PRESENTATION ON

INTRODUCTION TO COMPETITIVE TRADING BILATERAL CONTRACT

MARKET (CTBCM) (THE WHOLESALE POWER MARKET OF PAKISTAN)

CENTRAL POWER PURCHASING AGENCY (CPPA)MAR 31, 2021

Scheme of Presentation

Part-1 Preamble

Part-2 History of Power Market Development (Global & Pakistan)

Part-3 International Perspective & Stages of Market Development

Part-4 Competitive Market Design

Part-5 CTBCM Implementation Plan and Monitoring

Part-6 Role of Institutions in CTBCM

Part-1Preamble

Preamble

• Competition is good and we all will work together to bring competition in the

market with the objective to benefit all market participants

• CPPA has played a central role in preparing and submitting wholesale

competitive market model and plan (CTBCM) that Authority and FG has

approved

• CPPA-G has been assigned the role of Central Facilitator to provide assistance

to all entities in implementing their respective action plans

• All entities have submitted their respective actions plans regarding CTBCM for

approval of the Authority

www.cppa.gov.pk

Market development journey started in 2015 and continues…

• 100+ consultative sessions including workshop and one-to-oneconsultation meetings with stakeholders

• Around 2,500+ man days of training organized by CPPA for powersector entities on market development. 91 Certified professionals.

• Learning Exchanges with Turkey, India, US, Canada, South Korea, Englandincluding NEPRA, NTDC and MoE (PD)

• More than 800 written comments from stakeholders were responded byCPPA

• Conceptual Design as well as Detailed Design and Implementation Roadmapapproved by NEPRA and ratified by Federal Government

www.cppa.gov.pk

What has been Done in Past 05 Years

• Review of the design by:

• International Consultant of NEPRA

• EPIAS – The MO of Turkey

• PSR – The leading market design consultant of Brazil

• CRA – Leading US based Consultant

• Others including EpexSpot and LUMS Energy Institute

• SECP consultations and review by Special Committee

• International Collaborations and physical visits of 10 markets

• The robust consultative process – inclusive approach

• Capable Design & Impl. Facilitation Team [MRC, TetraTech, Core CPPA Team]

• Enabled Electricity Market Team [16 entities]

www.cppa.gov.pk

www.cppa.gov.pk

EMP Program 2018

Trainings and Consultations

www.cppa.gov.pk

www.cppa.gov.pk

Trainings and Consultations

www.cppa.gov.pk

Electricity Market Team

Part-2History of Power Market Development (Global and Pakistan)

Earliest Days of Electricity Distribution

• 1882, Edisons short distance low voltageDC current

• 1886, High Voltage AC Systems of Ganz& Co and Westinghouse Electric Co

• Earlier Days, every company has totransmit power through own cables

• Quickly learnt that this business is naturalmonopoly

www.cppa.gov.pk

Monopoly Model

• For most of the twentieth century, when consumers wanted to buy electrical energy, they had no choice.

• Various forms of Monopolies

• Vertical Integration (Generation, Transmission, Distribution)

• Monopoly in local Distribution and Buying form another Greater Monopoly on Transmission and Generation

• Either Private Regulated Entities or Public Sector Entities

• Irrespective of ownership and the level of vertical integration, geographical monopolies were the norm

www.cppa.gov.pk

Monopoly Model

• Electric utilities operating under this model made truly remarkablecontributions to economic activity and quality of life.

• Access improved quickly

• For several decades, the amount of energy delivered by these networksdoubled about every eight years

• Technological Advancements, Transmission Lines operated over 1OO KV,Spanning around 1000s KMs, Plants Capable of producing over 1000 MWs,all components interconnected and coordinated

• The sector prospered under monopoly

www.cppa.gov.pk

Transition towards Competition

• In the 1980s, some economists started arguing that this model had run itscourse.

