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Concept Note onInterim Solution To Open Access

(Wheeling)

DRAFT CONCEPT NOTE ON INTERIM SOLUTION TO OPEN ACCESS THROUGH MODIFICATION OF WHEELING AND OTHER REGULATIONS

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Table of Contents1. RECOMMENDATION PAPER ON INTERIM SOLUTION TO OPEN ACCESS THROUGH MODIFICATION OF WHEELING AND OTHER REGULATIONS............................................................................................4

1.1. Background................................................................................................................4

1.1.1. Formation of CPPA-G Board Committee on Wheeling................................................4

1.1.2. CPPA-G Board Committee Meeting with NEPRA.........................................................2

1.1.3. Presentation Before Honorable Minister / Secretary Ministry of Energy (Power Division)................................................................................................................................2

1.1.4. Opening of Wholesale Market in Three Stages...........................................................2

1.2. Interim Solution - Introduction...................................................................................4

1.2.1. Objectives...................................................................................................................4

1.2.2. Alignment with CTBCM...............................................................................................4

1.3. Stage 1 – Key Challenges To Market Opening.............................................................5

1.3.1. Key Issues in Existing Wheeling of Electric Power Regulation 2016............................5

1.3.2. Non-existence of Procurement Regulations...............................................................6

1.3.3. Commercial Code........................................................................................................6

1.3.4. Supplier Licensing Regulation.....................................................................................7

1.3.5. Instruments for Commercial Transactions..................................................................7

1.3.6. Adjustment and Modification of Regulatory Framework............................................7

1.3.7. Inadequate Institutional Capacities of Implementation Agencies..............................7

1.3.8. Implications – Stranded Cost......................................................................................8

1.3.9. Implications – Network Stranded Cost.......................................................................8

1.4. Interim Solution General Framework.........................................................................8

1.4.1. Key Changes Proposed in New Regulation..................................................................8

1.4.2. Procurement Regulation - New Capacity Procurement and Capacity Obligations......9

1.4.2.1 Capacity Obligations for interim period..................................................................10

1.4.2.2 Firm Capacity of Different types of technologies....................................................10

1.4.3. Amendments in the Commercial Code.....................................................................10

1.4.4. Electric Power Suppliers Licensing Regulation..........................................................10

1.4.5. Alignment of Legal and Regulatory Framework........................................................11

1.4.6. Strengthening of Entities..........................................................................................12

1.4.7. Recognition of Stranded Costs..................................................................................12

1.4.8. Recognition of Network Stranded Cost.....................................................................13

1.5. Interim Solution Specific Framework........................................................................13

1.5.1. Deviation of Contracts and Settlement of Imbalances..............................................13

1.5.2. Transactions Between Generators and BPCs............................................................14

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1.5.2.1 Bilateral Contracts..............................................................................................14

1.5.2.2 Deviation Settlement Mechanisms (DSM)..........................................................15

1.5.2.3 Metering requirements and Calculations...........................................................15

1.5.2.4 Open Access (Wheeling) Costs............................................................................16

1.6. Other Distinct Recommendations to Support Open Access.......................................16

Annex A- Process Flow for Open Access/Wheeling Regulations.......................................17

Annex B- Possible Use of Second Tier Supply Provision for Market Enablement..............20

Annex C- Three Stages of the Market Opening with Timelines.........................................21

Annex D- Process Flow For Market Participation Agreement...........................................23

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DRAFT RECOMMENDATION PAPER ON INTERIM SOLUTION TO OPEN ACCESS THROUGH MODIFICATION OF WHEELING AND OTHER REGULATIONS

1. RECOMMENDATION PAPER ON INTERIM SOLUTION TO OPEN ACCESS THROUGH MODIFICATION OF WHEELING AND OTHER REGULATIONS

1.1. BACKGROUND

Wheeling of Electric Power (Open Access) is a mechanism to enable trading of electric power among different parties located at different locations in the network. Basically, open access (wheeling) mechanism deals with the transportation of electricity from the point of generation to the point of consumption. The open access (wheeling) arrangement defines a framework for the transportation of electricity using the network of the Transmission/Distribution companies.

In Pakistan, NEPRA allowed the bilateral trade between generators and Bulk Power Consumers (BPCs), consumers having sanctioned load of 1 MW & above, through an open access (wheeling) regulation in 2016. However, due to certain limitations of the regulation and other factors, the regulation was never implemented and until now, no single transaction has been carried out based on open access (wheeling) arrangement.

Recently, there has been a push from the policy makers as well as the market players to amend the current wheeling regulation to remove the obstacles in the implementation of the open access (wheeling) arrangement to enable BPCs to trade bilaterally with the generators. CPPA-G considers the open access (wheeling) regulation as one of the most important regulation for opening of the market and has been striving to operationalize it since long. In the Electricity Market Professional (EMP) Program organized by CPPA-G during July 2018-January 2019, the current Wheeling Regulations was an important part of the training curriculum and CPPA-G had several interactive sessions on current Wheeling Regulation with the participants including NEPRA, DISCOs, NTDC and NPCC. Later, the issue of Wheeling Regulation, among others, was taken up by CPPA-G Board of Director.

1.1.1. FORMATION OF CPPA-G BOARD COMMITTEE ON WHEELING

Keeping in view the importance of operationalizing the open access (wheeling regulation) as well as the net metering regulation, the CPPA-G Board of Directors (BoD), in a board meeting, dated 17th January 2019, directed to constitute a Special Committee of the Board to identify the impediments in implementation of the Wheeling, Net-Metering and Captive Generation and present recommendations to NEPRA for its implementation. Subsequently, a ‘Special Committee on Net Metering and Wheeling Issues’ was formed comprising CPPA board members, Mr. Hamid Ali Khan as Chairman, Zargham Ishaq Khan, Joint Secretary (Power/Finance) and Abid Latif Lodhi (CEO, CPPA) as members, to work on three issues namely Wheeling, Net Metering and Captive Generation.

