the reinstatement of the Chief Justice and the Bhagwandas Committee, when the involvement of OCAC in price determination was roundly criticised and was rescinded. We are back to the square one again. Competition Commission of Pakistan may examine it, if not conduct their so-called raids; more on this and other relevant issues later in some other series.
Bringing in some competition can make some difference and solve the problem of discovering the true price. There is a provision for auctions in the solicited projects, but by and large it remains unimplemented. The main issue against such auctions is the lack of availability of adequately prepared projects and feasibility studies that could be made the basis of procurement and provide for comparable quotations. Then auctions are not simply sealed bids or a voice vote ala stock exchanges. There are much kind of auctions and such auctions have become quite complicated and elaborate but very useful processes. Recently, World Bank has come out with a good publication in this respect meant for guidance. Latin American countries have been at the forefront of such electricity auctions where in 55000 MW of capacity has been successively procured. Even some South east Asian countries like Thailand and the Philippines have made some beginning in this respect. In Europe, electricity exchanges are functioning successfully for past many years, whereby short-term spot (next week, next day or even next hour) procurements are done by the power companies. Energy planning and scheduling and load forecasting practices are currently rudimentary in our electricity sector, which militates against the idea of electricity exchanges. Yet for providing incentives for production over and above the contracted one, some market mechanism could be introduced. In India, they have introduced availability-based tariff. Concluding, instead of taking the cost claims at their face value with the inevitably obvious consequences, some project-based bidding is definitely called for. For renewable Energy projects, countries are finding it very attractive. Recently in Brazil, very attractive prices for wind power projects have been obtained as low as 6 cents per kWh. In India, tenders have been floated for solar energy projects against a reference price. The outcome has been very encouraging for the Gujarat government. It also rewards the most efficient bidders for their efficiency and frugality. In the cost-plus, inefficient is rewarded for his inefficiency and even for its corruption.
An argument in the favour of classical approaches is that the potential investors are weaned against it and any change or prospects of reducing their margins and unfair practices would drive them away. We have to pamper them, as they say. However, there is the other side. The laissez-faire cannot be allowed much into the future, for it often results in excessive and unaffordable tariff. The circular debt has shown that the government cannot pay the promised subsidies and Tariffs cannot be unduly enhanced, as there is very limited buying power. Promising a lower price and return and being able to pay it diligently may be more welcome than promising high returns and margins to IPPs and not being able to pay eventually. Higher prices and Tariffs would also militate against the expansion of electricity and energy networks and markets. For example, at such exorbitant price as 15 cents per kWh, buyer the CPPA or the distribution companies may hardly be able to afford one or two wind power projects. At reasonable prices and tariff made possible through auctions, more energy purchase agreements can be entered into.
Thus it would be advisable to the enthusiasts to seek and work for lower prices than higher returns to the proponents, especially in such difficult circumstances. Recent history has proved this even in case of much richer and resourceful countries like Brazil and Turkey. Lower wind power prices have enabled Indian utilities to buy more of it and consequently 1000 MW per year of Wind Power has been installed there totalling 11000 MW or more. Similar Wind Power expansion has taken place in China due to higher availability and lower prices. To day four of the top ten wind turbine companies are Chinese. In Pakistan also, but for the rapacious pricing practices and inefficient regulatory environment, a wonderful resource in Sindh remains literally unexploited. If by efficient policy design, Wind Power is brought to 10 cents per kWh, and there is an immediate market for 10 Wind power projects. And eventually more, as the transmission system and local demand in Sindh and adjoining region grow. The same goes for all other projects, more or less.
The issue of affordability could be partly handled by unfreezing the prices for the large industrial and other companies, which can afford to pay higher prices and get supplies and service. A related issue is separating the supply businesses from distribution and adopting an "open wires and open pipes" policy. An ex parte distribution tariff should be announced for electricity and gas. Present negotiated price approaches are inefficient, unreliable and time-consuming. Under this scheme of things, demand consolidation may occur. A large consumer having branches and production in many parts of the country can produce at one location and get electricity or gas at all their locations on payment of a transmission charge. Or widely distributed and stranded and locked energy resources could be exploited also under such schemes. Many co-operative initiatives and cogeneration options could be implemented also. The possibilities are endless that could augment supplies at prices affordable by the respective groups. This practically means operating a two-tier system; a regulated and controlled one primarily for residential customers and small businesses and the other a voluntary free market system for the large consumers, as the latter can protect its interest reasonably well. As a corollary, the so-called generation and facility licencing procedures may have to be made more efficient and less time consuming. LNG projects could also be accordingly designed whereby 25% of the capacity may be allocated for open market operations.
On the other hand, competition may not work always, although it might be partially effective. There are examples of price manipulation by sugar and cement industry. In Pakistan, LPG (the fuel of the poor) sector had been deregulated, but the result is that LPG prices in Pakistan are twice as much as in India, despite the fact that LPG is produced locally. Its prices have climbed by almost six times in less than a decade for no apparent reason. The conundrum is that the local monopolist argues for lower prices, while the importers demand enhancement and term the LPG pricing as anti-competitive and barring new entry. This is yet another fertile area for creative thinking and we may be able to expound on it in a later series. Suffice is to conclude that some competition is better than no competition and that it has to be augmented.