Competition, not regulation, brings down energy prices

Time has come to introduce competition in which prices are discovered via bidding

ISLAMABAD: Utilities have been considered as natural monopolies as these used to be integrated companies combining generation, supply, transmission and distribution.

These days integrated utilities are rare and generation of electricity and supply of gas is universally competitive. Distribution companies buy electricity at competitive rates largely determined in energy or commodity exchanges in a stock market-like situation.

In developing countries, however, there are regulatory agencies like National Electric Power Regulatory Authority (Nepra) and Oil and Gas Regulatory Authority (Ogra) who determine the prices both for producers and consumers.

Many people in the country are sceptical about the (so-called) competition as has been indicated by frequent raids of even a docile Competition Commission of Pakistan. This has created justification for the continuation of regulation.

However, time has come to introduce some competition as we will see in the following the failure of regulation.

This is the second part of an article in which the need for introducing competition is discussed in order to reduce energy prices, as has happened elsewhere. In the first part, published last week, a review was made of the falling wind and solar energy prices.

Despite one’s reservations about competition (which can be manipulated and hijacked), the world experience is that competition brings lower prices (if not supplies always, there have been market failures elsewhere eg California) than regulation.

Prices are discovered through bidding. Otherwise, there is no more accurate way of knowing the prices of inputs and outputs.

Cost estimates by regulators or bureaucrats may be faulty, in favour of the supplier or the buyer. Interestingly, in Pakistan’s case, it appears that mistake or faulty assessment has never been done against the suppliers.

Finally, in regulation, everybody is equal. All companies, irrespective of their balance sheet, experience and credibility, get a risk spread of, say, existing rate of 4.5%.

Everybody manages to get a supplier and a lending agency with this kind of liberal spread.

In a competitive situation, better companies are able to get better borrowing terms and thus are able to offer better prices and get the contract.

In a regulated environment, all and sundry form a queue vis-à-vis the buyer and the latter has no cue whom to sign power purchase agreements (PPAs) with and thus the premium?

It augurs well that Nepra, after observing all that has happened in the past and facing difficulties in arriving at the right tariff, has come out in support of competition, although a bit late.

Nepra has issued guidelines for competitive tariff. I guess, it is for solar and wind or other renewables. If it is for all sources, where would the Private Power and Infrastructure Board (PPIB) go?

Reportedly, the Alternative Energy Development Board (AEDB) has responded by asking more time as auctioning is new. However, consultants can be invited to assist in “reverse auction”.

Real reason

The real reason for procrastination appears to be different. Firstly, the Central Power Purchasing Agency (CPPA), the power purchaser, is already full of 1,000MW PPAs it has to pay for.

Secondly, the CPPA is already under financial load of paying for the expensive solar power capacity of 400MW or so.

Thirdly, there are transmission issues possibly, as there are special problems in transmitting renewable energy which is often non-steady if not unstable.

There was and is no need that solar and wind tariff be kept so high compared to other countries due to vendor influence under flawed regulatory practices and reliance on public hearings without making use of good third-party expert advice.

Although regulation is almost always less efficient than competition, regulation could have been better conducted.

The above should not be construed as an indictment of the present leadership either in the government or regulatory agency in question, it has been a common problem over the years.

Let us look forward to better days and an appropriate tariff under competitive conditions. Here, we have dealt with price bidding at the beginning of awarding a contract to an IPP for installing a solar or wind power project.

It is rather static pricing system that remains valid for the entire life of the project, barring well-defined adjustments.

There is a larger issue of competition among all energy/electricity producers wherein prices are established through an exchange system like stock exchanges, which we will deal with in future articles.

The writer has been member energy of the Planning Commission until recently

 

Published in The Express Tribune, March 20^th, 2017.

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