• Monopoly status of the electric utilities removed the incentive to operateefficiently and encouraged unnecessary investments

• Cost of the mistakes that private utilities made should not be passed on tothe consumers

• Public utilities, on the other hand, were often too closely linked to thegovernment. Politics could then interfere with good economics.

www.cppa.gov.pk

Transition towards Competition

• Economists suggested that prices would be lower and that the economy as awhole would benefit if the supply of electricity became the object of marketdiscipline rather than monopoly regulation or government policy

• Chile was the first country that implemented the market reforms in 1882,followed by UK, Europe, Latin America and United States

• Several countries are currently at various stages of their market reform(Wholesale, Wholesale and Limited Retail, Full Retail)

• Stories of success and also spectacular failures (California)

www.cppa.gov.pk

WAPDA Strategic Plan

1992 1997 1998

• Enhance capital

formation

• Improve efficiency

and rationalize

prices, and

• Move towards full

competition by

providing the greatest

possible role for the

private sector

through privatization

NEPRA Act

• Enactment of

NEPRA Act

• Formation of

Independent

Regulator (NEPRA)

to oversee the

restructuring process

Unbundling of WAPDA

PEPCO

- Transition

Management

Company

- Oversee the

corporatization

& privatization

- Formed

Business Plan

for

Restructuring

process

GENCOs (4)

DIS

CO

s (1

0)

NTDC

• LESCO• GEPCO• FESCO• IESCO• MEPCO• PESCO• HESCO• QESCO• TESCO• SEPCO

- Thermal Power

Generation Companies

- Transmission Network Operator

- System Operator

- Planner

- Power Procurer

- Power Market Development

- Perform Supply

Business

- Perform

distribution,

construction,

expansion,

maintenance

operation of the

distribution system

Power Sector Reforms (Historical Perspective)

1994

First Power Policy

• Enabled

Private

Participation

in Generation

• Offered

generous

incentives

• Several deals

and capacity

additions

www.cppa.gov.pk

2002 2013

- NTDC was granted Transmission License to perform five functions:.1) TNO.2) SO3)Power Purchaser..4)Contract Registrar/

PEX Administrator

- Per licensing requirement, NTDC was mandated to develop the whole sale market (CTBCM) by 2008

Historical on Market Development in Pakistan

2009

- 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 wholesale markets

may be introduced to introduce multiple

buyers and sellers in the marketplace.”

Legal formation of CPPA.

However, functioned as

Department of NTDC from

2009 to 2015.

2017

- 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

- CPPA formed Market

Development Department

2015

- 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

- Board principally approved CPPA’s re-

structuring and allowed submission

of CTBCM submission to NEPRA

- Consultations with SECP

2018

-The model and plan

submitted to

NEPRA for review

- Request for ECC in

amending timelines

- New NEPRA

Act

Amendments

- MO’s

Authorization

- Comments

- Partnerships

2019

-NEPRA Approved

CTBCM Model

www.cppa.gov.pk

Market Development History

2015 2017 2018 2019

Apr 2015ECC Decision Point 9

(To Prepare CTBCM)

Mar 2018Submitted CTBCM

to NEPRA for

approval after

evaluation of

special committee

and approval of

CPPA board

Oct 2020 After approval of

CTBCM Plan by

NEPRA 1.5 years

extension granted by

ECC

Dec 2019CTBCM Model approved

by NEPRA

2022

Apr 2022CTBCM COD

Apr 2017Special committee

including MoE (PD)

,MoF ,CPPA &

NEPRA constituted

to evaluate the

proposed model

2016-2017Numerous

Consultation being

done for making the

model

2020

www.cppa.gov.pk

Part-3International Perspective & Stages of Market

Development

AESO• Gross pool• Price Based• ISO Model• 7 day ahead scheduling

NYISO• Day Ahead Market• Real Time Market• Security constraints

Economic Dispatch• Price Based Pool

TURKEY• Net Pool• Day Ahead

Market• Intraday Market• Real time Market

INDIA

Philippine• Gross Pool• IMO is independent

& SO is part of Transmission Company

• Hour Ahead Market• Real time MarketBRAZIL

• Real Time Market for Imbalance Settlement

• Weekly System Marginal price

• System Operator and Market Operator are Separate

ARGENTINA• Gross pool• Hourly Marginal Price• ISO Model• Ancillary Services Payments

