Power sector: the regulatory discontent

CPPA-G criticises capacity expansion plan due to its negative impact on tariff


SYED AKHTAR ALI June 21, 2021

ISLAMABAD:

Public hearings were held by the National Electric Power Regulatory Authority (Nepra) recently on the Indicative Generation Capacity Expansion Plan (IGCEP) and allied issues.

There was considerable controversy and discontent. There are two major issues that are under deliberation these days, which have a bearing on each other: Competitive Trading Bilateral Contract Market (CTBCM – a competition framework in the power sector) implementation issues and IGCEP.

Recently, in this space, we discussed some of the issues that impinge on the accuracy and credibility of IGCEP. In the recent public hearing, the very legitimacy of IGCEP came under question. It is important for the stakeholders to know what is at stake. We will discuss in the following space the allied issues.

There is an approved Grid Code, which provides the legal basis for the power planning process and the project formalisation and induction processes related to both generation and transmission. Generation and transmission plans have to be prepared and submitted simultaneously, as these are interdependent.

We often hear that there is enough generation capacity, but lesser transmission capacity. National Transmission and Despatch Company (NTDC) has to prepare these plans, by undertaking the need assessment and the cost and economic evaluation.

It has to optimise and come up with a least cost generation plan. This has to be done in line with the policy guidelines of the government. If the above framework is correct, all projects should be borne or developed out of this plan.

There were renowned and known power sector experts who questioned the practices in vogue.

Their contention was that instead of IGCEP giving a plan and project list with their costs and economics, it is the execution agencies which have developed most of the plan elements and submitted to IGCEP makers at NTDC as a fait-accompli.

Arbitrariness has been alleged in project solution due to which there was controversy and heart burning among project promoters including the provincial governments.

Admittedly, all projects cannot be included when surplus has been indicated in recent years. Transparency requires that unconstrained optimisation should have been done.

One would have known which projects are selectable on a least cost criterion and pure merit as compared to the constrained optimisation which takes into account the policy criteria and practical factors. There are indeed some practical issues like the projects which are already under-construction which have to be included irrespective of their merit or least cost considerations.

The contention has arisen on the projects that have been given the Letter of Support (LOS) or are at advanced processing stage. Some projects are sacrosanct for the political economy reasons. It is amazing but pleasing to note that the Central Power Purchasing Agency-Guarantee (CPPA-G) criticised the plan due to the negative impact of IGCEP and its included projects on power tariff.

CPPA-G pointed out that there would be a 41% increase in average consumer tariff at constant prices, eg inflation effect excluded. It was probably mostly due to the capacity charges. CPPA-G should be concerned as it will have to finally pay the bill. Actually, the planners of IGCEP (NTDC) were supposed to work out the tariff impact and develop recommendations for project exclusion or improvement.

They avoided doing so. The regulator is not supposed to pressurise the presenters to provide a rosy picture.

Take and pay

There is an issue of “take and pay” (TAP) vs “take or pay” (TOP) as well, which is causing confusion among the stakeholders. There is no mention of any approved policy or guidelines on TAP.

All existing and forthcoming projects have been awarded tariff based on TOP and not on TAP. TAP is an open market instrument where the buyer buys electricity at market prices or under bilateral negotiation, and the CTBCM is far away from actual implementation.

Projects are not yet being approved under CTBCM. We have no dearth of legal problems at hand to deal with.

TAP is a populist framework in the developing world. In the advanced economies, the electricity market and exchanges make TAP possible. The buyer can buy from the market directly or use the exchange price as a reference in bilateral power purchase agreements (PPAs) under a TAP agreement.

In Pakistan, nothing of the like is there and has been consistently opposed by the proponents of CTBCM. TAP, when applied in the regulated frameworks, results in almost the same price as TOP – the reason being the lower capacity factor generally assumed under TAP (50-60%) than TOP (80%).

No commercial independent power producer (IPP) would be prepared to price its product at a high capacity factor of 80% when it does not have a fixed lifting agreement. Thus, it is inappropriate to pressurise CPPA-G professionals to follow TAP pricing in the vain hope of showing a lower impact of the proposed IGCEP.

Partial solution

There may be a solution to all this, at least a partial one. Something is better than nothing. Competition has been meticulously avoided in the power sector in Pakistan.

CTBCM has appointed the Private Power and Infrastructure Board (PPIB) as auctioneer for new projects. There is still an opportunity both for PPIB and Nepra to organise competition for the projects included in the IGCEP.

It is, however, an open question as to how many megawatts can really be there for such an operation. Something is better than nothing. Renewables appear to be the ready candidates. They would say, why discriminate and let us not enjoy zero-equity syndrome.

It is argued that investment can only come in Pakistan under free-for-all conditions. Competition scares the investors away. There are many actors and agencies involved representing various interest groups. There is PPIB which deals with mostly IPPs and there is Wapda which has its independent working.

There is NTDC, CPPA-G, National Power Construction Corporation (NPCC) and PPIB. Everyone has some reason and power and influence to push their projects, except for the poor IGCEP planner NTDC which is given the approved projects as fait-accompli to be put in its list and develop the so-called IGCEP and provide legitimacy or rationale.

Interveners pointed out these issues, but were not allowed to complete their arguments. There shouldn’t be such annoyance on the part of the functionaries that were present, if corruption possibilities are indicated in a country which has a low ranking and a consensus that there is widespread corruption.

Unusually high tariff and undue payments, and excess capacity have given rise to circular debt and have been hurting the economy. Bypassing the due process and due diligence of investments has made this possible. Due attention should be paid to this in place of “kill the messenger” syndrome. Public hearings are meant to elicit views and opinion of all the stakeholders. Consumer representation and input has been lacking in the regulatory processes.

It is desirable that the input of independent interveners is encouraged and respected. Some attention should be paid to correct this. It would only enhance esteem and credibility of the regulator.

The writer is former member energy of the Planning Commission and author of several books on energy sector

 

Published in The Express Tribune, June 21st, 2021.

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