Firm being set up to open power market

Independent institution will help address capacity payment challenge

ISLAMABAD:

The government has allowed the Power Division to approach the Securities and Exchange Commission of Pakistan (SECP) for incorporating a limited company to operationalise the Independent System and Market Operator of Pakistan (ISMO) as a credible independent institution, which will open the electricity market.

This move will lead to addressing the challenge of capacity payments to the independent power producers (IPPs). In a recent meeting, the Cabinet Committee on Energy (CCOE) approved the creation of ISMO and its corporate structure including board composition and the first promoters.

It authorised the Power Division to approach the SECP for incorporating a guarantee limited company in the name of Independent System and Market Operator under the Companies Act, 2017.

The division will facilitate the grant of system operator licence of National Transmission and Despatch Company (NTDC) and market operator licence of Central Power Purchasing Agency-Guarantee (CPPA-G) to ISMO through regulatory proceedings, including the issuance of required guidelines to stakeholders. It will ensure the completion of steps required to make the ISMO functional.

The Power Division told the meeting that the National Electricity Policy 2021 and the National Electricity Plan 2023-27 provided the basis for creating the ISMO. Its establishment has also been approved as an institutional arrangement for a competitive wholesale electricity market as part of the Competitive Trading Bilateral Contract Market (CTBCM), designed by the CCOE in its decision dated January 14, 2021 and ratified by the federal cabinet on January 19, 2021.

Later, the prime minister, through a directive in meetings on May 15, 18 and 25, 2024, approved the restructuring of CPPA and NTDC to pave the way for setting up the ISMO.

ISMO will serve as the technical and commercial pillar of the wholesale electricity market with interdependent functions. This entity will perform integrated planning for the power sector. It is imperative that these interdependent roles are performed by an independent, corporatised and credible institution to demonstrate credibility and ensure confidence and trust among market players to achieve the objectives of a competitive wholesale market.

Countries like the US, Canada and Australia, which operate on centralised economic dispatch similar to that of Pakistan, have assigned these roles to a single independent entity, generally named the Independent System and Market Operator.

Currently, CPPA is performing the roles of market operator and agent on behalf of power distribution companies while NTDC is acting as a network and system operator.

When the ISMO starts functioning, it will require the transfer and assignment of market operator licence from CPPA and system operator licence from NTDC. These licences were issued under Section 23 of the Regulation of Generation, Transmission and Distribution of Electric Power Act 1997 to perform their roles in accordance with Sections 23A, 23B, 23G and 23H of the Nepra Act 1997.

During discussion, the energy committee was apprised that the ISMO would serve as a technical and commercial pillar of the wholesale electricity market with interdependent functions. It was added that the entity would lead and undertake integrated power planning, marking a key step towards a more competitive marketplace.

Minister for power informed the forum that observations of the National Electric Power Regulatory Authority (Nepra) and the SECP on the instant summary had been addressed.

Minister for planning suggested including a representative of end-consumers to ensure better decision-making. In response, the power minister clarified that appropriate representation had already been ensured and sector-specific expertise was incorporated into the board, with members from the information and communication technology, legal and technical fields to ensure an effective board.

Special assistant to the prime minister on power cautioned that the representative of end-consumers could raise concerns about conflict of interest.

Committee chairman and the minister for finance emphasised the need for conducting a cost-benefit assessment to determine how the merger of system and market operators would benefit the electricity sector and the general public.

The power minister elaborated that the ISMO was expected to provide an enabling environment for the electricity market, facilitating smoother and more effective transactions and oversight.

The CCOE inquired about the inclusion of wheeling charges and called for enhancing electricity consumption to address the capacity payment challenge.

When the minister for petroleum asked about the benefits of forming the ISMO, the power minister explained that it would help the government switch from acting as the single buyer and sovereign guarantor for attracting investors to the ISMO, which would provide a market for the direct sale and purchase of electricity between producers and buyers.

Hence, the burden of sovereign guarantees and capacity payments will ease and a competitive electricity market will emerge. This transition will be implemented in a phased manner through a trial run.