mckinsey’s 7s model - cppa study-competive... · web viewmckinsey 7s model was developed in 1980s...

Strategy and Market Development DepartmentCentral Power Purchasing Agency

ww.cppa.gov.pk

WHOLESALE COMPETITIVE MARKET

GETTING INTO ACTION >>>>

A CASE STUDY

1

This case was prepared by Strategy and Market Development Department of CPPA for discussion during Electricity Market Professional (EMP) Program. The case is developed as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Views and thoughts shared by the fictional characters in this case are depiction of their personality types and may not reflect the reality on ground or author’s views.

2

Copyright © 2018 CPPA: COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE OWNER.

Competitive Whole Sale Market-Getting into Action A Case Study .

After an exhaustive discussion with his friends, Pervaiz was standing in the room indecisively and trying to determine whether he should support the case of developing an Electricity Market in Pakistan presented by Mujahid or should continue with the status quo.

A few months later…

Mujahid went to attend the second module of the EMP Program and was surprised to see Pervaiz who was also there to attend the same.

Mujahid: “Well, well, well! Look who is here. What a pleasant surprise. So what makes you attend the EMP course my dear friend?”

Pervaiz: “Well, one of the colleague in my DISCO nominated for the EMP Program dropped off as he is planning to join another company, so I requested my supervisor to nominate me in his replacement. As I heard so much from you during our last meeting about the EMP Program, so I wanted to experience it myself.”

Mujahid: “Welcome onboard! I hope that you will enjoy the session.”

One week later, after completion of EMP Module II, all four friends once again sitting are sitting in the drawing room of Mujahid where Ali and Danish are eager to know about the learnings that Mujahid and Pervaiz had in the latest module of EMP last week.

Mujahid: “Yes again it was a wonderful learning experience and I was very happy to see that Pervaiz was also there this time. In that module, we had a further deep dive into the salient features of the competitive market model. I hope that Pervaiz is feeling the same way I am feeling”

Pervaiz: “You are right that the session was good from the perspective of learning but since I missed the first module, therefore I felt a little disconnected and did not grasp all the contents.”

Mujahid: “Dear Pervaiz! Don’t be so worried. If you have still have any queries, I can help you clarify those as well. We just want you the believe on our ambitions and be the part of our EMT team. The Country needs us brother! Introducing competitive market in Pakistan is already part of the new government’s manifesto”. Tabdeel aaa nahee rahee Tablee aa gayee hai! Hahaha!

1


Pervaiz: “Ok fine! I will ask you some further questions provided that you convince me this time with solid arguments in the perspective of power sector in Pakistan and not some fancy international markets. I want to see some practical action not just theories.”

Mujahid: “Thank you for joining back. I would continue the discussion and try to clarify your queries but please try to participate in the discussion with open mind. Last time I felt that you were way too aggressive and not in the accepting mode”

Pervaiz: “I know that I am a very serious or you can say look like a stubborn person because I don’t follow things blindly. Not so while back, I incurred a major incident in life which entirely changed my view about the world, especially contributing towards my Country. You knew my brother Khalid, right! Both of us graduated the same year but choose different paths. He joined the Pakistan Army because he was a patriotic person who passionately wanted to do something for his Country.

Whereas just like an average guy, I wanted a peaceful life ahead and wanted a job near my home and family. Therefore I landed in a power sector entity where I could do a 9-to-5 routine job and spend the rest of the time as I like. Recently the Operation Zarb-e-Azab was announced by Army and my brother volunteered to lead the battalion in a faraway conflicted zone in Wana. Our family tried too hard that he take his decision back but he was too determined for this. And one night we received the news that my brother has been martyred while fighting the enemy and he received several gun shots right on his chest. But his sacrifice led his battalion to push back the enemies and as a consequence the area was successfully evacuated and recaptured by Pakistan Army.

When we used to have discussions on contributing to improve our Country, he always used to tell me that there are three main monsters that are not letting our Country to move ahead (1) extremists working against Pakistan, (b) the power sector’s financial losses burden on the economy and (c) the plague of corruption. He and so many other brothers across the entire Country sacrificed their lives to kill the biggest problem of our Country, now it’s our turn.

