Imagine an electricity market where price is determined by market forces of demand and supply. Even though this shift has long been on the cards for the Pakistan power sector, there has only been some sign of working towards that aim in the past year or so.
The government filed an application to register the Central Power Purchasing Agency (CPPA-G) as a “market operator” by the Nepra last year in July and a public hearing was held last week to take stakeholder input.
Upon becoming a market operator, the CPPA-G will be the focal point for trading of electricity at prevailing market prices across the entire power value chain. In most developed countries electricity markets operate similar to a stock exchange.
But developing countries are also adopting the model in order to bring more transparency and efficiency in their power sectors. India was the first country in South Asia to establish the Indian Energy Exchange (IEX) which has resulted in efficient price discovery and risk management for power market stakeholders.
Turkey is another country which has moved to market based electricity trading and the incumbent government has been keen on learning from their reformation process. Before the overhaul, the Turkish power system was also characterised by payment defaults and cash flow issues coupled with high losses and low investment by the private sector.
Historically, Pakistan’s power sector has relied on upfront tariffs being determined by the regulator while more recently there has been a move towards competitive bidding to determine energy tariffs. On the other hand, the government still continues to be the most dominant and inefficient player in the power sector. From power generation to transmission and distribution, losses remain high while recoveries are on the lower side.
As a result, the government has resorted to imposing unfair surcharges on power consumers that actually pay their bills to cover for the recovery losses by the defaulters. The mounting circular debt in spite of these baseless surcharges speaks volumes of the gross incompetence and negligence of the institutions involved in energy management of the country.
Therefore, the move to wholesale electricity markets is necessary and the sooner the transition the better it is. But the process has only started and there is a long way to go. Nepra’s hearing will determine whether the CPPA-G has the requisite technical and organisational capacity to conduct market operations in an efficient manner. Then there is also the capability to manage cash flows and financial management for collection and billing purposes. More on this on the coming weeks as Nepra decides on the market operator application license.