PERU• Gross pool• Cost Based• ISO Model• Real Time Mandatory Pool

DEN

MA

RK

• Hybrid Structure• Long term PPAs• Day Ahead

Market• Regional ,State &

National SO• Exchange exist

• Net Pool• Day Ahead Market• Intraday Market• Balancing Market• EPEXSPOT/Nord Pool

Exchange

Every Market is UNIQUE in terms of Design!•Type of Pool

•Market Architecture

•Types of Products

• Contractual Arrangement

• Pricing Mechanism • Institutional Arrangement

•Types of Customers

•Types of Suppliers

Paki

stan

’s E

lect

rici

ty M

arke

t Fr

amew

ork

Legal Constitution NEPRA Act 2018 Electricity Act 1910

Policy Power Policy 2015 RE Policy 2019Power Policy

2013, NEP

Regulatory Rules Regulations Codes and Guidelines

NTDC Transmission Network Operator (TNO) Metering Service Provider

NTDC SystemOperator

System BalancingOperational Planning &

Forecasting

MarketOperator

Market & Product Development

Billing and Settlement

DISCOsDistribution Network

Operator (DNO) Base Supplier

Metering Service Provider

Markets Transition Single Buyer Single Buyer PlusCompetitive

Wholesale & Retail

Market Transition is a ‘Big Undertaking’

Vertically Integrated

Framework Alignment:

Legal, Policy &

Regulatory

Institutional Work:

•Roles Alignment

•People capacity

•Processes automation

•Technology deployment

Market Participants

Generators BPCsTraders

Expansion Planning and Forecasting

Contract Registration

Competitive Suppliers

Other ServiceProviders

IAA SPT

VerticallyIntegrated

Single Buyer

Wholesale Competition

Retail Competition

South AfricaTajikistan

AfghanistanMalawi

Several US States

BangladeshPakistanKuwaitQatar

MoroccoVietnam

ArgentinaBrazil

MoldovaPeru

Philippine

TurkeyUKUS

NoneHighIntermediate

Level of Competition

Leve

l of

Mar

ket

Lib

era

lizat

ion

High

Low

Competition = Liberalization

Competition requires liberalization (private participation) to achieve desired results!

www.cppa.gov.pk

Players in the Market

1. DISCOs as Regulated Supplier

Market Participants Service Providers

1. Wire Business (Transmission & Distribution)

4. Traders

3. Generators

2. Competitive Suppliers

3. System Operator (SO)

2. Market Operator (MO)

4. Special Purpose Trader (SPT)

5. Independent Auction Administrator (IAA)

www.cppa.gov.pk

5. Eligible /Non Eligible Consumers

Players in the Market

Consumers

1. Regulated Tariff Consumers(all consumers)

2. Eligible Consumers (large consumers with choice)

Suppliers

2. Competitive Supplier (can sell to only eligible consumers at non-regulated prices)

1. DISCOs as Supplier(can sell at regulated tariff only*)

Consumers

Suppliers

Consumers

www.cppa.gov.pk

Single-Buyer Model and Wholesale Competitive Market

Single Buyer DISCOs as

SupplierAll Consumers

Power Generation Companies

Wholesale Market

Traders

Competitive Suppliers

26.6 Mln Consumers, 84% share in energy sales

2000+ Eligible Consumers, 16% share in energy sales

Current Structure: Single Buyer Model

Approved Structure: Competitive Wholesale Market Model

1st Stage: Wholesale (CTBCM) Apr 2022

DISCOs as Supplier

Power Generation Companies

Power Generation Companies

DISCOs as Supplier

Competitive Suppliers

Traders

Single Buyer in Pakistan?

