he power sector regulation in Pakistan is at a crossroads. Significant current challenges threaten its stability and future. Two of the most pressing issues are the escalating cost of capacity payments and the declining propensity among the consumers to pay the rising bills. These challenges are not only straining the national economy but also pose serious threats to socio-economic stability.

The sector is currently mired in inefficiencies and financial distress, primarily blamed on poor governance. Circular debt (Rs 2.64 trillion and rising) has accumulated due to inefficiencies, power theft and inappropriate tariff structures.

The debt situation has worsened with the rising cost of capacity payments. This has placed a heavy financial burden on the government. The problem is a result of policies focusing on short-term solutions rather than sustainable, long-term strategies.

The governance structure of the power sector has long been plagued by bureaucratic inertia and lack of transparency. The decision-making processes are often slow. Enforcing compliance with proposed reforms looks like a daunting challenge. This environment has resulted in suboptimal use of resources and a lack of trust in the system.

Historically, governments have focused on expanding the generation capacity without addressing inefficiencies in transmission and distribution. Transmission constraints for Thar plants, for instance, are causing an annual impact of Rs 16-20 billion.

The government’s focus on expanding generation through projects like the Gwadar Power Plant has not been accompanied by timely upgrades to the national grid. This has resulted in inadequate grid capacity to handle the higher load, causing reliability issues. Since its inception there have been proposals to switch to LNG or Thar coal or replace it with a solar plant.

Reliance on imported fuels and poor tariff structures have resulted in high costs and contributed to the so-called circular debt crisis. Subsidies have strained public finances without effective targeting.

The policy weaknesses have made the sector financially unstable. It is also unable to address customer needs resulting paradoxically in both excess demand and large-capacity payments.

For the fourth time, the Economic Coordination Committee has withheld approval for a new solar policy, apparently on account of a lack of consensus on whether to promote or inhibit solarisation.

Competitive Trading Bilateral Contracts Market is a proposed solution. As Pakistan considers its implementation, it is crucial to critically evaluate the model to ensure that it alleviates the problems rather than exacerbating those. The NEPRA had approved the model in November 2020 to open Pakistan’s Wholesale Electricity Market.

The May 2022 Market Commercial Code calls for an end to the single-buyer regime. It allows the DISCOs to procure power through centrally organised auctions managed by an independent auction administrator (IAA). It also permits bulk power consumers, with a load of 1 MW or more, to choose their electricity supplier and allows market-based sales for interested generation plants, including retiring or captive plants connected to the national grid.

The Competitive Trading Bilateral Contracts Market model is expected to address deep-rooted problems in the power sector. A critical evaluation of the model is crucial.

The idea of market liberalisation in Pakistan’s power sector is not new. Over the years, several attempts have been made to introduce reforms aimed at increasing efficiency and reducing costs, the Power Sector Reforms Act 1992 and Electricity Act 2012 are there. The CTBCM is the latest in a series of initiatives aimed at restructuring the sector.

To date, progress towards implementing CTBCM has been slow. Regulatory frameworks are being developed and consultations are going on with various stakeholders. There is also scepticism about whether the necessary infrastructure and regulatory oversight can be established in time for its smooth implementation.

Liberalisation comes with its own challenges. It requires a strong regulatory framework to ensure fair competition and prevent market abuse. It further necessitates a significant shift in how electricity is traded and consumed in Pakistan, which may be difficult to achieve given the current state of the sector.

To assess CTBCM’s potential impact, it’s useful to examine similar reforms in countries like Turkey and India. Market liberalisation in Turkey boosted investment and stabilised supply. Despite initial challenges like regulatory hurdles and price volatility, Turkey’s energy policy emphasised supply security, market predictability and sustainability, even as it privatised many public power plants.

India’s experience offers another perspective. While the introduction of competitive markets has helped reduce inefficiency and encouraged investment, issues such as market manipulation and inadequate grid infrastructure have persisted. These examples highlight the importance of robust regulatory oversight and the need for a phased approach to market liberalisation.

For the CTBCM to succeed, it is essential to ensure that the market is fair and transparent. This required national level capability building to enforce rules. Additionally, the costs associated with using the electricity grid must be managed sustainably.

If grid costs are not adequately controlled, the benefits of liberalisation could be lost to rising transmission and distribution expenses. Moreover, the model must be designed to ensure that all participants can compete on a level playing field. This includes providing access to accurate market information, ensuring non-discriminatory access to the grid and preventing monopolies.

The CTBCM may change electricity trading, but wheeling charges remain crucial for covering grid use costs and ensuring sector efficiency. Transparent, well-structured charges will enable accurate pricing, support infrastructure development and reduce power shortages and inefficiency.

The CTBCM model presents an opportunity to address some of the most pressing challenges facing Pakistan’s power sector. Introducing competition can be expected to result in efficient pricing, better resource allocation and lower costs for consumers. However, the CTBCM’s success depends on careful planning and phased change.

Net metering brought down electricity sales, leading to an increase in the capacity component of the tariff. With the introduction of the CTBCM, this issue may escalate further.

The writer is an economic correspondent at The News. He tweets @jawwadrizvi