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Competitive Markets Setting the Perspectives D-1 Session 1

Competitive Markets Setting the Perspectives D-1 Session 1. www.cppa.gov.pk. Electricity Market Team. www.cppa.gov.pk. Electricity Market Team. Muhammad Khalid Sheikh. Akhter Ali. CPPA Core Market Team. www.cppa.gov.pk. EMP. EMP’18:

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Competitive Markets Setting the Perspectives D-1 Session 1

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  1. Competitive MarketsSetting the PerspectivesD-1 Session 1 www.cppa.gov.pk

  2. Electricity Market Team www.cppa.gov.pk

  3. Electricity Market Team Muhammad Khalid Sheikh Akhter Ali CPPA Core Market Team www.cppa.gov.pk

  4. EMP • EMP’18: • 31 EMPs graduated after going through series of assessment and passing one final exam • Objectives • Flow of Understanding • Integration of common thinking among different entities • Collection of different perspectives • Ideas sharing among participants • Mutual collaboration of entities informing the market design • Learning and only self learning www.cppa.gov.pk

  5. EMP Program 2018 www.cppa.gov.pk

  6. Scheme of Presentation www.cppa.gov.pk

  7. Part-1 Electricity Markets: Setting the Perspective

  8. Why Competition? • Market-based price signals are transparent and can stimulate appropriate infrastructure investment, energy conservation, and demand response • Achieve efficiency both in energy and economic terms • Pressure on Price / Adequacy • Create the conditions for a fair allocation of risk and benefit sharing between investors/sellers and buyers/consumers • Standard products traded in market enhancing liquidity • Level the playing field; removing conflict of interest to facilitate entry of new investors and participation of private players, including Bulk Power Customers • Ensure transparency and predictability • Competition provides customers with choices www.cppa.gov.pk

  9. The Electricity Market A trading environment where multiple sellers trade with multiple buyers, market products under specific rules. Why they have been there in many countries? Service providers. What do they do?. Restrictions? Competition may apply in certain segments of the market. Which ones? Why? Why regulation still is necessary? www.cppa.gov.pk

  10. 19_85 20_84 24_84 Exchange Traded Volume global benchmarks on penetration of st markets Exchange markets 3-91% globally VOLUME IN BU (Billion Units)

  11. Evolution of Each Model --------------- www.cppa.gov.pk

  12. Pillars of Market Design Transparency Liquidity Competition

  13. Drivers of the Change to the Market Model Strategy Objectives Efficiency through competition in generation and retail Regulation for activities not appropriate for competition, specifically networks Search for efficiency, as the traditional model had no incentives for reducing costs and making prudent investments Facilitate the financing of the sector, introducing dynamic and creditworthy players Increased efficiency and appropriate financing ultimately should lead to lower tariffs and better service quality for end users www.cppa.gov.pk

  14. Lack of an agreed “best practice” design of the markets And others And others www.cppa.gov.pk

  15. What World has achieved Through Wholesale Competition • US (PJM): • Downwards Trend in Power Prices : Average annual wholesale energy price of $36.26 per megawatt hour (MWh) in 2015 was lower than the 2000 price of $42.28/MWh • Capacity Resources: Gain of 17% in installed capacity, which ensures that sufficient resources are available for reliability • Operational Efficiency: Improvement in generator operational efficiencies (e.g. increased thermal efficiency, reduced reactor outages) and reduced labor and non-fuel costs www.cppa.gov.pk www.cppa.gov.pk

  16. What World has achieved Through Wholesale Competition • UK: • Reduction in electricity prices for end user • Increase in the generation investment • Active participation of demand • Turkey: • Market transparency for new entrants both on production and retail side • Sufficient diversity of active players • Development in the installed capacity • Market price decreased from 100 $/MWh to 49 $/MWh over a period of 2009 to 2017 www.cppa.gov.pk www.cppa.gov.pk

  17. Part-2 Pakistan’s Electricity Market Framework

  18. Overview: Market Operator in the Electricity Market Service Providers CPPA Government of Pakistan Market Participant NEPRA (Regulator) MO CPPA-G Private Sector Power Division Pakistan Atomic Energy Commission Ownership Licensees SPPs/ CPPs K-Electric WAPDA AEDB PPIB CHASHNUPP KANUPP IPPs PEPCO SO + TNO Mega Dams Water Projects GENCOs DISCOs NTDC (TNO+SO) Ownership www.cppa.gov.pk

  19. Pakistan’s Electricity Sector Wholesale Electricity Market Operator - BPC > 1MW - Others non-eligible customer Generators as Market Participants - DISCOs: Wire Business & Supplier - Participants as Retail Suppliers 10 DISCOs and KE - Service Provider for wire business/distribution Transmission Service Provider NTDC www.cppa.gov.pk

  20. Pakistan’s Power Sector Overview Installed Capacity 35,961 MW Total Traded Volume 109,552 GWh Peak Demand 24,921 MW (2019) 26,741 MW (2018) TESCO PESCO IESCO GEPCO Energy Sales 88,806 GWh FESCO LESCO MEPCO No. of Consumers 28.3 Million Avg. Unit Price 15.28 Rs/KWh QESCO SEPCO T & D Losses 17.30 % HESCO www.cppa.gov.pk