From that day, I decided that I would continue the mission of my brother of serving my homeland. One does not need to be in the armed forces to serve his or her Country and anyone can bring betterment to this Country with in

2


his own boundaries and limits. Therefore I decided that I will do every effort to bring a positive change in the power sector that I am employed with and will support every cause that emerges. And in order to get something done, one needs a serious attitude. You call it rude, I call it serious”

Ali: “Your brother is a true inspiration for us all.”

Danish: “Brother Pervaiz. Your perception so far in front of us all was that you are a resistive and stubborn person who don’t want to move ahead in life and stick with the status quo. But I think we were unable to understand you!”

Pervaiz: “Fellows, that’s why I am telling you don’t take me wrong for resisting things. The reason I was so pessimistic about the implementation of electricity markets in Pakistan, because I still have some doubts that just like other plans and ambitions, it is also a non-serious initiative with lack of detailing and designing behind it and may end up giving us the results as achieved from de-bundling the sector in later 90’s, due to lack of transition planning, change management and implementation. Change my perspective and make me to believe that this is not the case and I will join you for sure. I am a patriotic person by heart just like my brother and am willing to do anything to bring a positive change in my power sector. I have learned that jointly if we can even improve the one percent of the wholesale turnover, it will result in a saving of billions of rupees for the Country on annual basis.

I work in a DISCO, overall governance is such in a bad condition that I perceive it is extremely difficult to implement such reforms. However, we can play our part and make our contributions!

Mujahid: “We can improve things step by step.”

Pervaiz: “Yes. Change is always gradual. But it is not that easy. Any change effort has to been holistically, it is not only the processes or only the matter of implementation of a technology, but things are connected. Let me share with you an interesting model that I learned during my MBA.”

McKinsey’s 7s ModelMujahid: During my MBA, I leaned about McKinsey 7s model1 which is a tool that 7 key internal elements: strategy, structure, systems, shared values, style, staff and skills, in-order to identify if they are effectively aligned and allow organization to achieve its objectives by realizing the

1 Please refer to the Appendix-1 for more details on the McKinsey 7s Model

3


connection between these elements. The same idea also applies for meeting objectives for interventions even in an inter-institutional framework.

Out of 7s, three S are termed as hard S while 4 S are categorized as soft S. Skill, Staff, Style and Shared Values are Soft S, whereas, Strategy, System and Structure are Soft S. Soft S are easy to build and implement but it is very tough to bring a change in the hard S. One can easily device a strategy, built infrastructure and design and implement a system. But to improve the skills of the people, to make them use the technology and to change their working style and make them share a common set of goals and values is very difficult to achieve. But this is the real work that has to be done.” Therefore, the bottom-line is implementation should match readiness or it goes with the speed of readiness in these 7 S not only in three hard S that people usually believe. Please refer, Annexure-1 for some further details on McKinsey’s 7s Model.

Mujahid: You are right that it is very important to take into consideration the People, Processes and Technology aspects, otherwise the initiatives fail badly.

Competitive Trading Bilateral Competitive Market (CTBCM)

Ali: “Mujahid, what did you learn about the CTBCM model in the last EMP session?”

Pervaiz: “Good one Ali, I have a few queries as well. Although I learned a bit during the program but I too want to learn about CTBCM model for Pakistan in detail.”

Mujahid: “The CTBCM model is an electricity wholesale market model and a plan to implement the model proposed for Pakistan. The CTBCM corresponds to the competitive wholesale electricity market where multiple market participants carry out wholesale electricity transactions of the products traded in this market.”

Danish: “Can you also shed some light on the objectives of CTBCM?”

Mujahid: “Yes of course! The proposed competitive power market design has certain objectives. First of all it will create the conditions for a fair allocation of risk and benefit sharing between investors/sellers and buyers/consumers. Then, it will level the playing field removing conflict of interest to facilitate entry of new investors and participation of private

4


players, including Bulk Power Customers. It will also create the conditions to attract investments based on credit cover provided by market participants, without the need of the government providing sovereign guarantees in addition to putting pressure on the payment discipline. Furthermore, it will improve the efficiency arising from competition for the market and in the market.

In easy terms, it will enable the Eligible consumers to contract power themselves (consider large industries procuring and wheeling power), put pressure on prices due to competition in the market and for the market, increase supply security, while Products standardization and trading electricity as any other commodity is also a key objective in the long run”

Ali: “Does the CTBCM serve some other purposes besides the points you just mentioned?”