Competitive Wholesale and Retail Markets

2nd Stage: Retail

Wholesale Market

RetailAll Consumers

have choice

Power Generation Companies

Wholesale Market

Traders

Competitive Suppliers

26.6 Mln Consumers, 84% share in energy sales

2000+ Eligible Consumers, 16% share in energy sales

Approved Structure: Competitive Wholesale Market Model

1st Stage: Wholesale (CTBCM) Mar 2022

DISCOs as Supplier

Power Generation Companies

DISCOs as Supplier

Competitive Suppliers

Traders

Part-4Competitive Market Design

Immediate Benefits

1. Transparency and efficiency in wholesale market operation will improve operational efficiencies,for example respective improvement in variable costs (up to 10%) through optimized dispatch.

2. Institutional strengthening.

Future Benefits

1. Reduction in market, regulatory and other associated risks resulting in lower returns (prices) byinvestors.

2. Generation costs are likely to go down (up to 15%) through auctions.

3. Removing sovereign guarantees over time thus reducing burden on government for futureprocurements.

4. Avoiding over and under supply of power through clear, transparent and accountable marketmechanisms.

Tangible Benefits of CTBCM

1. Incentivize Efficiency –Low Cost Generation

2. No Arbitrage and Free-Riding

3. Minimum Cost for the Government –Minimum Subsidy Requirement

4. No Cost Increase for the Remaining Consumers (Including Industry).

5. Levelized Playing Field for DISCOs and Wheelers of Power

CTBCM - Principles to Achieve Objectives

CTBCM – Features

Capacity Obligations

Non Payment Risks

Grid CodeCommercial Code, others

Balancing Mechanism

Contract Registrar

Centralized New Capacity Procurement

Service Providers

K Electric

Market Participants

New PPAs

Competition for and in

the Market

Existing PPAs

Credit Cover (collateral)

Low Performing

Discos

Agent separated from MO

Centralized Economic Dispatch

31

MO

www.cppa.gov.pk

1. The CTBCM is constructed around bilateral contracts. No central entity

2. The System Operator will establish marginal prices for trading including settlement ofimbalances.

3. DISCOs will procure power through competitive bidding organized by IndependentAuctioneer (IAA) resulting in reduced purchase price for DISCOs.

4. Eligible Consumers will be free to procure power from Competitive Suppliers.

Trading in Competitive Wholesale Market

www.cppa.gov.pk

• Products Traded in the Market and System Reliability: Two main products, Energy andCapacity, Energy traded to supply consumption and Firm Capacity Traded to ensure mediumand long-term security of supply

• Pricing Mechanism: Cost-based pool model with single market clearing pricebased on marginal cost principle

• Power Procurement: 100% capacity obligations, procurement for regulated consumers issubject to IGCEP and Procurement Plan, Eligible Consumers free to contract bilaterally ontheir own terms and conditions

• Market Architecture: Bilateral Contracts complimented with balancing mechanisms forcapacity and energy

4 Major Design Parameters

www.cppa.gov.pk

CTBCM Main Features

CTBCM is wholesale competitive electricity market where electricity will be traded in

bulk quantities on competitive prices

Main Features:

• Establishment of an independent and impartial Market Operator & System Operator

• Dispatch Operations improved through strengthening of System Operator

• Tool based Security Constrained Economic Dispatch

• Generation adequacy ensured through Capacity Obligations

www.cppa.gov.pk

CTBCM Main Features

• New Capacity for DISCOs procured through centralized auction by Independent

Auction Administrator (IAA)

• Introduction of Credit Covers to cover non-payment risks in the market

• Government Support for low performing DISCOs

• Balancing Mechanisms introduced to trade imbalances on market prices

www.cppa.gov.pk

CTBCM Main Features

• Rules and Regulations established for Market Participants and Service Providers

• Legacy PPAs/EPAs will be commercially allocated to the DISCOs and will be legally

administered by the CPPA-G

• Introduction of flexibilities in new contracts

• Contract Registrar to check validity of contracts and verify capacity obligations of

the market participants

• New Commercial Code to govern the operations of in the Market

www.cppa.gov.pk

Capacity Obligations

• Capacity Obligations introduced to ensure Security of Supply and Generation Adequacy