  21. Pakistan’s Power Sector - Generation Mix Total Electricity Generation upto May 2019: 109,552 GWh www.cppa.gov.pk

  22. Pakistan’s Power Sector - Installed Capacity Mix Total Installed Capacity in May 2019: 35,961 MW www.cppa.gov.pk

  23. Pakistan’s Electricity Market Framework Legal Electricity Act 1910 NEPRA Act 2018 Constitution Parliament Policy Power Policy 2013 National Electricity Policy & Plan 1994, 2002, 2015 CCI/MoE Regulatory Wheeling, Competitive Bidding, Import Regulations Grid, Commercial and Distribution Codes NEPRA Market Rules, Power Procurement Rules Generation Regulated to Competition Public Sector IPPs K-Electric Pakistan’s Electricity Market Framework Transmission NTDC Regulated Service Provider Metering Service Provider System Operator (SO) Transmission Network Operator (TNO) Planner System Operator NPCC Regulated Service Provider Operational Planning Supply = Demand Market Operator CPPA Regulated Service Provider Market & Product Development Agency Role Billing & Settlement Distribution Distribution Wire Business (Regulated) Metering Service Provider (Regulated) DISCOs/KE Sales or Supply Business (Competition) Increase Competition Markets Competitive Wholesale Single Buyer Competitive Retail

  24. Part-2 NEPRA Act 2018

  25. NEPRA Act As Amended 2018 • Licensed Entities: • Market Operator • System Operator • Transmission Operators • Distribution Service Provider • Traders • Suppliers • De-licensing of Generators www.cppa.gov.pk

  26. New NEPRA ACT Amendments : Important Timelines and Sequencing 2 6 System Operator Licensee Considering 23G & H can come into force within 05 years & then there are 02 years for licensing (Maximum: 5+ 2= 7 years) Section 14A.2b: Policy and plan on efficient and liquid power market design 4 Market Operator Licensee Considering 23 A & B can come into force within 05 years & then there is one years for licensing (Maximum: 5+1 = 6 years) 3 Section 50(2): Rules and regulations shall be brought into conformity within 01 year CTBCM Model Approval 1b 2021 2025 2023 April 2018 2024 2019 5b 1a Enactment of NEPRA ACT 1997 (Amended vide 2018) Electric Power Trader Licensee 23 C &D Electric Power Supplier Licensee 23 E & F 8 Delicensing of Generation Companies 14 B 5a CTBCM Commercial Operations Date, providing an Enabling Environment for Trading Can only operate within an Enabling Environment i.e. (a) a competitive market model is in place and (b) the rules, regulations, codes, procedures and standards etc. are amended or created Separation of Supplier and Distribution Licenses 23 E 7 www.cppa.gov.pk

  27. Important Timelines and Sequencing www.cppa.gov.pk

  28. Part-3 Current Market Structure

  29. Background on Market Development - ECC’s Decision April 2015 - CPPA through consultation prepare CTBCM Model and Plan by June 2017 - The CTBCM is for wholesale market - Will be approved by NEPRA - Commercial Operations date: June 2020 - CPPA Operationalized -The model and plan submitted to NEPRA for review - Request for ECC in amending timelines - New NEPRA Act Amendments Legal formation of CPPA. However, functioned as Department of NTDC from 2009 to 2015. 2002 2009 2017 2015 2018 2013 - NTDC was granted Transmission License to perform five functions: .1) TNO .2) SO .3) Planner .4) Metering Service Provider .5)Contract Registrar/ PEX Administrator - Per licensing requirement, NTDC was mandated to develop the whole sale market (CTBCM) by 2008 - CPPA prepared and submitted the model and plan to Board in July 2017 - The Board formed a Special Committee - The Special Committee evaluated the plan - Consultations with SECP - National Power Policy 2013 -“… Innovative business and regulatory models will be deployed to weaken the monopolies, increase efficiencies, and decrease costs through competition. Wheeling charges and whole sale markets may be introduced to introduce multiple buyers and sellers in the market place.” www.cppa.gov.pk

  30. Current Market Structure Market Structure: Pakistan has a single-buyer market structure in place. Buyer: Central Power Purchasing Agency Guarantee (CPPA-G) Ltd. Generators CPPA-G DISCOs Invoices CTR & ETR Payments CTR = Capacity Transfer Rate ETR = Energy Transfer Rate www.cppa.gov.pk

  31. Market Structure – Types of Contracts • Three major types of power purchase mechanisms in place: • Power Purchase Agreements a.k.a take or pay • Energy Purchase Agreements a.k.a must run • Power Purchase Agreements with fixed energy supply clause www.cppa.gov.pk

