Sustainable development of power system

March 13, 2019 By 0 Comments

Planning of power system in the past has been dominated by the urgent need to address the large amount of load shedding. This resulted in greater attention to increasing power generation capacity while the development of T&D infrastructure lagged behind. Financial viability of the power sector has also been a matter of serious concern in the wake of likely procurement of more than needed capacity in the short run, determination of tariffs on cost plus basis in most cases, large amounts of arrears and circular debt, need to rationalize electricity retail tariff, growing dependence on imported fuels and declining share of clean energy in the generation mix. To avoid the problems caused by repeated cycles of power shortages and surpluses and mismatches in the development of various components of supply chain affecting the socio-economic development of the country, sustainable development of power system will be pursued in future through integrated planning for optimal[1], affordable and secure development of the power sector.

Integrated Planning of Power system

The integrated plan will be based on the following principles:

  1. A thorough assessment of demand and supply position taking into account Demand Side Management (DSM)[2], provision of adequate amount of reserves for scheduled shut downs of plants for maintenance, real time fluctuations in demand supply balance (spinning reserves), Forced Outages due to unforeseen failures and resource variability (Renewable Energy and Hydropower).
  2. Synchronized development of generation, transmission, distribution infrastructure and associated services in accordance with the requirements given in the various Codes and standards laid down by NEPRA[3].
  3. Incorporate modern technologies and management practices, needed for a well-managed, stable and reliable power system.
  4. Priority to be accorded to indigenous energy resources, particularly hydro, Renewable Energy (RE), Thar coal based projects with energy purchase prices arrived in accordance with the parameters given in Section 1.2(a) below.
  5. Meeting the demand of under/or unserved areas through systematic grid extensions, local mini-grids and off-grid applications for use of RE. 
  6. Power plan will be financially viable, affordable and integrated with the overall macroeconomic planning framework of the country

[1] (Least Cost Planning adjusted for requirements for transfer of technology, energy security and development of underserved or unserved areas).

[2] Demand Side Management (DSM) will be promoted through various measures such as time of day tariffs, demand charge for residential sector except for life line consumers, support of Energy Service Companies (ESCOs) through fiscal and financial instruments/facilities to assist the end customers in carrying out DSM. NEECA will also launch several programs to promote DSM.

[3] Commercial Code, Grid Code, etc.

Financial Viability of the Power Sector

Electricity Procurement

The government is reforming the power sector such that the price of electricity supply is determined through open access and market-based competition in the long run (see road map in Section 6 below). However, in the interim, the cost of electricity purchase by DISCOs will be minimized, to the extent possible based on the following principles:

  1. New power capacity will be acquired on the basis of estimated requirements under integrated plan to avoid shortage or idle capacity in future. The integrated plan would be updated every two years to remain in sync with actual developments. Electricity will be procured at least possible cost adjusted only for needs for energy security and development of underserved or unserved areas.
  2. Electricity from following categories of projects will be procured on the basis of international competitive bidding[1]:
    1. All new thermal, solar and wind power
    2. Hydropower and indigenous coal based power projects, where feasibility and engineering studies have been prepared.
  3. Hydropower and Indigenous coal projects on raw sites (those sites for which detailed feasibility and engineering study has not been done) will receive Letter of Intent (LOI), through international competitive bidding for the work program, to carry out feasibility studies. LOI may also be issued to IPPs for unsolicited hydropower projects for raw sites, identified by the IPP, after evaluation of the proposal by the PPIB/AEDB.
  4. LOI/LOS will be given to projects envisaging a specified minimum component of transfer of technology (TOT) on the basis of international competitive bidding with suitable incentive for maximizing TOT component.
  5. Government to Government (G-G)/ Transfer of Technology (TOT) Projects and nuclear power projects will also be eligible for supply of electricity to NTDC system (preferably through competitive bidding within the donor country). Before making the award, prevailing international prices will be used as benchmark.
  6. Tariffs for the projects developed on the basis of LOI (i.e. projects on raw sites), will be based on EPC and O&M costs arrived through competition amongst at least three bidders under the supervision of a third party. The cost of Balance of Plant (BOP) including project development costs, financing costs and ROR will also be required to be competitive. Any subcontracting of EPC/O&M will require Government of Pakistan (GOP) approval.
  7. For hydropower projects, resource variability risk will be borne by the purchaser as per the present arrangement (based on monitoring of actual water flows). Other RE projects will bear the resource risk themselves.
  8. Renewable Energy[2] (RE), hydropower, nuclear and indigenous coal projects (with back to back guarantee to miner), will be “must run” projects.
  10. Payment obligations of the federal power purchaser entities will be backed through government guarantee.
  11. LOI/LOS will be issued by AEDB/PPIB for projects feeding electricity in the national grid for purchase by Federal entities in accordance with this policy. Provinces may issue LOI/LOS according to their policies as per the Constitution.
  12. Contribution of customers towards electricity supply through net metering regime based on distributed solar power generation will be promoted through attractive tariff and financing support schemes (see Section 2.2 below).