1.1.2. CPPA-G BOARD COMMITTEE MEETING WITH NEPRA

Special Committee Chairman, Mr. Hamid Ali Khan along with Mr. Zargham Ishaq Khan, held a meeting with Mr. Saif Ullah Chattha, Member Punjab, NEPRA on February 8, 2019 and discussed these matters. During the meeting, Member Punjab, NEPRA warmly welcomed the

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CPPA’s inputs in this regard and appreciated the efforts of mutually discussing and coming up with the solutions to overcome the bottlenecks in these three areas.

Member NEPRA principally agreed with all recommendations made by Special Committee of CPPA Board on Wheeling and Net-Metering. However, he further informed the Committee that he will discuss the recommendations from CPPA with the Technical Team of NEPRA to implement these recommendations by NEPRA and other relevant entities. For Captive Generation, Member NEPRA agreed to issue the captive generation guidelines after consultation with Technical Team of NEPRA. However, he pointed out that this regulation will not be applicable retrospectively for existing captive power generators, but will become valid from the date of approval by the Authority moving forward.

1.1.3. PRESENTATION BEFORE HONORABLE MINISTER / SECRETARY MINISTRY OF ENERGY (POWER DIVISION)

CPPA-G presented its views to the honorable Minister / Secretary, Ministry of Energy (Power Division) in a meeting held on 18th March, 2019. During the meeting, it was decided that CPPA-G will propose its recommendations to the CPPA-G Board for an interim solution which is easily implementable and legally correct. Reference letter from Secretary MoE (PD) is given in Annex-1. After deliberation at the CPPA-G board, NEPRA will be requested to amend the current wheeling regulation based on these recommendations.

1.1.4. OPENING OF WHOLESALE MARKET IN THREE STAGES

To come up with a workable solution on the directions of MoE (PD), CPPA-G has prepared a comprehensive roadmap which consists of three stages. The first two stages are interim approaches in order to prepare the market to undertake open access (wheeling), whereas the third stage comprises a comprehensive solution involving implementation of seventeen group actions required for the establishment of competitive wholesale market in Pakistan. The activities comprising each stage along with their timelines are described in the Annex-C.

Following table illustrates a quick comparison of the three stages of market opening:

Items Stage-1 Stage-2 Stage-3

Salient Activities regarding Regulatory Framework

- Preparing recommendation paper on interim solution on open access (wheeling)

- Drafting Complete Open Access (Wheeling) Regulation

- Commercial Code entailing the financial transactions required

- Identifying required

- Drafting comprehensive Procurement Regulation

- Adjusting Commercial Code

- Adjustment in Open Access (Wheeling) Regulation

- Alignment of relevant policy, legal and

- Full-scale implementation of Competitive Wholesale Electricity Market by 2020

- Separation of CPPA in two entities separately entailing Agency function and Market Operator function

- Alignment of complete policy, legal and regulatory framework with the

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changes in legal and regulatory framework

regulatory framework proposed market model

Parties Allowed to Contract Bilaterally

- Only BPCs with Generators

- Only BPCs with Generators

- Both DISCOs/BPCs with Generators/Suppliers/ Traders

Settlement of Imbalances

- Deviation Settlement Mechanism (DSM) on regulated price on monthly basis for both Energy and Capacity

- Deviation Settlement Mechanism (DSM) on regulated price on monthly basis for both Energy and Capacity

- Hourly Balancing Mechanism for Energy (BME) and Monthly Balancing Mechanism for Capacity (BME) on market prices

Capacity Deviation Measurement

- W.r.t individual customer peak

- W.r.t individual customer peak

- W.r.t contribution to coincidental system peak

Firm Capacity - Formula based on technology type

- Formula based on technology type

- Measurement taken at time of coincidental system peak

Capacity Obligation

- No obligations on BPCs - No obligations on BPCs

- Obligations to both DISCOs/BPCs based on contribution to system peak

Capacity Procurement for DISCOs

- No further procurements for DISCOs

- No further procurements for DISCOs

- Procurements will be done as per Procurement Regulations

Eligibility for Suppliers

- Only Generators are allowed to become suppliers

- Only Generators are allowed to become suppliers

- Other entities besides Generators can become suppliers/traders

Other Important Activities

- - - Allocation of existing contracts to DISCOs

- Auction Administrator to execute new procurements for regulated consumers

- Strengthening of DISCO/NTDC/NPCC

- Separation of CPPA in two entities i.e. MO and Agent

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This paper presents the recommendations for an interim solution in order to operationalize the open access (wheeling) arrangement. It is important to mention here that this solution is for the interim period till the commencement of the competitive wholesale market i.e. Competitive Trading Bilateral Contract Market (CTBCM) (Completion of Stage 3 of the action plan). The commencement of the wholesale market will fully integrate this mechanism and will provide a broader and complete solution for the bilateral trade among different players of the market.

1.2. INTERIM SOLUTION - INTRODUCTION

1.2.1. OBJECTIVES

To gradually open the market from current single buyer regime by allowing open access to BPC and Generators. Any solution proposed for the interim period shall be:

Legally correct Implementable in the simplest possible manner Designed in a way to allow BPCs and Generators to trade bilaterally at the shortest

possible time Technically viable and financially sustainable i.e. having no adverse technical or

financial implications for the network operators and regulated consumers.

1.2.2. ALIGNMENT WITH CTBCM

Competitive Trading Bilateral Contract Market (CTBCM) model design and roadmap was submitted for approval to NEPRA in March 2018. The wholesale market model and roadmap will introduce competition in the market through centralized dispatch and for the market through competitive auctions. The roadmap entails 17 group of actions segregated in legal, policy, regulatory, institutional, technical, commercial and capacity building areas to be implemented by market participants, service providers, regulator and MoE (PD) to open a wholesale competitive market in true sense.