Mujahid: “Certainly! The CTBCM will enhance power sector security of supply, generation adequacy, to develop power sector sustainability in the short, medium and long term. Additionally, the accountability of all Participants and Service Providers will be ensured through this market. This will also ensure overall transparency and predictability of the power system. And lastly, everyone will have open access to the information of the power sector transactions and all the data will be publicly available. The market will cater both for the energy and capacity needs of the Country.”

Products Traded in the MarketPervaiz: “Wait a minute. Why are you treating energy and capacity separately?”

Mujahid: “Brother, capacity and energy are two distinct products, both will be separately traded in the market - Energy to supply electricity consumption; and “firm capacity” to provide sufficient and adequate capacity for medium and long-term security of supply. Energy and capacity will be traded mainly through contracts, complemented by trading through balancing mechanisms administered by the Market Operator for settling imbalances.”

Pervaiz: “OK I understood that there are two different products, one is capacity and other is energy. But I read in the State of Energy Report of NEPRA 2017 that the available energy and the capacity is currently more than the energy and capacity forecasted even up to 2025 or even onwards. Let me show you the graph from the report.”

5


Figure 1 – Generation Adequacy by 2025 (Source: NEPRA’s State of Industry Report 2017)

Pervaiz: “From the above diagram, it is clearly evident that the capacity and energy are already contracted are over and above the forecasted values. So, if there is already adequacy of the products in the market, so what will be traded in the market?”

Mujahid: “Ok I understand that we have achieved supply adequacy for some years to come, also the contracts we have are quite inflexible, i.e. we have part of energy which is take-or-pay, as well as the capacity which is also take-or-pay. But moving forward the demand does not remain static, for instance in 2040, the projections are that demand will reach around 90,000MW, which is way more then what we have right now. For adding more supply, and that too based on the Indicative Generation Capacity Expansion Plan (IGCEP), we may have to procure power for 2026 onwards, for which new flexible contracts and competitive bidding must start in working in 2021/22.

Otherwise, we may end up using same supplier dominated contracts2 in buyer dominated regime. We need to start designing the market and subsequently work on its implementation from right now in order to bear the fruits in future.”

2 Under shortage and other conditions that Pakistan had in the past such contracts were kind of necessary, however, as the overall Country and Business Risks improves the risks should be shared between sellers and buyers.

6


Circular Debt and Uniform TariffPervaiz: “OK fine. I got it. But coming back to the issue of Circular Debt which is exponentially rising by each passing day. Don’t you think that Circular Debt and the Uniform Tariff are impediment to the market?”

Mujahid: “They impact the market, but I don’t think that they are the show stoppers. A good analogy would be of an Athlete injured his knee and also recently diagnosed with a chronic sugar disease. Should he wait to get one problem fixed or can work in parallel, I suggest the later”

Ali: “That’s a good analogy, however, points raised by Perviaz do carry some weight. Can you elaborate what makes you think differently.”

Mujahid: “Certainly the problem of Circular Debt, it is a huge and it is real. But it is on the hit list of the new government and its one of the top priorities. The government is determined to eradicate the problem of Circular Debt once and for all. At the end of the day it will be paid off I am sure about that. Over time, the institutions definitely need to be reformed. Not everything is sequential and few things are done in parallel also. So we should not declare one thing dependent on other in advance. That if one thing does not settle other things will not move on. Rather, bringing market reforms is one of the pills that the sector needs, and other pills include off-course the institutional reforms, structural reforms etc. that are interlinked but one should not make assumptions like, once all the stars are aligned I will do my homework. Then you will never do it!

And as far as the Uniform Tariff is concerned, please be informed that the tariffs are outside the domain of the market and they do not have any impact on the market. Besides, the tariffs are for the regulated consumers. You can look around, Turkey, Australia, part of north and south America, India etc. have competitive markets with Uniform Tariffs. Well I hope such examples take’s your suspicion away otherwise you would have never believed me”

Processes AlignmentPervaiz: “So my next question is, as currently we have a legal framework, and under it we have so many different policies such as Generation Policy 2015. In addition to this, we have various regulations, codes, rules, procedures etc. So, in a sense all these are examples of processes are

7


external3 to the companies and are extremely important that they are aligned to implement the market. And I am sure that these processes are not aligned amongst each other. Let me tell you about a very famous case in MEPCO where a generation company wanted to come on wheeling arrangement with my DISCO. Apart from many mistakes that the applicant did, there are many misalignments in the overall framework that proved to be impediments. Consider Wheeling Regulations, Grid Code, IGCEP, and licensing regimes alignment?

