Tuesday, 01 December 2020
NEWS

FAQ

General Questions

Q:1.      What is CTBCM Model? 

CTBCM stands for Competitive Trading Bilateral Contract Market which is the NEPRA approved model for the Wholesale Electricity Market of Pakistan. The basic aim of the CTBCM is to introduce competition in the Electricity Market and provide an enabling environment where multiple sellers and buyers can trade electricity. The current market structure followed in Pakistan is the single-buyer model in which CPPA (as a single-buyer) purchases electricity on behalf of ex-WAPDA distribution companies. In CTBCM, there will be multiple buyer and multiple seller, and the hourly electricity price will be determined by the economic forces of supply and demand.


Q:2.   What immediate and long term benefits it will bring in power sector of Pakistan?

The introduction of competitive auctions for incremental capacity will reduce prices in the long term, substantial price decrease is expected through measures such as (a) competitive bidding will reduce the price of entering in the market; (b) transparent economic dispatch will reduce the variable cost of generation; (c) forecast improvement will also result in efficient dispatch and improving least cost expansion planning; (d) procurement discipline, will surely reduce end consumers cost. etc. Prices will fall as the competition increases.The improvements achieved in performance of various entities through the proposed group of actions in the CTBCM implementation plan will reduce certain risks, increase transparency, which will create better environment for investment. 

Q:3  What is the difference between Regulated and De-Regulated Energy Market?

A “regulated energy market” is where a utility company owns the electric transmission lines and all associated infrastructure (like power poles, power lines and transformers), and generates (makes) or purchases electricity and sells it to customers. Utility companies must show a return on investment or a benefit for the money they spend.

A “deregulated energy market” is where utility companies continue to own and maintain the transmission infrastructure and distribute electricity, but other companies can compete in that area to supply and sell electricity to customers. Deregulation is focused on competition, and future generation decisions are based on how to best manage risk and earn income.

In deregulated market there can be regulated consumers which does not have choice to buy electricity other than base supplier in regulated rates, depending on the size and threshold defined in market rules. This threshold is gradually reduced to increase level of competition.

Q:4 What are natural monopolies? Why no competition is introduced in transmission and distribution business?

A natural monopoly is a type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. A company with a natural monopoly might be the only provider of a product or service in an industry or geographic location.Transmission and distribution of electricity are considered as natural monopolies, because they are most economically performed by a single line or a single network of lines and are suitably operated by a single entity. A single high-capacity line or network minimizes both capital costs and losses to electrical resistance per unit of power carried.

Market Perception
Q:1    What will CTBCM is expected to deliver? What will be the effect of CTBCM on end consumer tariff?

1   The main objective of CTBCM is to develop an efficient and transparent wholesale electricity market. For such reason, significant emphasis has been put in transparency and publication of information.

 The System Operator (SO), Market Operator (MO), DISCOs, NTDC as Planner, Transmission Network Operator (TNO), Metering Services Provider (MSP), Independent Auction Administrator (IAA)and the Special Purpose Trader (SPT) shall have IT based systems and information publishing mechanisms as given in CTBCM Plan to ensure all market participants are aware of the market decisions and market results.

Proper implementation of CTBCM actions will improve the market conditions and over time will enable to attract investment on risk sharing basis. Also, competition in the market both at the entry (auctions) and in the market (dispatch) with improved overall conditions, transparency and predictability will make the wholesale prices better for consumers as compared to conditions if they continue as-is today i.e. without CTBCM implementation.

Transparency, predictability and accountability in the market, improved institutional capacities and improved other market conditions through CTBCM implementation will for sure pay dividends and help in meeting the objectives for which the sector was de-bundled.

The improvements achieved in performance of various entities through the proposed group of actions in the CTBCM implementation plan will reduce certain risks and the introduction of competitive auctions for incremental capacity will definitely reduce prices in the long term, substantial price decrease is expected through measures such as (a) competitive bidding will reduce the price of entering in the market; (b) transparent economic dispatch will reduce the variable cost of generation; (c) forecast improvement will also result in efficient dispatch and improving least cost expansion planning; (d) procurement discipline, will surely reduce end consumers cost. etc. Prices will fall as the competition increases.

