Pakistan’s power sector circular debt has reached close to $10 billion or 3 percent of the country’s gross domestic product due to technical, financial, and governance deficits.
The Asian Development Bank’s Technical Assistance report “Pakistan: Developing an Electricity Market” states that Pakistan’s power sector is challenged with technical, financial, and governance deficits, resulting in huge circular debt currently close to $10 billion.
One key reason for this illiquid market is the underutilization of take-or-pay contract power plants commissioned between 2015–2019, primarily based on imported fuel that incur huge capacity payments, resulting in its share increase from 18 percent in 2015 to 40 percent in 2022.
In fiscal year 2022, inflated global fuel prices further led to an increase in capacity payments, with the reduction in generation from the new re-gasified liquefied natural gas and coal-based plants. This debt is a symptom of inefficient generation capacity planning as the country moved from crippling power shortages to expensive surpluses.
Since the late 1990s, Pakistan’s electricity market structure has been a single-buyer model in which the Central Power Purchasing Agency (CPPA), as a single-buyer, purchases electricity on behalf of the ex-Water and Power Development Authority (WAPDA) distribution companies (DISCOs).
In November 2020, the National Electric Power Regulatory Authority (NEPRA) approved a competitive trading bilateral contract model (CTBCM) that provided a road map for opening the wholesale electricity market of Pakistan and allowed bulk power consumers (with 1 megawatt or above load) to purchase electric power from the DISCOs or a competitive supplier of their choice.
This competitive regime aimed to (i) provide nondiscriminatory open access to all market participants, (ii) improve conditions to attract investments based on credit covers provided by participants and move away from sovereign guarantees, (iii) ensure a trading environment that seamlessly transits into the retail market, (iv) contribute in improving power sector security of supply, (v) strengthen efficiency arising from “competition in the market” and “competition for the market,” (vi) improve payment discipline in the wholesale market, and (vii) ensure transparency and predictability in the market.
The technical assistance (TA) aimed to build capacity and provide policy advice to introduce and strengthen mechanisms for electricity sales and purchases in Pakistan based on the CTBCM, developed under ADB’s preceding TA to strengthen the CPPA (Guarantee) Limited (CPPA-G).
The introduction of competition through implementing wholesale market development aimed to (i) enable flexibility to change supplier of electricity initially for large consumers, and subsequently at the retail level; (ii) create incentives and a level playing field to allow entry and sustainability of efficient generation mix; (iii) remove anomalies to curtail participants from taking undue advantage of market conditions; (iv) liberalize the market, and minimize provision of subsidies; and (v) ensure open access to information for transparency and fair allocation of risks among market participants.
The document states that the TA amount was increased by $500,000 from the Republic of Korea e-Asia and Knowledge Partnership Fund (EAKPF) and was approved on April 5, 2021, in response to the government’s request to extend support to developing a competitive electricity market.
The EAKPF portion was frontloaded for disbursements of consulting firms hired under the TA and this increased budget of $0.5 million was fully utilized. The TA completion date was extended by 17 months to December 31, 2022.
The TA progress was monitored by the Ministry of Energy, NEPRA, and a joint market implementation monitoring group (MIMG), which was established by the CPPA-G as it was responsible for the coordination among all the stakeholders. The consulting firm hired under the TA delivered, but deliverables were delayed because of the impacts of the coronavirus disease (COVID-19).
According to the report, the government under this project achieved most of the projects including new Market Commercial Code that was along with the granting of the Market Operator License to the CPPA-G.
In addition, NEPRA also approved revised Grid Code which is currently being followed for power sector operations by the NTDC and DISCOs whereas the CPPA-G granted market operator licenses, while the special-purpose agent registration is underway at NEPRA.
The technical assistance cost $1.13 million in which the cost of consultants were $1.12 million, $9,000 was used for training, seminars, and/or conferences while $68,000 remained unused.
Source: Pro Pakistani