Mujahid: “You are right. There certainly exists a serious need of improvement in the various processes and practices in the power sector. But, w.r.t wholesale market design and implementation, first there should be a design which needs to be developed and then align all the processes with the established and agreed design. Of-course it is a two way process, where the legal and policy framework informs the design as well. So the design of the power market will be the standard and eventually all external processes should be aligned with it. Let me draw a simple diagram for you.”

Diagram: The Alignment Framework

3 For the reader; the Processes here discussed are w.r.t wholesale market development and are categorized as “Internal” and “External” processes. Internal Processes are related within an institution (for instance, company’s planning and forecasting etc.) and External Processes are external to an institution (for instance Policies, Regulations etc).

8

Market Design

Processes (Market related)

Technologies

People


Mujahid: “If you look at the above illustration, there is an overall wholesale market design, under the design we need to align the processes both internal and external. Further below the hierarchy, there are technologies required for efficient operation including the software tools, the gadgets etc. And lastly there is the capability building of the personnel involved. Building people, the EMP Program, the EMT Team. For sure it is a simple illustration as the Market Design is informed by peculiarities of the Sector, the legal framework etc.”

Pervaiz: “You just mentioned all the points that I presented in the 7s model but in a different perspective with all the essential elements present here as well. So if I relate your theory with my 7s model, it is evident that the transition of the market should be gradual, working on all S, not ignoring even a single one. Also, ensuring that speed should match the ability and capacity”

Mujahid: “Exactly, the transition will be slow but gradual. Why because, such reforms include change across People, Processes and Technology domains within and across the sector’s entities involving many interdependencies. If you compare Pakistan with India and Turkey in terms of the time it took to implement the competitive market, India started the transition process back in 1996 and it took 5-7 years only to implement the first step of their market that is Indian Deviation Settlement Mechanism which is termed as the balancing mechanism in our model. And their journey from 1996 is still going on with 3% of Market Volume in Spot Market. Similarly, Turkey took almost 12 year to start the Spot Market and before that they started off with a Balancing Mechanism in 2001/02. So here we are talking about the whole market with so many entities involved so definitely it will take time, especially also considering our ground realities. Please refer Appendix-2 for details”

Main Features of the CTBCM Danish: “ Now I think we understood many conceptual items that surrounds the market, now tell us about the main features of the CTBCM market model”

Mujahid: “ The design of the proposed market itself is very simple based on the bi-lateralization of the contracts. The main features include Market based PPAs, Balancing Mechanism for Energy (BME) & Balancing Mechanism for Capacity (BMC), Capacity Obligations, centralized new

9


Capacity Payments, Credit Covers, Centralized Economic Dispatch, Service providers and Participants, Competition for and In the Market, Agent Separation from MO, Policy and Regulatory Changes such as amendment in Codes etc.”

Assignment of Existing PPAs/EPAsPervaiz: “OK but I am interested to know if the CTBCM model is built in consideration of the peculiarities of Power Sector of Pakistan? I doubt that it will work in the existing electricity market of Pakistan where our hands are tied with the long-term take-or-pay contracts with sovereign guarantees.”

Mujahid: “Don’t worry guys. The proposed model design takes especially into consideration the features of the power sector as they are today. The most relevant one that has been considered is the type of commercial transactions as they are carried out today, namely physical PPAs or EPAs with very inflexible capacity payment or take or pay conditions. Therefore, the design of the CTBCM is based on realistic inputs and assumptions, and built on prudent trading arrangements tailored for the Pakistan power sector.”

Ali: “So you meant to say that this model considers the challenge of handling inflexible long-term PPAs. Tell me how it proposes to do that?”

