How the New Electricity Market Will Work?

Pakistan has initiated the bidding process for its inaugural 400 MW electricity wheeling auction, signaling a departure from the conventional single-buyer model. Under this new system, major consumers, especially industrial entities, will be able to procure electricity directly from power producers via bilateral contracts, rather than solely depending on government procurement.

Traditionally, the government has played the role of the central buyer of electricity, procuring power from generators under long-term agreements and supplying it through distribution companies to consumers. A detailed post on X by economist and Federal Minister for Power’s adviser, Ammar H. Khan, elucidates how this new system operates and the potential changes it could bring to Pakistan's power market.

In essence, a large electricity consumer can approach a supplier and negotiate a bilateral power purchase agreement. The supplier then utilizes the existing transmission and distribution network to deliver electricity to the buyer. A fee known as the wheeling or Use of System Charge is paid by both parties to access the network. The available network capacity is allocated through competitive bidding under the new auction mechanism.

The electricity still needs to pass through the national transmission and distribution network. These wires are managed by distribution companies and the National Grid Company, implying that a producer cannot simply deliver electricity to a customer without utilizing the existing network. Instead, the producer or buyer pays a wheeling or Use of System Charge for utilizing the network, akin to paying a toll for using a highway.

The 400 MW auction essentially determines who gets to use the available capacity. The government establishes a baseline for the auction, while participants compete for the available capacity. Khan posits that competitive bidding can help establish a market-clearing price and allocate limited network capacity to the entities that are most willing to pay.

Currently, the framework allows for 800 MW to be auctioned over a five-year period, with 400 MW being offered in the initial phase. The future of this model could include the possibility of independent power producers signing direct contracts with industrial buyers, bypassing the need for the government to enter into additional long-term power purchase agreements.

This could gradually diminish the government's role as the primary purchaser of electricity and shift more procurement decisions towards individual buyers and sellers.

Khan suggests that a future development could involve competitive suppliers aggregating electricity from multiple smaller sources, such as a supplier purchasing excess electricity from numerous solar installations and selling it to customers at an agreed market price. This would necessitate further refinement of the competitive market framework.

Another concern is the cost of using the transmission network. Khan has proposed more location-based Use of System Charges instead of the existing flat rate, ensuring that charges more accurately reflect the actual cost of transmitting electricity. Khan also queries whether consumers should finance new large power projects through electricity bills.

He argues that projects with significant water benefits could be financed through the government budget or water charges instead. He contends that future power projects should be evaluated thoroughly, especially considering the evolving landscape of solar and battery storage that are transforming how consumers generate, store, and utilize electricity.