This paper considers that whatever is recommended for this interim period, should be aligned with the ultimate objective of having a competitive market by 2020, without any postponement. The CTBCM Model has been submitted to NEPRA for approval and is expected to be approved within 2019.

The following section discusses the issues identified in the Wheeling Regulation 2016, market reforms and stranded costs, other challenges including inadequate technical and human resource capacity of implementation agencies / organizational structures to implement gradual market opening.

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1.3. STAGE 1 – KEY CHALLENGES TO MARKET OPENING

1.3.1. KEY ISSUES IN EXISTING WHEELING OF ELECTRIC POWER REGULATION 2016

In the existing market structure, the open access (wheeling) regulation is the pillar regulation to enable the bilateral trade between the BPCs and the generators. The existing Wheeling regulation issued by NEPRA on June 13, 2016, establishes that the transaction will be between a generator, identified as the Wheeler of Power and a BPC according to the conditions of a Power Purchase Agreement (PPA) freely agreed between the parties. In order to materialize this PPA, the existing Wheeling of Electric Power Regulation provides the framework for the transportation of this energy from the point of generation to the point of consumption being located at different points in the network. This regulation includes two main subjects:

The conditions under which a Generator, identified as a Wheeler of Power, can request transportation (wheeling) services from NTDC and/or a DISCO to bring the energy from the point of generation to the point of consumption.

The mechanism to be applied to compensate the differences between energy generated by the Wheeler of Power (Generator) and the energy consumed by the BPCs in a specific time interval.

This regulation lacks from some simplifications and mechanisms that could be used more efficiently to enable the bilateral trade. This regulation has some inherent issues due to which, the regulation was never implemented. The key issues are highlighted as follows:

1. Wheeling Notice (Self Dispatch): The current wheeling regulation is based on the notion of self-dispatch, meaning that the dispatch of the generator will be decided by the power plant itself. However, the current market structure of Pakistan is based on central-dispatch model1. The wheeling regulation states that the Wheeler of Power (generator) will inform the network operator in advance regarding the quantum of electricity to be generated by the Wheeler of Power. This means that the Wheeler of Power (generator) is free to control its own generation and this is the case of self-dispatch markets. In Pakistan, the legal (NEPRA Act) and regulatory framework (Grid and Distribution Codes) establishes a central dispatch market. Therefore, it is required that the solution shall be made aligned with the legal and the regulatory framework.

2. Banked Energy: The electricity generation by the Wheeler of Power (Generator) and the consumption by the BPC can never be equal at all times and there will always be imbalances. Therefore, a mechanism is required to be established to settle the differences between the electricity generation and consumption at different time intervals. The current wheeling regulation provides banking as the settlement mechanism for imbalances. The banking mechanism is not economically efficient and creates price distortions at such high volumes of trade because electricity can’t be physically stored in the network and the price of electricity changes at very short intervals. Therefore, banking at one time and withdrawing at other time is not a

1 The Central Dispatch is applicable on Generators connected on primary and secondary transmission voltages

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financially viable solution in the case of bulk electricity trading. Therefore, a proper imbalances settlement mechanism needs to be developed in order to implement wheeling in an efficient manner without having any adverse implications for the DISCOs and regulated consumers.

3. Wheeling from Intermittent Generation Sources: The current wheeling regulation doesn’t take into account the financial impacts on the system due to generation from intermittent and seasonal sources i.e. wind, solar etc. The addition of these resources in the grid increases the demand for reserves in the system and also the system requires firm capacity (discussed later) to be available in the system at all times to cater for the intermittency of these resources. In existing market, the Single Buyer was covering firm capacity requirements and distributing the costs to all buyers, however, market opening will require this firm capacity additions to ensure security of supply. Therefore, this is an important aspect that must be addressed while we move from Single Buyer model towards bilateral contracts between BPCs and Generators.

4. Losses Treatment: The treatment of network losses should be a matter of concern in the wheeling regulation. However, the Wheeling Regulation is silent about treatment of losses and does not propose any methodology for treatment of network losses. The prevailing practice requires DISCOs to purchase all losses and recover from the respective consumers in different tariff categories based on cost of service principal. Similar provision should have been provided to recover the cost of losses from the BPCs having bilateral contracts through wheeling charges for their respective tariff category.

1.3.2. NON-EXISTENCE OF PROCUREMENT REGULATIONS

The procurement of new capacity in the system should be derived by a comprehensive and well-thought Procurement Regulation. This regulation should govern all the legal, commercial and technical aspects related to the power procurement so that the firm capacity added in the system is in line with the demand and supply situation. Since the BPCs opting for wheeling of power mostly from the renewable generation, which always requires the availability of firm capacity in the system to cater for the intermittency of renewable generation facilities. Therefore, there is a dire need to have a Procurement Regulation in place to cater the need for induction of new capacities that are targeted for open access (wheeling). Given the complexity and extensiveness of the Procurement Regulations, it is not something which could be prepared immediately and it requires ample amount of time for its development. Therefore, the Procurement Regulations would be prepared in the Stage-2 of the wholesale market opening.

1.3.3. COMMERCIAL CODE

The settlement of the imbalances resulting from the open access arrangement i.e. wheeling of power from generator to a BPC, is not covered under the existing Commercial Code. Therefore, establishment of a proper imbalances settlement mechanism is required and consequently the Commercial Code should be adjusted to include provisions for settlement of

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imbalances in order to implement open access (wheeling) in an efficient manner while taking care of all the relevant implications.

1.3.4. SUPPLIER LICENSING REGULATION

The NEPRA Act (as amended 2018) introduces Supplier, among others, as one of the market participants. These are the market participants who are allowed to sell to the end consumers including BPCs. According to the Act, a Supplier is a person who has been granted a licence under the Act to undertake supply of electricity. This implies that the Supplier would have to acquire a supply licence from the Authority for the supply of electric power to the BPC through wheeling. Therefore, the Supplier Licensing Regulation may become mandatory requirement of the regulatory framework required for open access (wheeling) to cover the procedures involved with the issuance of Suppliers Licenses.