Mujahid: “The CTBCM is a competitive wholesale electricity market with bilateral contracts as the main component for electricity trading. The model has proposed a mechanism which is called assignment of the existing contracts. Existing PPAs and EPAs will be assigned to DISCOs as retail suppliers, with some agreed upon formulae. As a consequence of this, in the future each GENCO and IPP having at present a PPA or a EPA signed by the CPPA G, NTDC or WPPO, after the assignment will have 10 PPAs/EPAs, one with each DISCO. All other conditions of the PPAs and EPAs will remain unchanged, particularly the guarantees. And those PPA’s which are not assigned will be parked on Special Purpose Supplier (SPS) that will be further bilateralized between SPS and DISCOs not legally but commercially for settlement purposes.”

Capacity Obligation Ali: I have a question about how the CTBCM model will incorporate the capacity obligation from the demand side. The reason is, during previous several years, the power sector in Pakistan has been suffering from a serious capacity adequacy problem leading to a lack of reliable supply and

10


financial problems. And at other times there are surpluses, so it looks like a cycle (over or under) but never in balance in longer run. Do CTBCM talk about how to address this issue?

Mujahid: “Yes of course! To address the issue of capacity obligation, CTBCM will include the trading of firm (reliable) capacity to ensure long term reliability of supply at competitive and efficient prices. Each Demand Participants (DISCOs and KE as retail suppliers and Bulk Power Consumers participating in the market) will have capacity obligations determined as the obligation to have in advance the capacity required to supply the forecasted system peaks plus operational reserves. The capacity obligation will be covered through contracts and trading of capacity in the market.

Therefore, all Participants must contribute to the secure and reliable supply of the power system by planning and contracting coverage of demand or providing generation availability and reserve resources. Network services providers (i.e. Transmission Service Providers and Distribution Service providers) will contribute by planning and ensuring network upgrade and expansion sufficiently in advance.”

Market Participants and Service Providers Danish: “Who are the Market Participants?”

Mujahid: “Market Participants will be Generators, Wholesalers, Retailers and Bulk Power Consumers (Eligible Consumers) that would have registered with the Market Operator as a Participant. They are just buyers and sellers of electricity have commercial interest in the market.”

Pervaiz: “And who do we refer to as Supplier and Trader of electricity?”

Mujahid: “The Suppliers (or the Retailers) primarily include DISCOs and K Electric as they sell electricity directly to the end-consumer. Now under NEPRA Act, a new retailer by taking a license can also sell electricity directly to the BPCs through entering into a sales contract with them.

Similarly the Traders (or Wholesalers) buy energy bulk from participants (or imports) to resell to other participants, or to export. In Pakistan, sales from one DISCO to another DISCO can be considered a wholesale supply activity. Sales from generation to a DISCO would also correspond to wholesale supply.

However, it is important to note here that competitive trading will require the People, Process and Technology environment ready and operational for

11


a trader, BPC or a supplier to come in otherwise we will face the same issues are were faced by the generator as Pervaiz was mentioning earlier”

Pervaiz: “Don’t you think other important power sector entities like System Operator, Transmission Company etc. are also Participants?”

Mujahid: “Such entities will be the Service Providers and will not be Participants. These will be companies licensed/registered/certified with the responsibilities set out in their licenses or registration/certification as well as NEPRA rules, regulations and codes. The Service Providers include Market Operator, Transmission Network Operator, System Operator, Metering Service Provider, System Planner, and Independent Auction Administrator. They don’t have commercial interest in the market and provides services to the market”

Balancing Mechanism in CTBCMAli: “I would further like to know more about the commercial aspects of this model, how it will run, how the transactions will take place, how the settlements will be done, and if not the traditional PPAs what type of contracts will prevail in the market?”

Mujahid: “Very good and valid questions. Since each question itself has significant depth, I would like to address these one by one.”

Danish: “OK. First of all tell us about the commercial structure of the proposed market, how the transactions will take place in such market?

Mujahid: “The target market will have a very well defined and well though yet simplified commercial structure. The market will include Balancing Mechanisms centrally administered by the Market Operator, covering both energy and capacity. The Contract Market is complemented with a Balancing Mechanisms centrally administered by the Market. These Balancing Mechanisms will be used for the settling imbalance between contracted and actual energy and firm capacity of each Participant at the Balancing Mechanism Price.”

