In Pakistan, a single-buyer model has controlled the electricity procurement model for decades, and now the country is finally backing away from it. Under the Competitive Trading Bilateral Contract Market (CTBCM), consumers will eventually be able to buy electricity directly from the power generators instead of depending completely on centrally procured power. The Federal Minister for Power, Sardar Awais Ahmad Khan Leghari, has announced the country’s first energy wheeling auction under CTBCM, with 400 MW to be offered in the first phase as part of an 800 MW program over the next five years. This auction is a significant step towards deregulation and competitive price discovery. This is a step in the right direction. Power sector privatisation alone cannot guarantee an efficient power market if the structure of procurement and allocation remains the same. A competitive market gives consumers options to choose between suppliers and generators to compete for demand, and CTBCM can provide that space.
However, the challenge lies in ensuring that the transition costs are not undermining the price signal that competition intends to generate. NEPRA’s most recent determination on Use of System Charges includes transmission, distribution, and cross-subsidy costs in the wheeling price paid by participating consumers. Consumers continue to use the national grid; thus transmission and distribution charges are unavoidable. However, cross-subsidy is more complicated. Historically, the industrial consumer category was used to subsidise domestic consumer categories through regulated tariffs. Under the new framework, some of that burden remains even when an industrial consumer switches suppliers. However, it is worth noting that enabling large consumers to leave the regulated system without contributing to current responsibilities may reduce DISCO income and shift expenses to remaining users.
However, if the large number of existing tariff structures is passed over into the competitive markets, the advantages of bilateral procurement pricing may be reduced significantly. The same concern applies to stranded costs resulting from old power purchase commitments. These expenses cannot be eliminated overnight, but they should not become a permanent barrier to competitive entry. The success of CTBCM should therefore be measured by the final landed cost of power, rather than just the price agreed between a generator and a consumer. If competition results in a significant reduction after accounting for wheeling charges, losses, and other system expenses, it can begin to put pressure on inefficient generation and boost industrial competitiveness.
The first wheeling auction should be viewed as a step towards power sector deregulation. The government’s proposal to progressively transition away from direct electricity procurement is a significant development. The next phase should be to increase competitive access while gradually rationalising cross-subsidies and legacy costs, allowing competition to play a more important role in determining power pricing.