One frequent option often advocated to address the issue of growing power rates for all consumers, particularly non-solar households, is to renegotiate current Power Purchase Agreements (PPAs).

The goal is to transition PPAs from a “Take or Pay” to a “Take and Pay” arrangement. It appears straightforward on the surface, and many experts feel that this change could reduce the financial strain placed on consumers who rely only on the grid for power. But is it that simple?

The fundamental distinction between these two contract types is based on capacity fees. A “Take or Pay” contract guarantees payments to power-producing businesses regardless of whether electricity is generated. This payment assures that the generation business is compensated for keeping its power plants functioning despite minimal grid demand. Essentially, the power consumer pays for the power plant’s capacity rather than just its electricity.

However, a “Take and Pay” contract would abolish these capacity payments. Instead of paying for preparedness, utilities would only pay for the electricity they purchase and consume. It’s a more adaptable strategy that matches payments to real-time consumption.

Net metering: Balancing the scales—II

So, how would this shift reduce costs? Currently, Pakistan’s national power purchase price averages around PKR 24.88 per kWh, and out of this, more than PKR 15 per kWh is attributed to capacity payments. Experts thus argue that more than half of what consumers are paying is not even for the electricity they have used—it’s for the readiness of power plants to generate electricity if needed.

By switching to a “Take and Pay” system, utilities would no longer have to cover these hefty capacity charges. As a result, non-solar consumers could see a significant reduction in their electricity bills, making energy costs much more manageable. This step would significantly benefit households and industries that rely heavily on grid power.

But let us pause for a moment. “Take and Pay” contracts do not mean the national power purchase price shall be reduced by PKR 15. It simply means that these PKR 15 per kWh shall not become due when the power plant is not generating. “Take or Pay” contracts are not unique to Pakistan. These types of agreements exist in many parts of the world, especially in developed countries, but a highly efficient competitive market is a prerequisite for effective risk management of the “Take and Pay” contract.

So why is this an issue for Pakistan? In developed countries, competitive energy markets are already in place. Power is bought and sold in spot markets or day-ahead markets, where prices fluctuate based on supply and demand in places like the United States, European Union, and Australia.

Utilities only purchase what they need, and power generation companies compete to offer the best prices. This competitive market ensures that electricity prices remain stable and fair, while long-term contracts like “Take or Pay” only apply in specific circumstances where infrastructure stability is essential, e.g. for hydropower projects.

Net metering: Balancing the scales—I

The situation is slightly more complicated in Pakistan, but there is optimism. Pakistan is actively building its competitive energy market, the Competitive Trading Bilateral Contract Market (CTBCM).

NEPRA hopes this market will increase competition among power-producing businesses, lower electricity costs, and benefit consumers.

The CTBCM intends to replicate competitive marketplaces in industrialised countries, allowing electricity buyers and sellers to negotiate directly via bilateral contracts. This should result in cheaper electricity rates due to market competition.

However, the adoption of the CTBCM process in Pakistan has its obstacles. One of the most significant challenges is the high cost of transferring electricity from the generation source to the consumer via the national grid.

After accounting for stranded costs, wheeling charges in Pakistan have been computed at more than PKR 25 per kWh, more than the current national average power purchase price of PKR 24.88 per kWh. This effectively indicates that transmitting electricity costs more than generating it. This poses an essential question: can CTBCM succeed in a country where the cost of delivering energy is higher than the cost of production?

But that isn’t the only challenge. As previously discussed, “Take and Pay” is difficult to implement in Pakistan for various reasons. First, long-term contracts between utilities and power-producing corporations are complicated to renegotiate. Many of these agreements are in place to ensure return on investment for generation businesses, particularly those funded by foreign investors.

The transition to a “Take and Pay” system poses financial risks that these investors may be unwilling to accept, particularly in a country like Pakistan, which is already deemed high-risk due to political instability and regulatory unpredictability.

Second, Pakistan’s grid infrastructure is not as adaptable or modern as those in developed countries. The current grid faces regular transmission losses and is ill-equipped to handle fluctuating demand. In developed countries, investments in smart grids and energy storage systems allow utilities to optimise supply and demand efficiently.

In Pakistan, the lack of such infrastructure makes it challenging to forecast and balance electricity needs in real time, which is essential for a “Take and Pay” system to work effectively. Without the necessary upgrades, the country would struggle to implement a flexible payment model that aligns with actual consumption.

Additionally, the regulatory environment in Pakistan remains a significant obstacle. While NEPRA is working to promote reforms, the political and regulatory landscape often shifts, making it difficult to implement long-term changes.

Power generation companies may not feel secure in a “Take and Pay” market unless there is robust and consistent government support and regulation. This regulatory ambiguity makes it difficult to attract new investment in power generation, especially for renewable energy projects that need significant upfront funds.

While renegotiating “Take or Pay” contracts to “Take and Pay” contracts may appear to be a simple solution to address sector problems, the reality is significantly more complicated. The challenges of high wheeling charges, long-term contracts, grid inefficiencies, and regulatory instability make it difficult to see how this model could work in the country.

Without addressing these issues, the CTBCM remains an ideal dream rather than a practical solution for reducing electricity costs. The way investors are being forced to change PPAs to a “Take and Pay” basis is not going to end well for the country from all perspectives, including FDI, stability, reliability and sustainability of the sector.

In the next part of this essay, we will explore another potential solution: gross metering. We will dive into its pros and cons and consider whether it could offer a more equitable approach to balancing the needs of solar and non-solar consumers. Stay tuned!

(To be continued)

Copyright Business Recorder, 2024