1.3.5. INSTRUMENTS FOR COMMERCIAL TRANSACTIONS

In order to enable the generators and BPCs to opt for the open access, few important instruments would be required. One of such instruments is the Connection Agreement which is an agreement between a Generation Company or a BPC and a DISCO/Transmission licensee to connect to DISCO and/or transmission licensee's network, as the case may be, as specified in the Grid Code and the Distribution Code. Another instrument is the Market Participation Agreement of the market participants with the Market Operator. This agreement would formalize the participation of the BPCs and Generator through the bilateral contract and would enable MO to settle their deviations arising as result of such trade.

1.3.6. ADJUSTMENT AND MODIFICATION OF REGULATORY FRAMEWORK

There may be other adjustments and modifications to the present regulatory framework which may be identified at a later stage when the open access (wheeling) regulation is operational. Therefore, the guidelines, rules and regulations shall be reviewed and necessary changes would be incorporated if required.

1.3.7. INADEQUATE INSTITUTIONAL CAPACITIES OF IMPLEMENTATION AGENCIES

DISCOs: Currently, the DISCOs lack the capacity and the systems to handle the complications associated with the open access (wheeling) regulation. There are no specialized departments/sections within the DISCOs to evaluate the open access (wheeling) applications and process them taking into consideration all the legal, commercial and technical implications. This gap seems to be widened while moving forward to the establishment of wholesale competitive market which require robust function within the DISCOs capable to manage bilateral contracts between DISCOs and Generators. In short, the DISCOs lack in both the training and structure required to function in the competitive market.

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As a result of the recommendation by CPPA-G, Market Working Groups have been established in the DISCOs. It is proposed that these Working Groups may be transformed into full-fledged functional Market Departments in parallel to the establishment of competitive wholesale electricity market. Doing this, would ensure that the DISCOs have built enough capacity in terms of people, processes, technology and the associated knowledge that is required to undertake the operations of the future electricity market by the time it is established. The structure of the Market Department should be formalized, staffed and equipped with adequate training, within six to eight months, due to the importance and urgency associated with the opening of the market.

NPCC: The System Operator is one of the main pillars of any electricity market. Therefore, strengthening of NPCC is also a key requirement of the future market.

1.3.8. IMPLICATIONS – STRANDED COST

Due to impressive generation addition in past few years in the national grid, the power system has achieved the required supply adequacy to cater for the existing as well as future load growth. Therefore, for some years in the future, any demand exiting from the existing long-term contract market will result in stranded costs2 which will increase the financial burden on the remaining consumers in the system. The current policy and regulatory framework provides no mechanism to cater for these stranded costs and to mitigate this impact.

1.3.9. IMPLICATIONS – NETWORK STRANDED COST

If in a DISCO’s territory, grid network is laid down for a generator that does not get dispatch in future, the consumers of the respective DISCOs will be burdened with the Stranded cost of that network. Therefore, the new mechanism shall be proposed in such manner that it mitigates this impact on the consumers of the DISCOs.

1.4. INTERIM SOLUTION GENERAL FRAMEWORK

The following sections present the general framework and broader guidelines for the implementation of the wheeling mechanism in a technically viable and financially sustainable manner.

1.4.1. KEY CHANGES PROPOSED IN NEW REGULATION

To operationalize the open access (wheeling) and thus to facilitate the trade in the market between BPCs and Generators, the key impediments have been addressed through following changes:

1. Central Dispatch: All generators connected on 132KV/66KV and above will be centrally dispatched as per provisions of the Grid Code by the System Operator (SO). The generators connected on the voltage level of 11kV and below, will be self-dispatched.

2 If an end-consumer exist DISCOs long term contract market, high percentage of fixed costs for DISCOs combined with the volumetric tariff charging structure from end consumers results in stranded costs

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However, they will communicate their dispatch schedule in advance to relevant DISCO and the SO.

2. No Banked Energy: There will be no concept of banking energy. The existing banking mechanisms shall be abandoned and replaced by a Deviation Settlement Mechanism (DSM) to settle the deviations between contracted and actual quantities, as later further developed. This approach is simpler and more efficient than the banking and aligned with equivalent needs for the proposed future wholesale market.

3. Wheeling from Intermittent Sources: To allow open access (wheeling) to intermittent sources like wind or solar which has no firm capacity, a mechanism of firm capacity calculations is being introduced and for the settlement of capacity imbalances, a deviation settlement mechanism is also being introduced. (Further details are in Section 1.5).

4. Losses Treatment: The treatment of network losses will remain the same as of today. Currently, all the losses are purchased by the DISCOs and recovered from the consumers in different tariff categories based on cost of service principal. The same mechanism shall be used for the open access (wheeling) arrangement as well and methodology to be devised by NEPRA to recover these costs of open access (wheeling) charges from the BPCs in their respective tariff category.

Guidelines and regulations exist today for the use of transmission and distribution network that provide the mechanisms to charge different users for the use of the network. At this stage, it is not envisioned that any significant changes will be required in the methodologies used for the calculations of network use charges. These guidelines, regulations and methodologies shall be reviewed and necessary changes to be incorporated if required.

1.4.2. PROCUREMENT REGULATION - NEW CAPACITY PROCUREMENT AND CAPACITY OBLIGATIONS

This section discusses the Procurement Regulations which is an important element of the overall legal and regulatory framework required for the proper functioning of the wholesale market. Although, the complete Procurement Regulation would be drafted under the Stage-2 of market opening, a brief description of the main features of the Procurement Regulation are included here for information.

Capacity is a concept related to the security of supply which means that at the time of system peaks, there is enough capacity in the system to supply the load with some reserve margins. Reserve margin is the availability of generation above the forecasted peak demand. In an ideal and perfectly competitive electricity market, market-forces ensure the necessary security of supply. Not always security of supply can be easily solved by the market forces, especially in newly created markets where the operators are not yet mature enough to make right decisions and the regulators are not yet prepared with regulations able to enforce the security of supply with minimum regulatory interventions.

