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September 17, 2020

Regulatory uncertainty


September 17, 2020

LAHORE: The concept of developing a competitive wholesale electricity market where sellers (generators) and buyers (Discos and other large bulk consumers) operate freely and enter bilateral power purchase contracts is good.

In its recent agreements with Independent Power Producers (IPPs), the government has indicated its desire to change their contract arrangement from existing ‘take or pay’ arrangement to ‘take and pay’ deals once the Central Power Purchasing Authority (CPPA) develops a competitive trading mechanism.

The creation of a competitive electricity market is indeed a desirable objective. However, there are many issues before the government can move in this direction. It would be better to find a solution to these issues before moving into a competitive market.

Currently, the government is the single buyer of electricity from all generators through the CPPA, which transfers all the value chain risks to it. For the last few years, CPPA has been working on the design of the competitive bilateral trading market.

CPPA officials claim that they are close to achieving the target and expect to start implementing their model in next couple of years. The officials admit that the competitive power market has its own drawbacks, pointing out that India, which started the process in 1996, is still struggling to make it work.

Market competition is desirable as long as it provides a level playing field for all players, protects the rights of all customers to have access to power, and guarantees continued investment in the city’s power value chain in areas where it is needed the most and where it will result in the greatest impact in the interest of the people.

There are so many issues, which will directly create new problems for the consumers of Discos, especially the low to middle income consumers, and these issues must be taken care of before the bilateral trading model is implemented.

Take the example of Karachi where NEPRA has recently sought public opinion for changing exclusive rights of electricity distribution in K-Electric license to create a competitive environment for power supply in that city. According to the existing distribution license, K-Electric is guaranteed exclusivity until 2023.

The proposed model, for example, suggests that the new entrants will bring in generation mostly for high-income groups and K-Electric will provide them wheeling services through its infrastructure.

All network-related investment and performance obligation would remain with KE. Besides, the new investment will result in reduction of power off-take on account of decrease in good consumer base affecting KE’s revenues and its ability to seek financing for investment in power projects.

This will further deteriorate the system, immediately impacting service delivery in the vulnerable areas of the city. This will eventually also result in deterioration of the system in upscale areas as they require maintenance and governance, which the distributor may not be able to do with hampered investment. So, the medium- to long-term impact of this new investment does not appear to be in the public interest.

Ideally, if properly implemented with the required prerequisites in place, competition usually results in improvement in the quality of service. But it will not be the case in the current scenario.

More importantly, consistent policy frameworks are crucial to mitigate investor risk. Policy shifts ahead of committed periods violate the investor rights, create regulatory uncertainty, and damage Pakistan’s position as an investor-friendly destination. Any move to revoke that exclusivity will certainly send the wrong message to investors, both local and foreign who are looking to invest in the country, in any sector, and particularly in the power sector.

In background conversations, CPPA officials concede that the new competitive market arrangement will be controlled by the law of demand and supply. That means the increase or decrease in the cost of electricity for the consumers will depend on demand-supply situation at any given time.

For instance, the generators will increase the cost if a buyer requires it desperately. This will create further financial problems for Discos, which are supposed to sell electricity to their customers at a predetermined rate.

It is yet not known if the new players – distributors and suppliers – will follow the uniform tariff policy in place across the country, or they would cross-subsidise the price to sell power to low-income groups at a lower tariff while charging higher tariff from high-end consumers.

If this is not the case then the logical conclusion is that the cost of power for the general consumer, which makes up a majority, will go up. It has already been seen in the past, in the case of generators/second tier supplier licenses granted by NEPRA.

Major advantage will be taken by high-income groups residing in zero theft areas as new entrants will prioritise provision of electricity to industrial, commercial, bulk, and high-end residential consumers due to which these groups would be able to avoid cross subsidy and capacity payments.

As a result, the tariff for the remaining regulated consumers will likely increase as cross subsidy for them will either be reduced or removed. So, this may lead to a decreased cost of electricity for high-end customers while consumers living in low-income and vulnerable areas will have to bear higher price.