CTBCM: Positive Implications and Potential Hurdles

Pakistan’s power sector has been on a path towards increased market participation since the early 90’s. Implementing a Competitive Trading Bilateral Contracts Market (CTBCM) is the next step in that journey. As per decision of the ECC[1] Pakistan is expected to implement such a power market within three to four years from the date of approval of the CTBCM Plan. That Approval came from NEPRA in December last year. As per current implementation plan, CTBCM will see its Commercial Operation Date in November 2021[2].

With the implementation of CTBCM, players in the power sector will witness an evolution. This progress will reward prescient players while punishing unaware ones.

Potential of CTBCM for the Power Sector

First, bilateral contracts may finally lead to increased demand creation. Currently, the winter base demand is going through stagnation as evident in the figure below.

With bilateral contracts, the winter time demand can hopefully increase as industries decide to switch towards potentially cheaper on-grid power. Such an increase in winter demand will help reduce the load of capacity payments on the system.

CTBCM design also mandates transparency form multiple market participants. Such a transparency will have a number of positive effects. First it will help in de-risking of the sector via provision of information to current and future potential entrants into the market. In addition, provision of this information also motivates firms to improve performance with an incentive of converting performance into future brand power rather than minimum enforced contractual obligations of the past. Hence, efficiency of industry leaders such as HUBCO is expected to spill over into performance benchmarks of other IPPs.

Complete implementation of CTBCM will also reduce the direct role of government in the sector. Such a hands-off approach helps pave the way for depoliticization of the sector. This in turn will help bolster investor confidence that is expected to translate into lower risk premium in the long run.

Lower government presence also helps solve the strategic confusion regarding public or private orientation of the market. Such dubiety has stifled industry development since the early 2000’s. With CTBCM, even government owned suppliers will be forced to play under market rules. Such a level playing field will ensure that no player is allowed to become inefficient solely on account of being a government owned entity.

In addition, CTBCM rules carry the appropriate mechanisms for timely expansion of the transmission network. Under the current regime, low recoveries often translate into underinvestment in the transmission system. With CTBCM that bottleneck will be obviated .

Finally, the CTBCM regime helps open the possibility of IPPs exporting power to other countries. This is a promising situation where Pakistani Current Account can reap peace dividends from Afghanistan. This can become a money saver especially considering the committed nature of fuel supply import contracts for LNG.

However, these benefits can only be realized once the CTBCM implementation road map can address potential challenges.

Challenges to CTBCM implementation

The most important of these challenges pertain to maintaining sanctity of contract vis-à-vis the Power Policy 2015 Power Plants. Under the current strategic plan, appropriate changes will be made to the Power Policy 2015 in order to ensure compatibility with CTBCM. While this is a well thought out move for future, caveats need to be introduced that protect already established IPPS -under 2015 Policy- from alterations in the contract terms and conditions.

The second biggest hurdle towards implementation of CTBCM is Circular Debt. CTBCM will have to ensure the curtailment of Circular Debt. Otherwise the system could see lack of funds towards investment in Transmission and Distribution that are so pivotal to the establishment of the business.

The cash related hurdles for CTBCM also include more expensive credit covers for DISCOS as compared to the government. The Detailed Action Plan for implementation of CTBCM will have to cater for ways to reduce that financing differential in order to ensure that CTBCM has a positive influence on the overall financial health of the sector.

Moreover, the current arrangement for discussion of TORs of assessment of financial health of DISCOS will take input from a number of stakeholders. Currently IPPs are not one of those stakeholders. This is troubling considering that DISCOS are expected to be the main customers of IPP products[3]. Therefore, it is imperative that IPPs are made part of the committee that will help develop TORs of assessment of financial health of DISCOS.

Another condition that could become a hurdle to the market is DISCOS being suppliers of last resort. As more and more retailers enter the market, it is expected that industrial and low loss domestic customers will shift to appropriate demand aggregator services. This will make the demand portfolio of DISCOS riskier. Therefore, CTBCM will have to find mechanisms that follow an appropriate risk mitigation strategy without side-lining risky but politically important customers.

Such risk mitigation will have to be executed in an environment that rewards high recovery rates. Under the current plans for CTBCM, transmitters will be punished for unacceptable transmission losses by being forced to purchase the lost electricity units. However, no such incentive arrangement has been propounded for DISCOS.

Apart from Distribution, the transmission side of CTBCM will also have to face certain realities. First, CTBCM envisages only one Transmission Network Operator (TNO) i.e. NTDC. However, under the 18^th Amendment -to the Constitution of Pakistan- the provinces are entitled to their own Transmission and Dispatch companies. These rights have been turned into reality with the creation of Sindh Transmission & Dispatch Company (Pvt.) Limited. A similar Transmission and Dispatch company is being considered for Khyber Pakhtunkhwa. The system will have to adjust the role of TNO for presence of provincial Transmission and Dispatch Companies.

By adapting to the various challenges CTBCM can help realize its stated aims of: Fare sharing of risk-reward, Removing Conflict of Interest, Sovereign guarantee free investment, Payment discipline, Market efficiency increase (new procurement + current use), Sustainability, Accountability, Transparency and
Predictability, Open Access Information.

Conclusion

CTBCM is an overdue stride towards market orientation of the sector. With its implementation the sector is expected to see increased demand creation, transparency and expansion of the transmission network. In addition to opening the possibility of electricity export, the reform will also aid in depoliticization of the sector while giving it a private oriented strategic guidance.

However, at the same time the plan for CTBCM will have to be amended for a number of challenges including the circular debt, presence of multiple Transmission and Dispatch entities, maintenance of sanctity of contract vis-à-vis 2015 Power Policy investors and organizing appropriate financial arrangements for DISCOS.

