Daily Times

Electricity market reforms have been extensively adopted in numerous countries across the globe since the late 1980s, aiming to improve the working of their electricity markets. While the specifics may vary from country to country, a general reform framework typically involves corporatization, unbundling, regulatory oversight, the establishment of wholesale and retail markets, and privatization. Aligning with international best practices, the WAPDA Act of 1998 provided the foundation for electricity market reforms in Pakistan. These reforms were introduced in response to a heavily state-regulated market characterized by inefficiencies in production, transmission, and distribution, limited private investments in the sector, price discrimination across sectors, consumer categories, and geographical areas, below the marginal cost prices of electricity production, and alarmingly high T&D losses. The primary goals of these reforms were to improve the efficiency in electricity production, transmission, and distribution, minimize losses, ensure energy supply security, maintain economically efficient investment levels, and improve efficiency in electricity consumption by eliminating price differentials among sectors.

Not only did the WAPDA Act establish the legal structure for the disintegration of various sectors within the electricity market, but it also reconfigured the policy framework under which the market functioned. Prior to the reforms, all segments of the electricity market were planned centrally. However, after the introduction of reforms, the vertically integrated electricity utility, WAPDA, was disintegrated into four electricity generation companies (GENCOs), a transmission company (NTDC), and eight distribution utilities, which have since increased to ten. To regulate the overall electricity market, an independent regulatory body, the National Electric Power Regulatory Authority (NEPRA), was enacted in 1998.

Electricity market reforms have largely remained unproductive in affecting the performance indicators.

Despite the implementation of these reforms, the performance of the electricity market in Pakistan has not witnessed significant improvement. The market continues to face challenges such as deteriorating financial indicators, a widening gap between demand and supply, operational and capacity constraints, and inadequate generation capacity. Moreover, the country’s electricity generation heavily relies on fossil fuels, resulting in a deterioration in price-cost margins. T&D losses contribute to the mounting circular debt. Factors such as inadequate revenue collection, delays in fuel price adjustments, electricity theft and persistent T&D losses have contributed to the circular debt, which has averaged around 20 per cent over the past decade. Governance and management flaws, as well as poor coordination among institutions, have also resulted in inefficiencies in the electricity market. Notably, Pakistan’s electricity market also experienced a reversal of reforms when the Pakistan Electric Power Company Private Limited (PEPCO) was dissolved in April 2012 due to a severe power crisis, and its functions were transferred to the Central Power Purchase Agency.

A recent study published in the Pakistan Journal of Social Issues has empirically evaluated the impact of these reforms in the electricity market of Pakistan on the different market outcomes. The results indicated that the electricity market reforms in Pakistan had marginal success because these reforms have largely remained unproductive in affecting the performance indicators except for IPPs, capacity utilization and T&D losses in selected dimensions of the market outcomes. The IPPs significantly contributed to increasing electricity generation per capita whereas other reform parameters did not record any statistically significant contribution to this indicator. The electricity reforms, including the introduction of IPPs, unbundling of the natural monopoly and the introduction of a regulatory body, significantly contributed to the enhancement of the capacity utilization in electricity generation and played a decent role in reducing the T&D losses in the short-run. Similarly, electricity reforms did not have any significant effect in reducing the price-average cost margins and sectoral price ratios-indicating no effect on subsidies and cross-subsidies.

In this background, it is important to re-initiate the reform process to change the governance structure in the electricity market of Pakistan drawing lessons from past experiences and global structural changes in electricity markets.

Firstly, electricity prices should reflect the true costs of generation, transmission, and distribution. This necessitates reducing subsidies and introducing cost-reflective prices to promote financial sustainability and attract private-sector investment.

Secondly, the government’s role in decision-making should be minimized to enhance competition in different market segments. The regulatory body should be empowered to ensure transparency, accountability, fair competition, and effective enforcement of rules and regulations. NEPRA, in particular, should be granted greater autonomy by reducing government control, enabling it to foster competition among market players. Additionally, overlapping authorizations regulating the generation, transmission, and distribution network should be eliminated. Strengthening the governance and regulatory framework is crucial.

Thirdly, competition in the electricity generation market should be ensured by creating a day-ahead market, balancing market, and intraday market, allowing bilateral trade outside the pool. These fundamental changes can improve the efficiency of generation companies by enabling supply contracts based on market-determined electricity prices.

Fourthly, enhancing the operational activities of distribution companies requires increased competition, which can be achieved through privatization. It is also crucial to separate electricity distribution from retailing. Currently, the wholesale market model operates in Pakistan’s electricity market, where distribution companies purchase electricity from generation companies and sell it to the consumers directly while only the large consumers have the option to buy directly from generation companies. Conversely, consumers may be allowed to choose their suppliers in the retail market, whereas only large consumers may be allowed to purchase from generators in the wholesale market. This structure will reduce the local monopoly of distribution companies, promote competition, and provide consumers with the power to switch retailers in response to high prices.

Fifthly, reducing Pakistan’s heavy reliance on thermal power generation is vital to address high costs and environmental pollution. Encouraging a diversified energy mix, including the development of renewable energy sources like solar, wind, and hydropower, will improve energy security, reduce dependence on imported fuel, and promote sustainable development.

In conclusion, Pakistan’s electricity market reforms have grappled with significant challenges and have fallen short of achieving their intended objectives. Despite the implementation of measures such as corporatization, unbundling, and the establishment of regulatory oversight, the market continues to face financial deterioration, capacity constraints, and heavy reliance on fossil fuels. The performance indicators have shown marginal improvements in certain dimensions, such as capacity utilization and transmission and distribution losses, but have failed to address crucial issues like price-cost margins and sectoral price ratios. The need for a reinvigorated reform process is evident. To chart a path towards a more efficient and sustainable electricity market, Pakistan must embark on a multifaceted approach. First and foremost, there is a pressing need to align electricity prices with the true costs of generation, transmission, and distribution. This requires reducing subsidies and introducing cost-reflective pricing to foster financial sustainability and attract private-sector investment. Moreover, minimizing government intervention and empowering regulatory bodies is paramount to enhancing competition, ensuring transparency, and enforcing rules and regulations. Strengthening the governance and regulatory framework, while eliminating overlapping authorizations, will pave the way for a more efficient and competitive market. Furthermore, creating robust electricity generation market mechanisms, such as day-ahead, balancing, and intraday markets, will foster competition and allow for market-determined electricity prices. Privatization of distribution companies can inject much-needed competition and operational efficiency while separating distribution from retailing will empower consumers and reduce the local monopoly.

In light of environmental concerns and high costs associated with thermal power generation, diversification of the energy mix is imperative. Encouraging renewable energy sources like solar, wind, and hydropower will not only improve energy security but also contribute to sustainable development and reduce dependence on imported fuels. As Pakistan looks to reinitiate its reform process, valuable lessons can be learned from both past experiences and global structural changes in electricity markets. A renewed commitment to comprehensive reforms, incorporating the recommendations outlined above, will be crucial in navigating the complexities of the electricity market and securing a brighter and more efficient energy future for Pakistan.

The writer is a Professor and Dean Faculty of Social Sciences at the University of Gujrat. He can be reached at faisal.mirza@uog.edu.pk.