Privatization: Panacea for Energy Sector Woes

By Muhammad Mudassar

ISLAMABAD, Jan. 21 (INP-WealthPK): Major reasons for rising circular debt in the energy sector include the capacity payments to independent power producers, governance issues, cross-subsidisation, line and distribution losses and dependence on imported fuels for generating electricity.

According to the ministry of energy and power division, Pakistan’s circular debt had reached Rs2.3 trillion in the fiscal year 2020-21, reports WealthPK.

Experts suggest privatising the energy sector to bring in competition to ensure reliability, accessibility, affordability and sustainability of energy to consumers. According to them, the so-called cross-subsidisation is also contributing to the circular debt as the less or non-productive sectors are getting huge subsidies at the cost of the high-performing sectors. For example, a major chunk of subsidy goes to the residential and agricultural sectors, accounting for around Rs303 billion and Rs65 billion per annum, respectively. What adds to the predicament is the fact that about 12% of power consumers in Pakistan do not at all pay the monthly electricity bills.

Keeping in view the ills afflicting the power sector, Pakistan, sooner than later, will have to move towards privatising the energy sector to overhaul it through competition and to get rid of the vicious circular debt.

Pakistan can take cue from the countries having successfully implemented the energy sector privatisation plans and brought sustainability to the supply-demand issue.

Privatisation provides an opportunity for everyone to enter the market, giving rise to a healthy competition, and improving the operational capacities of the stakeholders.

How good will it be when consumers can choose to buy electricity from any entity of their choice in the market?

In its bid to privatise the power sector, the government had introduced the ‘Competitive Trading Bilateral Contract Market (CTBCM)’ back in March 2018.

According to the National Electric Power Regulatory Authority (Nepra), CTBCM will initially cater to the wholesale market but will eventually pave the way for progressive opening up of the retail sector as well as trading with regional markets.

The development of the wholesale competitive electricity market in Pakistan was envisioned at the outset of power market reforms of the 1990s and was further provided in the Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997, amended in 2018.

The Central Power Purchasing Agency (CPPA) mandated to prepare the model of CTBCM in consultation with the stakeholders, had submitted to Nepra a high-level conceptual design of the proposed CTBCM model and the roadmap on March 5, 2018, for review and approval, according to WealthPK.

CTBCM will provide large consumers with the much-needed options to actively trade electricity founded on competitive market-based principles. This eventual systemic improvement in the wholesale market will consequently have the trickle-down effect for other consumers, resulting in more competitive prices in the days to come. CTBCM’s implementation of the plan, as approved by Nepra, is itself a huge undertaking and a challenge to be completed within the next 18 months in order to roll out the CTBCM by April 2022.

This reform plan entails actions ranging from institutional strengthening to augmenting legal and regulatory framework. Interventions covering people, processes and technological aspects will provide a non-discriminatory open access to all market players. CTBCM will also contribute to improving the security of supply, enhancing efficiency, amplifying payment discipline in the wholesale market operations and advancing conditions to move away from the historical sovereign guarantees-based regime.

It is noteworthy here that the privatisation of the Karachi-Electric in 2005 has not gone well as planned as transmission and distribution (T&D) losses keep on rising. The causes behind this loss are monopoly, political interference and a lack of recoveries.

There are some bright examples of energy sector privatisation around the globe, and New Zealand is a prominent one as the country has a 36% share by the private sector in electricity generation and a 100% share in electricity distribution.