• Market participants representing Demand will have the obligation to contract in advance

sufficient capacity (contribution to system peak and system reserves) to serve its load

• Each market participant will be accountable for its demand projections

• These capacity obligations is a contribution to ensure medium and long term security of

supply

• Obligations for each demand participant will be calculated in advance by MO

• Capacity Obligations will be verified by the Contract Registrar function of the MO

www.cppa.gov.pk

Future Procurement Price Discovery through Competitive Auction

• All future procurements for regulated customers will be subject to competitive

procurements (to the extent feasible)

• The competitive process will be subject to NEPRA’s regulations and oversight

• The IAA will consolidate requirements from all DISCOs and will run competitive auctions

• After successful completion of the bidding process, the IAA will nominate successful

bidders which will then be required to approve their tariffs from NEPRA

• After approval of such tariffs, NEPRA will be bound to pass through these costs to end-

customer tariffs of the DISCOs.

www.cppa.gov.pk

Part-5CTBCM Implementation Plan and Monitoring

NEPRAPreparation, Modification of Regulations, Rules, timely approval codes, guidelines

DISCOsInstitutional Strengthening , Connection Agreements, Health Assessments etc.

PPIB/AEDB

Security package revision, Market contracts, Inst. Restructuring, IAA Registration

CPPA / Market OperatorCPPA Bifurcation, IT interventions, ISMO Licencing,

Capacity building, Commercial Codes, Transparency

Testing & Parallel Run

•D

etai

led

Des

ign

•Im

ple

men

tati

on

Pla

n

NTDC / System Operator ISMO Licensing, Institutional Re-structuring, IT interventions,

Connection Agreement, SMS metering, Amendments of Grid Code, Transparency

MoE (PD)Revision of Power Policies, Development of New Rules, Inst. Reforms –ISMO & IAA

Apr 2022Q4 2021Oct 2020

Plan for Implementation of CTBCM

Act

ion

s b

y En

titi

es

Timeline

ApprovalNEPRA

Implementation

Monitoring & Implementation

CCoE

Mont. Group

(MoE, NEPRA, PC)

Board Committee

Working Groups of Power Sector Entities

www.cppa.gov.pk

Part-6Role of Institutions in CTBCM

www.cppa.gov.pk

Role of System Operator

• Roles: SO a separate licensed entity with following roles:

o Real time operations and system balancing within security and reliability constraints

o Medium and short term planning, forecasting, Day ahead SCED

o Long term planning and forecasting

o Administration of Open Access to the Grid and Ancillary Services

• Transparency: To ensure transparency in operations, the SO will publish planning

reports and real time operational decisions on its website

• Information Sharing: Information relating to transmission congestions / network

constraints will be published through SO’s website on real time basis.

www.cppa.gov.pk

Role of Transmission Companies

• Provide reliable and stable transmission infrastructure to enable the trade

• NTDC as the NGC to coordinate with other transmission licensees for adequate design and

construction of network

• Execute the construction of projects as proposed by the planner in a timely manner

• Allow open access to the participants, sign connection agreements

• Ensure transparency by publishing the status of transmission network and SOPs for granting

connection

• Provide metering services in accordance with the provisions of Grid Code

• NTDC as NGC to provide metering services for BPCs across the country through SMS metering

• Comply with the transmission standards set by the Regulator

• Information Publishing

www.cppa.gov.pk

Role of IAA

• To Prepare the Capacity Procurement Plan based on IGCEP prepared by NTDC ,

Energy Gap by DISCOs and energy policies of the government

• To Conduct the competitive auctions for the new power procurement.