Therefore, in many markets, the obligation to contract capacity in advance has been adopted to ensure that there will be enough capacity to supply future demand, with higher levels of certainty for short term and lower for longer terms.

The CTBCM model proposes that buyers in general will have to meet the capacity obligations precisely to ensure capacity adequacy and avoid imbalances between supply and demand and

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ensure a proper quality of supply, within prices ranges compatible with the achieved quality of service.

These obligations should be part of the Procurement Regulations to be issued by NEPRA in accordance to the Section 32 of the NERPA Act for all buying sides supplying regulated customers. However, the CTBCM model also proposes to apply similar obligations on BPCs, in such a way that BPCs also make their contributions to the security of supply.

1.4.2.1 CAPACITY OBLIGATIONS FOR INTERIM PERIOD

Considering the demand and supply situation in Pakistan and having adequate capacity already contracted for coming few years, security of supply is already ensured. So, taking advantage of the situation, capacity obligation can be set to zero for the time being. However, this threshold needs to be evaluated every year and may be revised if required considering the demand and supply situation as well as the market maturity of the players.

1.4.2.2 FIRM CAPACITY OF DIFFERENT TYPES OF TECHNOLOGIES

Firm capacity is the capability of the generation unit to be available for production of electricity which can be (and in many cases must be) guaranteed at a given time. In order to provide sufficient and adequate capacity for medium and long-term security of supply, the concept of firm capacity for different type of technologies is needed to be introduced at this stage through the revised open access (wheeling) regulation.

For this open access (wheeling) mechanism, a methodology will be devised to calculate the firm capacity of each technology i.e. Thermal, Hydro (Run of River and storage based) and Variable Renewables (Wind and Solar). The firm capacities will be determined based on their contribution to the security of the system.

There are many methods available for the calculation of the firm capacity. However, for the interim period, a simplest approach will be adopted. This approach will be enhanced further in the subsequent stages of the market development. The open access (wheeling) regulation or the Grid Code3 shall provide standard factors to calculate the firm capacity of each type of technology.

1.4.3. AMENDMENTS IN THE COMMERCIAL CODE

The existing commercial code doesn’t cater for the bilateral trade between Generators and BPCs. Therefore, it shall be amended to incorporate these transactions and the deviations settlement mechanism.

1.4.4. ELECTRIC POWER SUPPLIERS LICENSING REGULATION

The current rules (NEPRA Licensing (Generation) Rules, 2000) have the provision for the second-tier supply business by the Generation licensee. For the interim period, this provision may be used to enable the generators to involve in trading with the BPC through the second-tier supply business.

However moving forward, a separate regulation needs to be developed in order to enable the Generators to trade bilaterally with the consumers. This licensing regulation shall clearly

3 Firm Capacity calculation is a technical subject and should be addressed in the Grid Code.

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indicate the type of consumers for which the Suppliers is authorized to make sales to and the regulation shall also establish a framework for the last resort Suppliers in the network.

1.4.5. ALIGNMENT OF LEGAL AND REGULATORY FRAMEWORK

For the implementation of the open access (wheeling) arrangement, some adjustments are required in the legal and regulatory framework to align it fully with the amended NEPRA Act. The relevant sections of the Act that allows the generation company for wheeling are 14B Generation, 14C Captive Generation and 14D Duties of Generation Companies and similarly, under section 22 Sale of bulk power consumers permits the BPC to buy directly from generation company and other relevant sections under which alignment is required are 23E Electric Power supply license, 23F Duties and responsibilities of an Electric Power Supplier, 31 Tariff and 50 Savings.

For this purpose, the entire legal and regulatory framework has been reviewed to identify relevant documents and specific sections of these documents for amendment in order to align the entire framework to make the transition as smooth as possible. The analysis of required amendments is given in the following table:

Table : Alignment of Legal and Regulatory Framework

Rules Changes May be Required in Relevant SectionsNEPRA Licensing (Generation) Rules, 2000

- The current rules have the provision for the second-tier supply business by the Generation licensee. Therefore this provision may be used for the interim period to enable the trade between generators and BPCs. Although in the amended NEPRA Act, Electric power Supplier regime has been introduced separately. So in this aspect the rules may need to be amended in the longer run. - The tariff for Generation licensee that are intending to supply power to the BPC through wheeling should not be approved by the Authority

New: NEPRA Licensing (Electric Power Supplier), Rules

- As mentioned above, the provision of the second-tier supply business might be utilized for the interim period. However, according to the NEPRA Act 2018, if Generating Company is aiming to sell power to a consumer, they need the license of Electric Power Supplier and for that the eligibility criteria for the grant of license should be prescribed by the Federal Government by setting certain rules, but currently no such rules has been approved. Therefore, development of these rules is required for alignment

New: Consumer Category(s) - New tariff category(s) are proposed for the network service charges and the recovery of capacity charges

Regulations Relevant SectionsNEPRA (Wheeling of Electric Power) Regulations, 2016

- The existing wheeling regulation needs to be adjusted with respect to the conditions of the wholesale market in order to remove gaps and inconsistencies with NEPRA Act.

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Therefore, in order to operationalize the trading through open access, the existing Wheeling Regulation needs to be amended in its entirety.

NEPRA (Supply of Electric Power) Regulations, 2015

- The existing supply regulation was formed to allow the second-tier supply business under the supply exclusivity of Distribution Companies, however, in the NEPRA Act 2018 these two things has been amended and separate electric power supply licensing regime has been introduced. - So these regulations need to be replaced by the new one which should be consistent with the NEPRA Act 2018.