 2.      Will CTBCM resolve the issue of Circular Debt and will improve payment discipline?

 The scope of the CTBCM needs to be understood very clearly. A strategic decision has been made at the highest level of authority to introduce a competitive wholesale market in Pakistan. This doesn’t mean a complete reform of the power sector that encompasses every possible issue in the sector and address it.

 As stated above, it is important to remark that the CTBCM model is for the design and implementation of the new WEM in Pakistan; it is not, and does not pretend to be, a reform plan for the entire Power Sector.

 Wholesale market implementation for sure will improve institutional capacities, enhance transparency, contribute in improving wholesale market governance, bring in efficiencies, attract investments on risk sharing basis, encourage competition and put pressure on prices, align the policy and regulatory framework etc. but will not address directly the non-performance issues, low recoveries, electricity theft etc. which are the major issues behind Circular Debt.

  GoP, in-order to improve performance of DISCOs may/can privatize or re-structure DISCOs. This can be done in parallel to CTBCM implementation. The market design does not distinguish between a private DISCO or a government owned DISCO. So, the CTBCM will be fully prepared to accept private DISCOs if the case may be.

 Q3.      What is the difference between Wholesale and Retail Market? When Retail Market will be introduced in Pakistan?

 Wholesale Electricity Market refers to the bulk purchase and sale of electricity by energy producers and suppliers. Other participants in the wholesale energy market include financial intermediaries, energy traders and large consumers. Whereas, Retail Market refers to sale and purchase of electricity between electricity suppliers and small end-consumers.

Initially CTBCM will introduce completion in wholesale market only, by allowing large consumers, suppliers, traders and generators to negotiate bilateral contract of sale and purchase of electricity in bulk (> 1MW). As the market maturity and liquidity increases this threshold shall be gradually decreased by the regulator to open the retail market introduce competition at retail level where the end-consumers will have choice to select their own supplier. But this will take time and will not happen in the recent future.

 Q4.      Future procurement for regulated consumers in CTBCM will be secured by Sovereign Guarantees or not?

 In the initial stage of the market opening, the contracts will still be backed by the government guarantees but their volume will be reduced significantly in CTBCM and would be limited only to DISCOs having low creditworthiness. The procurement of generation capacity for creditworthy DISCOs will not be secured by Sovereign Guarantees, instead other credit risk mechanism like credit covers will be introduced. For low creditworthy DISCOs guarantees backed by the government will be provided.

 Q5.      Will the Take or Pay contract regime will end with the start of CTBCM?

 Take or Pay contract regime will not end in the short term but eventually as it is a journey and not a step. It will take considerable amount of time to increase investors’ confidence in the competitive market.

 The objective of having Take and Pay contracts in Pakistan is a desirable goal and, therefore, the approved CTBCM model do not exclude them. However, following should be considered as prerequisite before moving entirely to Take and Pay contract regime:

·        From investor’s perspective, the legal, political, regulatory, market, operational, construction and financing risks of Pakistan are far higher than the developed countries and also higher than many of developing countries. The payment discipline in Pakistan is far from what is desirable and only this issue (without considering others) discourage investors to take risks in the country.

·        Reduction of risks don’t happen overnight and are linked with overall reforms of not only power sector but across various sectors, overall governance improvement and with culture /norms of societies.

·        Even if electricity market intervention in Pakistan gradually addresses and improves power sector risks, to immediately switch on Take and Pay contracts may end up in exceptionally higher prices by investors to compensate high risks, which Pakistan can’t afford at all.

 Detail Design

 Q1.      What are the main differences between Service Providers and Market Participants?

