National Power Policy: A vision for the future
The following discussion carries forward from previous news-letter which outlined necessary provisions for the creation of a sustainable National Power Policy. While part one discussed measures the discussion will be continued in subsequent Newsletter encompassing: Preparation for the Fourth Industrial Revolution, Solving the “missing money” problem through Capacity Markets and learning from past mistakes.
Preparing for the fourth industrial revolution
The Fourth Industrialization Revolution (FIR) would create tremendous opportunity in terms of automation. The magnitude of disruption for the Fourth Industrial Revolution is akin to that of the introduction of the steam train. Therefore, NEP needs to ensure that the power sector of Pakistan is ready to exploit this change for the greater good. FIR will be defined by 3Ds of Distributed Generation, Digitization and Decarbonization. Distributed generation will require capacity building[1] exercises to give the ability to implement mini-grids and transactive energy. Furthermore, the government will have to create institutional capacity for standardization of equipment being used for distributed generation.
Digitization within FIR will include the implementation of the Internet of Things (IoT) within the power sector. IoT will stimulate automation potential along the lines of commoditization of production experience[2]. However, keeping Fifth Generation Warfare in mind, the implementation of IoT needs to ensure relevant cyber security standards that guarantee system security against hacking attempts. Therefore, NEP will have to engage stakeholders that ensure network security for the power sector. For starters, the policy can simply ape the framework from other developed countries[3] to get the ball rolling. Later on, these policies can be adapted to the national and provincial requirements.
Decarbonization will affect generation and consumption. On the consumption side, decarbonization of transport sector is expected to source its energy from electricity rather than hydrocarbons. Furthermore, renewable energy will also dominate the energy mix for power generation. While renewable energy generation will be beneficial in many ways; the sector needs to prepare for the transmission and life-cycle challenges brought on due to Variable Renewable Electricity.
Apart from the 3Ds, FIR would also see servicification of economy including the power sector. Therefore, a large portion of the Distributed Generation and IoT sector will be captured by these service providers. Hence, NEP has to cater for the incentive scheme and market-positive limitations on these service providers.
Preparation for the issue of Capacity Markets
Electricity Markets for the developed countries were established on the promise of no capacity payments and low electricity pricing. However, experience has shown that these electricity markets have failed to generate relevant ROE to warrant reinvestment in increased capacity. Such a situation, as a consequence, has forced governments to resume capacity payments in the form of Capacity Markets. The government needs to consider the Capacity Market Conundrum and come up with a localized solution before implementing the Electricity Market. Otherwise, NEP will be replacing one set of problems with another set of problems.
If NEP is successful in implementing the above-mentioned reforms it would fulfill its responsibility of preparing Pakistani Power Market for the future. However, NEP’s liability does not end here. Any new policy needs to incorporate lessons of the past.
Learning from old mistakes
Unfortunately, history shows that previous policies have made a number of errors of design & implementation. One way to categorize them is: market, generation, transmission and distribution.
Market
The gravest mistake of the past policies has been the complete absence of measures to increase efficiency of power consumption. This strategy needs to be implemented on both industrial and consumer level[4]. A more efficient power sector would have a higher worth of value addition per KWh of energy generation. This extra value addition would promote demand increase in the long-run which, in-turn, will lead to demand creation[5].
On the financing side, institutions have failed to promote a bond market for the country. Corporations have failed to attract institutional investors , such as Mutual Funds, Pension Funds, Insurance Firms etc due to one major reason. The country does not have credible Secondary Bond Market. Secondary bond markets increase the liquidity of bonds issued by corporations (Power Sector Companies). This in turn makes them more attractive assets. Therefore, the policy needs to plant seeds of creation of secondary bond market.
Generation
The previous policies seem to have made number of mistakes that increased the cost of doing business for Generation Companies. NEP can pave the way for auto-indexation of various components of the tariff. This would reduce expenditure of public funds wasted in NEPRA determination while at the same time minimizing avoidable loss of business time. Similarly, workload for market operator (CPPA-G) can be reduced via direct connection of CPPA-G[6] servers with the SCADA data of power producers. Doing so would lead to a dispute free resolution of figures such as NPMV[7] values.
Previous power polices also failed to implement provisions for B2B[8] sale of power. The SEZs[9] of the second phase of CPEC, provide an opportunity for B2B purchase of electricity. Such facilities benefit the nation by reducing cost of production while reducing the burden of capacity payments on the nation. Furthermore, NEP needs to introduce clauses for conversion of old power plant into more relevant fuel mix. Such conversions can happen through Novation or via new contract signing. Through these four generation orientated innovations, NEP can hopefully make up for sins of its fore fathers.
Transmission
The transmission sector needs to make similar amends. For too long, the sector has used fixed wheeling charges for a given area. This has skewed the sector incentives towards under-investment in transmission chokepoints. As a result, expensive investment in generation is not making its due contribution to the economy simply because the power cannot be evacuated or delivered to high demand areas. Introduction of point of delivery transmission charges would lead to a rational business model that prioritizes investment on the basis of transmission constraints.
Conclusion
As Pakistan looks back at a lost economic decade, brought-on in large part due to the power crises, it must plan ahead to thrive in the Asian Century. National Energy Policy would be one of the embodiments of that planning. In order to realize its geo-economic potential, the country must assure the world that it has the ability to learn from its past mistakes and possess the vision to look into the future. Both these assurances can be achieved by incorporating relevant factors into the upcoming NEP.
[1] Financial, legal and technical
[2] Through collection of data
[3] Preferably national security states
[4] In the long-run this would lead to a decrease in the domestic share of consumption as industry related consumption is more sensitive to efficiency-based measures.
[5] Demand creation is good for the economy because it lowers the burden of capacity payments per KWh of power generation.
[6] Or any market operator that may replace it in the future.
[7] NPMV values
[8] Business to business.
[9] Special Economic Zones