New: NEPRA (Electric Power Supply) Regulations

- Existing regulation of 2015, may need to be revisited

Guidelines Relevant SectionsNEPRA Guidelines for determination of Consumer End tariff (Methodology and Process) 2015

- Due to the introduction of Deviation Settlement Mechanism (DSM) for wheeling, as discussed in above sections, the formula for transfer price mechanism in these guidelines should be aligned according to the Commercial Code - One of the options proposed above for the recovery of stranded costs, is to park the standard cost to those BPCs which are intending to buy directly from the generation company . for this purpose, new consumer category(s) needed to be introduced, and hence these guidelines need to be amended accordingly.

1.4.6. STRENGTHENING OF ENTITIES

CPPA has already taken the initiative to strengthen relevant power sector entities including DISCOs and NPCC. A memorandum of understanding has been signed with Lahore University of Management Sciences (LUMS) to facilitate CPPA in the delivery of specialized training programs and other areas of mutual cooperation related to market design and research. A comprehensive EMP Program was designed and delivered by CPPA to induce knowledge within power sector entities about competitive electricity markets. All these efforts coupled with the formal establishment of Market Departments with the power sector entities would accelerate the pace of market development.

Therefore it is proposed that the Market Departments are formally endorsed by the Ministry of Energy (Power Division) and the relevant Boards of respective entities. These departments should be equipped with the necessary staff by 2019. Rigorous trainings of market participants and service providers shall be organized by the Market Operator in collaboration with its training partners. Similarly it is proposed that the NPCC should have a separate Market Department as well. There should be complete focus on the strengthening of the System Operator (NPCC) in terms of people, training and tools.

1.4.7. RECOGNITION OF STRANDED COSTS

The power sector of Pakistan has achieved the required level of supply adequacy (subject to certain conditions) to cater for the existing as well as future load growth for many years to come. During this surplus regime, if any demand exits the contract market, it will cause

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stranded costs which will increase the tariff for the remaining consumers in the system until this gap is filled by new demand. Therefore, the amended wheeling regulation shall recognize this impact and shall propose a mechanism to recover these costs from the consumers exiting the contract market and opting for open access (wheeling), which can be done through introduction of new consumer category(s) for such applicants.

For the recovery of the stranded cost, three options are proposed as follows:

1. The costs are charged to the consumers leaving the contract market of DISCOs in form of capacity charge2. The costs are parked to the existing consumers in form of increased tariff in terms of capacity3. The costs are picked up by the Government in the form of subsidy

1.4.8. RECOGNITION OF NETWORK STRANDED COST

If in case a generator is not getting dispatched and resulting in stranded cost of the network which was deployed dedicatedly for that generator. The stranded cost associated with the network cost of that generator would be recovered from the generator by charging the network cost.

1.5. INTERIM SOLUTION SPECIFIC FRAMEWORK

1.5.1. DEVIATION OF CONTRACTS AND SETTLEMENT OF IMBALANCES

The NEPRA Act 2018 establishes that always when a generator directly or indirectly uses the transmission system, the dispatch of this generation4 will be subject to the economic dispatch run by the System Operator (SO) according to the Grid Code (GC), regardless of the trading conditions.

This NEPRA Act 2018 provision is intended to increase the overall efficiency in the power sector, so that it may lead to the situation in which the Generator selling directly to a BPC is not dispatched because in the system, there are cheaper generators (merit order). In this case this Generator must be allowed to settle the deviations in the “pool” 5 its obligations under the direct selling agreement with the BPC. In a centralized economic dispatch system, whenever a generator is not dispatched means that the price in the “pool” is lower than its own generation costs. Thus, this will be beneficial for the System and as well as for the Generator. There might also be gains through optimization of the use of water as hydel resources will be used to replace the costlier thermal resources.

In line with the reasoning above, in the amended open access (wheeling) regulation, the existing banking mechanisms shall be abandoned and replaced by a Deviation Settlement Mechanisms (DSM) to settle the deviations between contracted and actual quantities, as later further developed. This approach is simpler and more efficient than the banking and aligned with equivalent needs for the upcoming CTBCM6.

4 Regardless licensed or not licensed, i.e. including Captive Generation 5 Later considerations are made about the “pool”6 will also serve to install the balancing concept and help operators to get used to that

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The settlement and payments between the contracting parties will be done directly between them. The settlement and payment of deviations will be done by the MO and through the payment mechanisms foreseen in the commercial code (CC) as amended to cater for these types of transactions.

The Deviation Settlement Mechanisms (DSM) for open access (wheeling) arrangement will cease to exist when the CTBCM Balancing Mechanisms (BM) start, however, all the mechanisms to deal with bilateral contracts, settlement of deviations, use and payment of transmission networks, etc. will be very similar to the one for the open access (wheeling) arrangement, and therefore making the transition smooth avoiding abrupt changes, essential to create more confidence in the steps to come in the future.

1.5.2. TRANSACTIONS BETWEEN GENERATORS AND BPCS

1.5.2.1 BILATERAL CONTRACTS

In the wheeling mechanism, the transactions between Generators (Wheeler of Power) and BPCs (the Buying Side) will be through bilateral contracts, at prices freely agreed between the parties.

The main features of the bilateral contracts shall be:

o Identification of the parties, that will be registered at the CPPA G (MO) as market participants

o Establishment of contracted quantities at agreed time intervals (to be consistent with the Deviation Settlement Mechanism)

o Establishment of the Commercial Delivery Point (CDP)

o Be registered with the MO (Contract Registrar)

o Have a duration until the CTBCM starts. The contract may have provisions for novating it to the CTBCM requirements

For the sake of simplicity, it would be preferable that these bilateral contracts will be:

o Consumption (energy): load following contracts meaning that the generator is responsible for all the consumption of the load

If load following, the BPC will never have deviations

o Demand (capacity): either demand following or fixed capacity

If demand following, the BPC will never have deviations

If fixed, both, the BPC and the generator (Wheeler of Power) may be exposed to deviations

The bilateral contract will establish the contracted demand (MW) (the equivalent to the Committed Capacity in the existing wheeling regulation) and the contracted consumption (MWh) quantities. If it is a load following contract, contracted consumption will be the actual demand of the BPC (it could be considered to cap it up to the contracted demand times a load factor to be agreed between the parties).