 The Service Providers are companies that provide non-discriminatory services to all Market Participants, but do not buy or sell electricity in such market. The role of such entities will be quite similar to what exist today, however, with additional requirements of transparency and accountability for some of them. For example, the System Operator or the Transmission Network Operator will continue to perform what is expected of them today with an additional need to have dedicated mechanism for dissemination of market relevant information to the stakeholders. In addition, other new institutions will be introduced in the power sector for example the Market Operator (MO) or Independent Auction Administrator (IAA).

 The Market Participants are entities that have commercial interest in the market. In other words, the entities who perform trading of electricity by buying and / or selling electricity in the market are called Market Participants. They include Generators, Traders, Base Suppliers, Competitive Supplier and Bulk Power Consumers. In order to be market participant and perform trade in the market, it is mandatory that it get itself registered with the Market Operator by signing the Market Participation Agreement and complies with the commercial metering requirements defined in the Grid Code.

 Q2.      What is the main difference between Trader and Supplier?

Electric Power Traders will be licensed entities to buy and sell electricity to other Market Participants at wholesale level and can be involved in export or import activities, but it cannot sell electricity directly to end-consumer. Whereas, an Electric Power Supplier can sell directly to the end-consumers.

 Q3.      Why no Power Exchange is being developed in CTBCM?

 The concept of a power exchange is based on the fact that there are multiple buyers and sellers willing to sell or buy their products (Energy, Capacity) conveniently. Both the demand and supply sides analyze their day ahead requirement and try to balance out any deviations between contracted quantities and actual consumption / supply, by procuring / selling in the PX to minimize the impact of real time balancing costs.

 In Pakistan, we have Generation Following long term contracts with Take or Pay capacity and Pass Through energy. Whole demand seems to be adequately contracted which means that if there is any PX, demand side will not participate (as it has no deviations or imbalances to procure from the PX).

 Similarly, generators are paid capacity charges (fixed charges) based upon their availability. Variable cost is a regulated pass through cost. If it participate in PX, it will always submit the same bid (for availability purpose it will try to be available for all the time to secure fixed capacity charges and due to regulated variable charge, it will submit same price all the time). Therefore, submitting the same bid at all times without any optimizing strategy makes no sense at all.

 Q4.      What are stranded costs and cross subsidy charges?

 In electric power generation deregulation, stranded costs represent a public utility's existing infrastructure investments and legacy contractual costs that may become redundant after substantial changes in regulatory or market conditions.

 Cross-subsidies in electricity tariff can be defined as a mechanism whereby some consumer groups are charged a higher tariff as compared to the cost of supplying power to them. The additional revenue generated from them is used to tide over the revenue shortfall from other consumer groups, who are charged lesser tariff as compared to the cost of supplying power to them.

 Q5.      How K-Electric will be integrated in wholesale Market?

 There can be multiple options for integration of KE in the Market. Some of these are discussed as under:

• Option 1: KE remains as integrated utility and trade in the market as import and export.

• Option 2: KE remains as integrated utility for certain period and trade in the market as import and export, however, a clear plan is established to integrate it into the market and one single market is established. This will require enhancement of the transmission network at the interconnection.

• Option 3: Two separate markets are established with clear boundaries for import and one market operator makes settlement in both markets.

These 3 options are analyzed in detail design report submitted to NEPRA in which option 2 is recommended.

 Q6.      What will be the role of PPIB/AEDB in CTBCM?

 

PPIB/AEDB will be merged to assume the role of Independent Auction Administrator (IAA), which will perform the auctioneer function for procuring generation capacity against the incremental demand, primarily for DISCOs. In order to undertake this function, PPIB/AEDB would need to get themselves registered with NEPRA as IAA.

    Policy/Regulatory

 Q1.      Is CTBCM aligned with Regulatory framework and NEPRAs Act?

 Yes, CTBCM is fully aligned with NEPRA Act (amended) 2018. Before submitting the high-level CTBCM Model to NEPRA for approval, a special committee of the CPPA board was formed to review the model and check its consistency with the NEPRA Act. After submission, NEPRA also performed a consistency check before granting the approval of CTBCM model.

