The power sector in Pakistan is structurally flawed. Being the most dominant player sector, the government has failed to institute the necessary reforms required for the financial and operational sustainability of the power sector.
At the core of the problem is the use of take or pay contracts, which are most often than not inflexible documents guaranteeing electricity off-take by the government that does not have any credible demand forecasts to plan its purchases. The result is excess capacity payments burden on the exchequer and an uncompetitive electricity market. Across the globe, countries have opted for competitive energy market models, which essentially trade electricity market as a commodity on an exchange. The interaction between demand and supply forces results in minimum wastage of power while ensuring reliable supply at the same time.
In a welcome move, Pakistan has also embarked on making the transition to a competitive market based electricity model. The transition will hopefully take not more than three years and is expected to be concluded by July, 2020.
Recently, the government has given permission for the Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) to become the market operator, which will allow the entity to purchase and sell power in line with a market based mechanism. Currently the entity is carrying out two functions that include procurement of power and energy market development. Going forward, the CPPA-G will only carry out market development and will need to separate or remove its power procurement role.
However, stakeholders have also expressed other reservations, which include questioning the financial strength of the CPPA-G to become a market operator. Indeed, the overall capacity of the CPPA needs to be drastically improved before it can successfully carry out its role as a market operator. Currently, it relies on sovereign guarantees by the federal government, which will not be there once the competitive market is in place.
There are also those who say the move to a competitive market model is too advanced for a country like Pakistan, while some believe that the move is being done in a hasty manner. However, it is high time that this exercise be undertaken given that peers including Turkey, China and India already follow a market based model for electricity trading.
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