• To Prepare the standard bidding documents and submit to NEPRA for review

• To Prepare and obtain the regulatory approval of PPAs / EPAs templates for the

centralized auctions

• To Assist the Discos in finalizing the bilateral PPAs/ EPAs with each generator that has

been awarded in the auction

• To Arrange Guarantees for low performing DISCOs through GoP

www.cppa.gov.pk

Role of SPT

• SPT will Perform the same functions as CPPA-G do in agency role today

• Verification of invoices sent by Generators for legacy PPAs/EPAs

• Receiving of payments from DISCOs and transferring it to Generators

• Calculation of the capacity and energy transfer rate, in accordance with the Authority

approved transfer Mechanism, for the purposes of invoices against each Distribution

Company

• Receiving Payments for UOSCs and transferring to NTDC for legacy PPAs

• Fuel purchases & PPA data verification of generators for usage in merit order

• SPT ,without any implication, will honor existing PPAs, However no new procurement

will be allowed to sign by SPT.

Role of Regulator

• Perform functions as defined in the Law

• Update the existing regulatory framework

o Issues New Regulations and Guidelines as per amended Act

o Amend existing rules and regulations as per amended Act

o Approve and issue the updated/new codes

• Issues licenses to the Market Participants and Service Providers

• Monitor and supervise the functioning of the market (particularly the risk of market

power abuse)

MO Functions (1)

• Contract Registrar (Admission, suspension and cancellation of Participants)

• Registration of CDPs

• Sign a Market Participation Agreement (MPA) with Participants establishing rights,

responsibilities and obligations, including the obligation of the Participant to provide credit

cover

• Calculate energy and capacity imbalance quantities for each Participant;

• Calculate hourly imbalance prices for energy

• Calculate monthly transmission use of system charges and market fee

• BME Settlement on a weekly (provisional) and monthly (final) basis

• BMC settlement on annual basis

www.cppa.gov.pk

MO Functions (2)

• Administration of credit cover/collaterals for transactions in the Balancing

Mechanism, transmission charges and market fee

• Administration of market payment system (weekly and monthly)

• Administration of the procedure to receive and resolve the complaints

• Administration of a dispute resolution mechanism for settlement complaints that

have not been mutually agreed and resolved.

• Responsible for Information disclosure of market results (made public through

its website)www.cppa.gov.pk

DISCO as Distribution Network Operator

• Develop adequate and reliable distribution networks in the specified service territory

• Prepare 5 years network investment plan and demand forecasting

• Prepare, update Distribution Code

• Perform metering services at the distribution level

• Provide non-discriminatory connection/open access to all users

• Sign connection agreement with connected users

• Calculate UoSC for distribution network and perform billing and invoicing

• Purchase excess losses from the BME

• Ensure transparency in the operations www.cppa.gov.pk

DISCO as Supplier (1)

• Obtain Electric Power Supply license with the defined service territory

• Supply power to all non- eligible consumers and eligible consumers (not opted for

competitive supplier) on regulated rates

• Contribute to the reliability and security of the power system by full filling capacity

obligations

• Register as Market participant with MO and sign MPA

• Obligated to procure the energy and capacity needed to supply its consumers through

regulated mechanisms

• Procure power as per the approved IGCEP (prepare by SO) and Procurement Plan

(prepare by IAA)

• Sign market based Bilateral Contract with generators as a result of centralized

auctions run by IAA

• Procure power from CPPA(agent) as per commercial allocation of existing PPAs

www.cppa.gov.pk

Thanks

52

Market Structure: Pakistan has a single-buyer market structure in place.

Buyer: Central Power Purchasing Agency Guarantee (CPPA-G) Ltd.

www.cppa.gov.pk

Market Structure

Generators CPPA-G DISCOsInvoices

UoSC Invoice

Payments

NTDC

CTR & ETR

UoSC Payment

Today – Single Buyer

• Today: each Disco has one contract with CPPA-G (PPAA)

• PPAs/EPAs costs are equally shared

• Costs allocated monthly: share of energy and of peak demand of a Disco within the total for all Discos.

• Same regulated purchase price for energy & capacity

• Wholesale price transferred as a cost to regulated retail electricity tariffs (plus fuel cost adjustments)

• All discos have the same system transmission charge

54

www.cppa.gov.pk