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The Selling side has the obligation to supply either both, the contracted capacity (firm capacity) and the contracted consumption (energy) or any of them, as established in the PPA7.

1.5.2.2 DEVIATION SETTLEMENT MECHANISMS (DSM)

Deviations between contracted and actual quantities will be settled according to the Deviation Settlement Mechanisms (DSM) as it will be established in the Commercial Code8. It will be based on the following principles:

The Settlement Period for the calculation of energy deviations, will be hourly.

Physical Energy deviations will be calculated for the Settlement Period by the CPPA G (MO) as the difference between the accumulated Energy Input injected by the Wheeler of Power during the Settlement Period and the actual accumulated Energy Output taken by the BPC, and will be settled on marginal price:

o If the accumulated Energy Input is less than the contracted quantities, the Wheeler of Power has to settle the difference through the DSM, provided however that there is energy available to be dispatched by the SO9

o If the accumulated Energy Input for the period is more than the accumulated Energy Output, the Wheeler of Power will settle the difference through the DSM

The Settlement Period for the calculation of capacity deviations, will be monthly.

Physical Capacity deviations for the Settlement Period will be calculated by the CPPA G (MO) and will be compensated using Capacity Transfer Rate (CTR) for the same monthly period

o The Wheeler of Power will be assigned a firm capacity certificate and it will be reviewed annually to check compliance

o If the MDI of the BPC is greater than the contracted firm capacity in a fixed quantity contract, then the BPC will settle the difference through DSM at the CTR for this Settlement Period and will be given a warning for this behaviour.

o If the MDI of the BPC is less than the contracted firm capacity in a fixed quantity contract, then the imbalance will be considered as zero

1.5.2.3 METERING REQUIREMENTS AND CALCULATIONS

The metering and calculations shall be undertaken in the following manner:

The actual Energy Output taken by the BPC will be metered at the Exit Point

The actual Energy Input by the Generator (Wheeler of Power) will be metered at the Entry Point

The meters installed at the Entry and Exit points shall be capable of recording hourly data and shall be fully compatible to be integrated with the Secured Metering System

7 For example energy only contracts, to allow producers without firm capacity to participate, such as solar power8 Using Energy and Capacity Transfer Rates9 If there is not energy available in the system, then there will be a breach of contract, with the consequences established in the bilateral contract between the parties

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(SMS) to be installed at the CDPs by NTDC according to the metering code of the Grid Code

The firm capacity of the Generators will be the result of a mathematical formulation for different type of generation technologies as explained in the following sections.

1.5.2.4 OPEN ACCESS (WHEELING) COSTS

The BPC will pay the following costs for using the network:

Market Operator fee as determined by NEPRA

NTDC10 use of system costs, as per the NTDC tariff determination by NEPRA

DISCO1112 distribution wheeling charge as per the tariff determination by NEPRA

1.6. OTHER DISTINCT RECOMMENDATIONS TO SUPPORT OPEN ACCESS

Following are some broad recommendations that would supplement the enablement of the market opening through open access:

1. Implementation of SCADA System: The SCADA system provides the ability to the power sector to perform operations at an unattended location from an attended station or operation centre and to have a definite indication that the operations have been performed. The main purpose of the SCADA system is to capture the required data from remote sites and allowing control of field services from the control room. The timely implementation of the SCADA system would allow the System Operator to perform the dispatch operations of the wholesale market efficiently.

2. Secured Metering System (SMS): It is very crucial for CPPA to have access to revenue meter data for billing and settlements through an automated and secured meter system (SMS). Therefore it is suggested that the SMS project should be implemented at the earliest so that the authentic and reliable data could readily be available for billing and settlements in the wholesale market.

3. Data Sharing Culture: Transparency and dissemination of market data is very important for the safeguard of the market participants. Therefore it is emphasised to improve the data sharing culture within the power sector and measures should be taken in the due course of time before the start of competitive wholesale market to ensure that all the participants and the public in general have access to market data for ensuring transparency and avoiding information asymmetry.

4. Approval of CTBCM by the Authority: Timely approval of the CTBCM model and plan by the Authority is very important in order to meet the assigned deadline of 2020 for the implementation of CTBCM model. Therefore, it is suggested that status of the approval of the CTBCM model and plan to be pursued at the highest levels.

10 To be determined whether directly or through CPPA G 11 Whenever today’s Discos sales are split from wires, the wires side will receive this payment. Distribution losses will be purchased by the wires side to the sales side 12 To be determined whether directly or through CPPA G

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ANNEX A- PROCESS FLOW FOR OPEN ACCESS/WHEELING REGULATIONS

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The process to avail the trading between Generation Company and Bulk Power Consumer (BPC) through Open Access (OA) Regulations involve the following 7 steps:

Exit Notice

Under section 22 of the NEPRA Act 2018, BPCs located in the service territory of the distribution company are allowed to purchase electric power directly from Generation Company. To avail this the first step for such BPC is to give exit notice in one year advance to the distribution company.

Generation License

The Generation Company intend to sale electric power to BPC through OA Regulations will apply for a generation license according to the NEPRA Act 2018, Grid Code 2005 and Distribution Code 2005 and NEPRA will grant the Generation License according to the NEPRA’s Licensing (Generation) Rules 2000.

Second-tier Supply Authorization/Electric Power Supply License

The Generation Company intends to sale electric power to BPC through OA Regulations will take the Second-tier Supply Authorization from NEPRA according to the NEPRA’s Generation Licensing Rules 2000 or apply for electric power supply license according to the NEPRA Act 2018 and NEPRA will grant such authorization or license according to the NEPRA’s Licensing (Generation/Electric Power Supply) Rules and Regulations.

BPC Connection Agreement (CA)

BPC will apply for the connection to DISCO/NTDC, as the case may be and DISCO/NTDC will approve the application according to the connection code of the Grid Code and Distribution Code. After the acceptance of the application, BPC will enter in the Connection Agreement with DISCO/NTDC.