 Q2.      How CTBCM will be aligned with upcoming NEP and policies?

 The National Energy Policy and National Electricity Plan are not pre-requisite to implement the wholesale. The provisions of such policies or any other policies that will come in future, when proposed and approved, could be perfectly adopted by the market model and implemented in true spirit through alignment of the framework. Therefore, it should be understood that the CTBCM could be perfectly implemented right away without the policies that are anticipated to be promulgated in future.

 Q3.      Will power policy 2015 will be effective in CTBCM?

 Not in the current form, as it has many gaps with respect to the competitive regime which requires modification. The Power Policy 2015 will be reviewed in light of the approval market model and will be amended accordingly.  

 Contractual Framework

 Q1.      How legacy PPAs will be dealt in CTBCM?

 The legacy PPAs will be allocated to all the DISCOs based on the allocation factors approved by NEPRA. The allocation will be among the DISCOs, K-Electric and all other existing distribution licensees (in the role of suppliers) including these small DISCOs on the basis of the criterion defined in the detailed design and subsequent methodologies to be developed. Through this allocation, each distribution licensee will be assigned a fixed share (subject to revisions in the future) from the existing contracted capacity so that the individual future needs can be calculated based on their respective demand forecasts.

 Q2.      Will Legacy PPA allocation have any impact on IPPs contractual arrangement with CPPA?

 No, there will be no impact of allocation on Rights and obligations established under the existing PPAs/EPAs. CPPA (to be SPT) will be dealing with legacy contracts in the same manner as today. These contracts will be protected and there will be no alteration of these agreements under CTBCM.

 3.      How future procurement for regulated consumers will be done in CTBCM?

 Future procurement for regulated consumers will be done through competitive auctions conducted by IAA, against the forecasted incremental demand of DISCOs. Power procurement of new contracts for DISCOs will be through competitive processes, initially administered centrally by the Independent Auction Administrator (IAA) and/or, at a later stage, through direct competitive contracting by each DISCO, when this possibility be authorized by NEPRA following applicable regulations and guidelines.

 DISCOs will procure power in representation of their consumers and will be regulated as Last Resort Suppliers to protect the interests of those consumers. The competitive process will follow NEPRA regulations as applicable and approvals for the resulting contract prices for the PPA/EPA to qualify as competitive generation tariffs and pass through as allowed power purchase cost to regulated electricity end-consumer tariffs.

 Q4.      Why CPPA need to be bifurcated in to Market Operator and SPT. Why MO need to be created as a legally independent company?

 The current role of CPPA-G being the agent of DISCOs is in conflict with the Market Operator role. To avoid conflict of interest and guarantee transparency, as the electricity market evolves to multiple buyers and sellers, the Market Operator must be totally independent from any other commercial interest in the market, in particular, not to be a party in purchase agreements, with generators or buyers that participate in the market, as CPPA-G is today.

 Without this independence, there will not be a level playing field in which all players perceived that not market power could act against them. This is a mandatory requisite for investors to take part of the risks associated to long maturity infrastructure developments.

 Therefore, without having the entity that administer all transactions in the market, the Market Operator as a separate legal entity and fully independent from any commercial interest in the market, the level playing field necessary for the achievement of the goals will not be reached and with that the implementation of a non-discriminative, independent and transparent competitive market will not be possible.

 Q5.      How electricity imports from AJK and other imports will be dealt in CTBCM?

 Electricity imports from AJK or any other area will be considered as a Generator “connected” in the international interconnection and represented in the market by the Participant that is the purchasing/import party in the contract. The purchasing party will be registered with the Market Operator and will be treated as a Generator. The contract between the purchasing party and the seller will be outside the market.

 Q6.      How tariffs for the regulated end-consumers will be determined in CTBCM?

 End-consumer tariff for regulated consumers will be determined by NEPRA, in a similar way as done today. The procurement process will also be regulated, the generation tariff will be determined through the competitive auction process instead of cost-plus and upfront tariff regimes.