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Thursday November 21, 2024

Power sector structural reforms needed to break state monopoly: CCP

By Israr Khan
November 09, 2024
A general view of the high voltage lines during a nationwide power outage in Rawalpindi on January 23, 2023. — AFP
A general view of the high voltage lines during a nationwide power outage in Rawalpindi on January 23, 2023. — AFP

ISLAMABAD: Pakistan’s power sector, long dominated by state-owned enterprises (SOEs) and saddled with inefficiencies, is in dire need of competitive reforms, according to a new report by the Competition Commission of Pakistan (CCP).

The sector’s monopolistic grip, largely controlled by state enterprises, restricts private sector entry and drives up costs, leaving consumers with high bills and limited choices. Structural inefficiencies and a centralised single-buyer model exacerbate the problems, with power losses exceeding 17.6 per cent, an aging infrastructure, and soaring circular debt.

The report titled ‘State of Competition in the Key Markets in Pakistan: Power Sector’ highlights the significant presence and impact of state-owned enterprises (SOEs) on competition within the power sector, offering strategic insights for fostering a more competitive market environment.

Chairman of the CCP Dr Kabir Ahmed Sidhu, in his message, emphasised the critical role of a competitive power sector in driving economic growth and ensuring affordable energy for consumers. “This report is a testament to the CCP’s commitment to promoting fair competition and addressing market inefficiencies in every sector of the economy,” he said.

The CCP report underscores a call for change: to revitalise the sector through privatisation, investment in smart grids, and a shift to competitive pricing -- before these entrenched flaws further erode economic stability and energy affordability for Pakistan.It reveals fundamental weaknesses in market dynamics, regulatory frameworks, and infrastructure quality that are impeding efficiency and affordability in the sector.

Transmission and distribution are primarily controlled by the National Transmission and Dispatch Company (NTDC) and regional distribution companies (Discos). A single-buyer model further restricts competition, with the Central Power Purchasing Agency (CPPA-G) acting as the sole purchaser from power producers. This centralised setup not only discourages private investment but also contributes to high operational inefficiencies, particularly in distribution where average losses exceed 17.6 per cent.

The sector’s installed capacity has grown, reaching 45,885MW as of June 2023, with a diversified energy mix. Thermal sources account for 62.79 per cent of this capacity, followed by hydel (23.18 per cent), nuclear (7.89 per cent), and renewables (6.14 per cent). Furthermore, a competitive trading bilateral contract market (CTBCM) model was approved in 2020 to encourage private players, allowing bulk consumers to choose their power providers.

Major weaknesses include high transmission and distribution losses, an aging infrastructure, and circular debt that exacerbates inefficiency. The Paris Agreement, which Subsidies provided under the tariff differential subsidy (TDS) mechanism, while meant to stabilise prices, often benefit inefficient DISCOs disproportionately, undermining market equity. Additionally, unreasonable system charges deter new private entrants, hindering competitive pricing and sectoral reforms.

Pakistan has significant potential to enhance competition by implementing the CTBCM model effectively. Encouraging private-sector participation, particularly through initiatives like competitive bidding for low-cost generation projects, could lower consumer prices and improve operational efficiency. Investment in smart grids and renewable energy, as seen in other countries, presents a sustainable path forward.

Geographical and socio-economic challenges, including high costs associated with rural grid expansion and power losses due to long-distance transmission, create a complex operational environment. Resistance from entrenched SOEs and regulatory delays could stymie needed reforms. Without swift action, the sector’s inefficiencies could increasingly burden Pakistan’s economic growth and energy affordability.

The report calls for sweeping reforms, including the phased privatisation or public-private partnerships (PPPs) for Discos to tackle distribution losses. It also recommends infrastructure investment, tariff rationalisation, and regulatory enhancements to support the CTBCM model’s implementation, setting the stage for broader retail competition.

The CCP recommends swift implementation of the CTBCM model to open the wholesale electricity market, allowing bulk consumers more choice and fostering competition. Strengthening regulatory and market affairs within Discos is essential, alongside transparent charges for transmission and distribution services. The CCP also advises phasing out inefficient state-owned plants to cut costs.

Competitive bidding should be used for low-cost generation projects, and the private sector’s participation in transmission expansion is crucial for efficiency. Transitioning Discos to public-private partnerships or privatising them will help reduce losses. Adjusting tariff subsidies to avoid uniform rates will promote efficiency, and gradually lowering the threshold for retail competition will boost consumer choice.

Infrastructure upgrades for transmission and distribution are critical for competition, and consumer education on timely payments can improve financial stability and reduce theft. These steps aim to dismantle monopolies and create a more competitive, efficient power sector.