Generation Company Connection Agreement

Generation Company will apply for the connection to the DISCO/NTDC and DISCO/NTDC will approve the application according to the connection code of the Grid Code and Distribution Code. After the acceptance of the application, Generation Company will enter in the Connection Agreement with DISCO/NTDC.

Firm Capacity Certificate (FCC)

After getting the Generation License and Connection Agreement, the Generation Company will take the firm capacity certificate from the Market Operator.

Verification of Variable cost

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01

02

03

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Initially for the dispatching purpose SO will verify the variable cost of the Generation through heat rate testing mechanisms according to the Grid code 2005.

Open Access Contract (OAC)

After completing all the above steps Generation Company and BPC will enter in the bilateral contract all the terms and conditions will be negotiated and confidential between the two parties except the information required by the Market Operator for the Deviation Settlement Mechanism according to the Commercial Code.

Registration of OAC

Market Operator, under its function of CRPEA, register (a) the parties to an OAC as Market Participants, according to the requirements established in the Commercial Code and (b) all Open Access Contracts, with clear identification of the quantities (energy and capacity) that are involved in the OAC according to the Commercial Code. Additionally, for registration the content information required against these OAC will be according to the Schedule I of the OA Regulations and these clauses shall not be considered confidential and shall be disclosed to the Market Operator.

BPC Market Participation Agreement (MPA)

BPC after registering as Market Participant will enter into the Market Participation Agreement with Market Operator pursuant to the Commercial Code. Under this agreement Market Operator will settle the deviations of BPC in the pool and BPC has the obligation to provide all the information required to MO for the settlement purpose, according to mechanism defined in the Commercial Code.

Generation Company Market Participation Agreement (MPA)

Generation Company after registering as Market Participant will enter into the MPA with Market Operator pursuant to the Commercial Code. Under this agreement Market Operator will settle the deviations of the Generation Company in the pool and such Generation Company has the obligation to provide all the information required to MO for the settlement purpose, according to mechanism defined in the Commercial Code. The standard draft of such agreement will be approved by the Authority and will be annexed with the Commercial Code.

After performing all the above stages, BPC and Generation Company will be able to operationalize their trade in the market under the OA regulations.

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ANNEX B- POSSIBLE USE OF SECOND TIER SUPPLY PROVISION FOR MARKET ENABLEMENT

In the absence of Electric Power Supplier Licensing Rules/Regulation, legally it may be possible that Generating Company can sale directly to BPC under the existing Generation Licensing Rules (2000), in which Generation Company is allowed to have second-tier supply business as electric power supplier because these rules were approved by the Federal Government. This can be viable if the second-tier supply authorization is given with the following conditions:

- Generation Company can sale only to BPC under this authorization- Authority ensured the minimum solvency and human resource requirements of the

Generation Company to fulfill all the provision of eligibility criteria as defined under 23E section

- All the requirement under the Eligibility criteria as defined in section 23E of NEPRA Act has been fully confirmed by the Authority

- Such authorization cannot be given to the last resort supplier- Authority can allow that the tariff for generation and supply of electric power will be

mutually agreed by the parties - While giving the authorization Authority will call for public hearing/ or hearing with

the relevant stakeholders and take the consent of the effected DISCO. However in the absence of relevant DISCO, the Authority still can give authorization, if it is in the public interest, under the section 26 of the NEPRA Act

- According to the given authorization the Authority can modify the license of the relevant DISCO

- This process for authorization will be subject to the new rules and regulation of electric power supplier

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ANNEX C- THREE STAGES OF THE MARKET OPENING WITH TIMELINES

This Annexure exhibits the details of the activities to be done for market opening in 3 stages.

Stage-1 (Within 02 Months)

Regulation on Open Access (Wheeling) Commercial Code entailing the financial transactions for Open Access (Wheeling) BPCs can have bilateral contract with Generators Establishing Deviation Settlement Mechanism (DSM) for imbalances on -regulated prices Capacity Deviations measured w.r.t individual peaks Firm Capacity for each type of technology will be calculated based on a formula DISCOs can’t have bilateral contracts with the Generators Energy and Capacity Deviations will be measured on monthly basis There will be no capacity obligations on the BPCs No further procurements for DISCOs Only Generators are allowed to become suppliers

Stage-2 (Within 08-10 Months)

Procurement Regulation Adjustments if required in Wheeling Regulation / Commercial Code BPCs can have bilateral contract with Generators Deviation Settlement Mechanism (DSM) for imbalances on regulated prices Capacity Deviations measured w.r.t individual peaks Firm Capacity for each type of technology will be calculated based on a formula DISCOs can’t have bilateral contracts with the Generators Energy and Capacity Deviations will be measured on monthly basis There will be no capacity obligations on the BPCs No further procurements for DISCOs Only Generators are allowed to become suppliers

Stage-3 (From Jan 2021)

Alignment of complete Policy, Legal and Regulatory Framework BPC’s/DISCOs can have bilateral contracts with generators and other suppliers/traders Players without physical assets can also become suppliers and traders Balancing Mechanism for hourly settlement of Energy and monthly settlement of

Capacity on Market Price Capacity Deviations will be measure based on contribution to the coincidental system

peak Firm Capacity will be measured at the time of coincidental system peak (or many peaks) There will be capacity obligations on BPCs based on their contribution to system peak. Market based PPA’s for DISCOs approved by relevant Authority Allocation of existing contracts to DISCOs Auction Administrator function will be established for new capacity procurements for

regulated consumers Further procurements for DISCOs as per the process established in the Procurement

Regulation DISCOs / NTDC / NPCC will be strengthened to participate in the market CPPA’s restructuring into two separate companies i.e. MO and Agent

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Three Stages of Market Opening – Timelines

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ANNEX D- PROCESS FLOW FOR MARKET PARTICIPATION AGREEMENT

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