It is also recognized that any large capacity surplus will have to be converted to economic opportunities in order to safeguard against the diseconomies and tariff impacts caused by idle capacity. For this purpose demand promotion schemes will be devised and tariff design will be improved to promote consumption in the productive sectors.

Curtailing aggregate technical and commercial (atc) losses to reduce arrears

Sustainability of the power sector is seriously threatened by accumulation of arrears due to failure in reducing the power system losses to targeted levels and less than full recovery of revenues.  These Aggregate Technical and Commercial losses (ATC) result in nonpayment to IPPs who in turn fail to make payments to primary energy/fuel supply companies. The Government recognizes the urgency of settlement of these issues. A committee of experts will be formed to make recommendations to address the root causes of ATC on permanent basis.

Rationalizing electricity tariffs

The Power Sector Reform in the country is witnessing a progressive tariff rationalization process. Tariff is based on the principle of cost recovery except for consumers with consumption below 300KWh and agricultural tube wells. In future, the thresh hold for subsidised customers will be further reduced. Simultaneous steps are being taken to gradually move towards open access and competitive market regime where the electricity prices will be market based. However, in the interim period, NEPRA shall determine the tariff in the light of the Amendment in 1997 NEPRA Act (2018). In summary, the key features will be the following:

  1. Uniform tariff for distribution licensees wholly owned and controlled by a common shareholder.
  2. Cost of service except for poor class of customers.
  3. Through pricing signals, promote energy efficiency, conservation and DSM
  4. Promote net metering.
  5. Promote use of surplus power by industries and commercial sectors[3].
  6. Tariff for off grid, mini grid customers to be subsidized.
  7. In the long run, prices be determined by the market itself.
  8. Cross subsidies will be minimized.

Tariff structure will be guided by the principle of reducing the cost of electricity through, but not limited to, efficiency in supply, improvement in end-use efficiency, improved power factors, better customer awareness and other demand management measures. For preparation and implementation of demand management programs, the National Energy Efficiency and Conservation Authority (NEECA) will be revitalized.

Priorities for investment

Emergence of power generation surplus provides an opportunity and gives fiscal space to focus on and address the long overdue need for improvement of transmission and distribution infrastructure. For this purpose, rehabilitation, augmentation and expansion of transmission and distribution system benefitting from modern technologies and management practices will get the highest priority. Financing schemes will be designed to promote investment by private sector in transmission and distribution infrastructure. The transmission and distribution companies will be also arranging resources from commercial sector, market and other means besides the conventional recourse to PSDP/Donors.  

New power generation projects will be required once the surplus power is absorbed. In this context, clean-energy and indigenous fuel-based projects will get priority. The new projects’ financing plans will be guided by the integrated long-term plans, which will allow their investment arrangements to be made reasonably up-front. However, investors will be responsible to raise financing through financial markets on the basis of strengths of projects, balance sheets, other market-based collaterals and/or innovative financing schemes except for nuclear, large hydro (run-of-river or multipurpose), technology transfer or other strategically important projects.

[1] Letter of Support (LOS) to be given to the successful bidder.

[2] RE means wind and solar based projects

[3] It may be considered that for the period during which the generation capacity is projected  to be surplus beyond the reasonable limit ( approximately up to 2023) , tariff for industrial sector be so designed that it would decline for  consumption above a minimum thresh hold for industrial and commercial customers reducing their cost of doing business.