Annexure – I

A Brief Overview of CTBCM

Currently the power market operates in Single Buyer model. This means that CPPA-G acts as a financial intermediator by buying power from all suppliers and selling it to all the DISCOS. Meanwhile NTDC ensures physical transfer of electricity from the power plant to the end DISCO network. The following image is a simplified overview of the sector structure where the red arrows indicate cash flows while blue arrows indicate energy flow.

 

Now, the financial transactions will take place directly between the generators and the end consumers via bilateral contracts. In order to make this conversion, a number of new entities have to be created. They are listed as following along with their functions and aims

Name of Entity	Constituents	Function	Aim
Generators	New IPPs + Old IPPs (in case of successful novation)	Provide Products of 1) Energy 2) Capacity Provision	Ensure generation of electricity using an optimal fuel mix as per Integrated Energy Plan.
Wholesale Suppliers	DISCOS	– Purchase electricity from Generators via bilateral contracts to be provided to customers or retailers – Can import or export power- Procure products from special regime power producers such as Neelum–Jhelum Hydropower Plant.	Act as reliable customers for generators.
Retail Suppliers	DISCOS + New Players (Demand Aggregators and Competitive Retailers)	Purchase electricity from wholesaler for further sale to end consumers.	Act as reliable service providers for small consumers.
Bulk Power Consumers	All consumers consuming more than 1 MW	Purchase Power Directly from Generators or Retailers.	Allow large consumers (mostly commercial) to realize potential efficiencies that accrue from bilateral negotiations.
Special Purpose Suppliers	Part of CPPA-G	– Current: Purchase Power from generators with legacy PPAs that have not been renegotiated with individual customers. – Perform invoice verification services for DISCOS.Note: Cannot sign new contracts – In future: will be used to sign contracts with generators of strategic significance.	To ensure Sanctity of Contract for old PPAs and to initially help DISCOS during the capacity build-up stage.
Independent Auction Administrator	Combination of PPIB and AEDB	– Perform new capacity procurement services until DISCOS develop individual auctioneering capacities to calculate demand gap between DISCSO demand and contracted capacity. – Help financially unhealthy DISCOS secure guarantees required for signing contracts. – Ensure Regulatory approval of new PPAs – Prepare Standard Bidding Documents – Align DISCO procurement with Generation System Indicative Expansion Plan (prepared by NTDC). – Help DISCOS sign contracts with generators.	Help ensure that lack of technical capacity does not lead to inefficiencies within the CTBCM regime.
Market Operator	Part of CPPA-G	– Ensure representation from other entities – Control Admission and Exit of Participants- Periodic Balancing Mechanism settlement- Dispute Resolution – Ensure all energy entering the system is under contract and all energy exiting the system is under contract. – Build Capacity of other players such as DISCOS – Creation of Contract Register – Settlement of Metering Systems	Ensure efficient CTBCM operations by performing oversight and due diligence functions.
Transmission Service Provider (TSP) or Transmission Network Owner (TNO)	NTDC	– Create Transmission Expansion Plan – Provide Transmission Services – Maintain Transmission Network as per Grid Code and Performance Standard Rules.	Minimize transmission bottleneck constraints.
System Operator	NPCC	– Ensure that supply meets demand – Planning and coordination of – Maintenance Outages – Economic Generation Scheduling – Dispatch – System in balance with security and reliability constraints – Design special arrangements for dispatch of hydel.	Maximize long-term health of transmission system via appropriate technical planning.
Planner	NTDC	–    Develop the Transmission Development Plan (10 year Least Cost Transmission Expansion Plan) –    Perform yearly review of Transmission Development Plan –    Develop Indicative Least Cost Generation Expansion Plan	Guide the strategic development of the system in terms of generation and transmission expansion.
Metering Service Providers	NTDC	– Metering service for revenue meters at the Commercial Delivery Points (CDP) (provide services of commercial meter reading, Validating, Testing and Calibration)	Ensure measurement of energy delivery.

 

Once the new system is implemented, each market player has to be registered with the Market Operator. CPPA-G will break down into two organizations of Market Operator and Special Purpose Suppliers. Special Purpose Suppliers will novate all of the PPAs of the existing IPPs onto its portfolio and in turn have back-to-back arrangements with DISCOS (as Retailers) to sell electricity to them. Overtime as new bilateral contracts are signed, the market share of the Special Purpose Suppliers will eventually diminish and be replaced by the signing of new Bilateral Contracts.

In the new bilateral contracts, the payment and contract signing between DISCOS and generators will be bilateral. However due to the nature of transactions, minor differences will exist between the contracted energy and actual physical transfers of energy. These differences will be handled by the Balancing Mechanism. MO will oversee the execution of the Balancing Mechanism of these contracts.

Balancing Mechanism is not the only novel operation for DISCOS. They would also be expected to forecast demand under their areas (as retailers), sign PPAs with Suppliers, procure capacity, work under plans such as Least Cost Generation Acquisition Plans. In order to help DISCOS, Independent Auction Administrator (IAA) and Special Service Providers will help them perform the relevant duties. In addition, the Market Operator is expected to build relevant capacities within DISCOS. IAA is also expected to provide financial guarantees to cover to ill-performing DISCOS and help them ensure capacity obligations for future.

Meanwhile Planner, Transmission Network Operators, System Operators and Metering Service Providers are expected to ensure system stability in the short and medium term via planning and maintenance of an integrated system. Together these components are expected to create a decentralized yet organized energy market in the country that will pave the way for creation of dynamic markets such as net pools and power exchanges.

[1] Economic Coordination Committee

[2] This is an Indicative Date conditions on NEPRA approval the implementation road map. Currently, only the conceptual framework has been approved by NEPRA.

[3] Energy Purchas and Capacity Obligations