  32. Current Contractual Canvas DISCOs DistributionCode Power Procurement & AgencyAgreement (PPAA) 2002& onward IPPs CPPA-G MarketRules MarketOperator MarketOperations PPAs NTDC SystemOperation TransmissionNetwork Operator BusinessTransfer Agreement PPAs GENCOs GridCode WAPDA (Hydel) CommercialCode MeterReading Verification Billing Settlements Payments PPA Administration Agreements ofPortfolioPPAs PPAs 1994 IPPs Administration Arrangement 1994 IPPs ModifiedVersionofPPAs Future Generation ConnectionAgreements www.cppa.gov.pk

  33. Types of Agreements Power Purchase Agreement Capacity Charges Energy Charges Fixed Operation & Maintenance Cost of Working Capital Insurance Debt Service Return on Equity Variable Operation & Maintenance Fuel Cost/ Water Use Charge Fixed Cost and Must be paid (Take or Pay) Variable cost – only payable if energy is purchased www.cppa.gov.pk

  34. Types of Agreements Power Purchase Agreement (with fixed energy supply clause) Capacity Charges Energy Charges Variable Operation & Maintenance Fuel Cost Ash Disposal (for coal only) Lime Stone (for coal only) Water Charges (for coal only) Fixed Operation & Maintenance Cost of Working Capital Insurance Debt Service Return on Equity Fixed Cost and Must be paid (Take or Pay) Certain % of energy must be bought (Imp. Coal 50%, Local Coal 90%, RLNG 66%) www.cppa.gov.pk

  35. Types of Agreements Energy Purchase Agreement Operation & Maintenance Cost of Working Capital Insurance Debt Service Return on Equity Must-run plant www.cppa.gov.pk

  36. Part-4 Market Development Initiative by CPPA

  37. CPPAs Functional Heads / Senior Management www.cppa.gov.pk www.cppa.gov.pk

  38. Strategy and Market Development (SMD): Core Team www.cppa.gov.pk

  39. CPPA’s 3 Year Strategic Plan Corporate Culture Teamwork Be-respectful www.cppa.gov.pk Excellence Transparency

  40. Progress Update on Market Development People Technology • Computer & Communication Monster (C&C): • Wholesale smart metering project underway • Automation of SO and MO process 80% complete • SCADA upgrade underway • Dispatch optimization & simulation tools implemented • DISCOs IT roadmap also prepared • Most Important & Most Difficult to • Build a Common Vision and Recruit People: • Collaboration with LUMS • International Trainers Engaged • International Collaboration • Numerous consultations • Communication through media Process Central Lead Role • Transition requires alignment of whole legal, policy, regulatory and institutional alignment: • Act amended and provide legal basis • Market Model and Roadmap under approval • Market Development Policy proposed • Regulations are under review • Institutional re-structuring underway • Market Operator is leading the design and implementation program: • Central facilitation and lead role • Market Implementation Support Committee • PMO office in CPPA • Electricity Market Team (EMT)

  41. Wholesale Market Design – Phased Approach Phase-II (Detailed Market Design) Phase-III (Implementation) Phase-I (Basic Market Design) Wire Business Remains Regulated Competition is Gradually Introduced in Wholesale and Retail Business June 2016 – June 2017 July 2017 – End of 2019 Aug 2017 – 2020 www.cppa.gov.pk

  42. Power Market Development-Achievements • 09 Reports on Market Design and direct assistance in preparation of reports on Forecasts and Generation Plans • Market Model and Plan Reports submitted to Regulator and approval in progress • Market Simulations runs completed • Transition an Inclusive Process: • 20+ Capacity Building workshops & Training sessions • Two internationalexchanges & other foreign study tours • Several consultations sessions on the Model • Completion of Electricity Market Professional Program in collaboration with EPIAS, LUMS / NUST in 2018, 31 EMPs graduated in 1st Batch • Support to DISCOs and NTDC: PMS and Econometric Forecasts • Support to NTDC: Least Cost Generation Planning • Support to NPCC: System Operator’s Strengthening • IT Systems: CPPA’s SFS, Portal, SMS project

  43. Strategic Partnerships • MoU Singed • Several exchanges conducted • Collaborating on fronts of IT, capacity building and knowledge transfer • MoU Singed • EPEXSPOT evaluated the proposed model • Full Time Member • CPPAs active participation • MoU Singed • CPPA and LUMS is delivering Market Professional Course for Market Participants www.cppa.gov.pk

  44. www.cppa.gov.pk

  45. Trainings and Consultations

  46. Trainings and Consultations www.cppa.gov.pk

  47. Part-5 Key Challenges

  48. Market Development Challenges Policy and Planning Issues Existing Market Issues Legacy Issues • Long Term Contracts with Sovereign Guarantees • Take or Pay PPAs carved in stone • Transmission System Constraints • Timely Availability of Metering Data • Readiness of Institutions • Conflicting Role of Market Operator • Strengthening of SO, TNO, DISCOs • Weak Information Sharing Culture • IT Enablement • Policy and regulatory framework alignment • Lack of Centralized Planning • Uncoordinated  Efforts by Different Stakeholders • Common Understanding of Key Concepts with respect to Market Transitions www.cppa.gov.pk

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