Ali: “What the Balancing Mechanism for Energy actually does?”

Mujahid: “From buyers’ perspective, the Balancing Mechanism for Energy simply performs the adjustment of total energy consumed versus the energy contracted by the buyer. In other words, for Demand Participants, settles the imbalance (the differences between actual metered energy and contracted energy).

12


And from the Generation end, it settles the difference between contracted energy and actual (metered) at connection point.”

Danish: “And what about the Balancing Mechanism for Capacity?”

Mujahid: “For Demand Participants, the capacity imbalance will be the differences between contracted firm capacity and actual peak demand.

And for Generators, the capacity imbalance will be the difference between committed/contracted generation and actual generation made available. The Balancing Mechanism for Capacity (BMC) will settle this imbalance. Well beyond this are some details that even I am not aware of and will be carried out by the market design team during the detailed design phase or will be discussed during the next module”

Credit Cover in CTBCMAli: “So tell me how the government make up for the sovereign guarantees and eliminating the risk of non-payments in the proposed market”

Mujahid: “The market will include a solid mechanism to address nonpayment risk. You see, the “bi-lateralization” of existing contracts will not include any change in the guarantee that are part of the existing PPA. However, for the new market based bilateral contracts to be entered into between the parties as from the CTBCM start: the market based, there, GOP will not anymore grant the sovereign guarantees for good performing DISCOs. Instead, such Market based Contract will include credit cover.”

Pervaiz: “What do you mean by credit cover?”

Mujahid: “The purpose of credit cover is to ensure that, should a trading party default, sufficient collateral is available to pay any debts. Requiring credit cover is a standard good practice in electricity markets with multiple participants.”

Market Contracts or Contract with Some FlexibilityAli: We have been frequently using the term ‘market contracts’ in our discussion. Can you please shed some more light on this as well?

Mujahid: “Sure! The market based contracts, will be introduced as a package. Such contracts will be customized to the needs of different participants for instance, regulated and non-regulated customers, customers not willing to take any imbalance risk, generators not willing to take any imbalance risk etc. Flexibility will include for instance, generators

13


having options to sell to other buyer in case original one defaults, some rationalization to contract tenures, payment regimes from take or pay to sharing some part of risks etc.

The CPPA team has proposed certain types of contracts, I now know only their names (Generation following, loading following, financial contracts with fixed quantities, capacity with associated energy, capacity only etc. The details of these contracts will be discussed in upcoming modules with EMT. Let me draw some other features of market most of them we have discussed earlier!”

Capacity Obligations

Non Payment Risks

Grid CodeCommercial Code, others

Balancing Mechanism

Contract Registrar

Centralized New Capacity Procurement

Service ProvidersK ElectricMarket

Participants

New PPAs

Competition for and in the

Market

Existing PPAs

Credit Cover (collateral)

Low Performing

Discos

Agent separated from MO

Centralized Economic Dispatch

DGBilateral Contracts

Settlement and Payments

CPPA G

Sale / Purchase Differences

Physical differencesPhys

ical

diff

eren

ces

Invoicing and Payments

Balancing Mechanism

Bilateral Market

Implementation Road Map4

Pervaiz: “For anything that is needed to be implemented, it should be simple and straight forward. No doubt that the design of the market is very simple and it seems nice. We are masters of preparing good designs, plans and speeches but when it comes to implementation, nothing happens in reality. So I am curious to further discuss the implementation roadmap?”

Mujahid: “Yes! There is a very well-defined road map for the implementation of CTBCM model in Pakistan. The implementation of the proposed CTBCM will require the implementation of actions that are part of the market and also actions that are beyond the limit of the market but that need to be done to ensure consistency. Therefore, this will also require active involvement of several stakeholders from the power sector entities.

4 Please see the Annex-5 for detailed Implementation Road Map

14


There is a group of 17 action items which are required to be done to achieve the commercial operation of the CTBCM. These distinct tasks have to be performed by the respective power sector entities in the requisite timeframe. By following the comprehensive roadmap, all the objectives shall be achieved gradually. Following matrix illustrates the people, process and technology aspects of the implementation road map”

# 17 Group Actions People Process Technology

1 Market Development Policy ✓2 Legal Framework Amendment ✓3 Energy Policies/Framework

alignment with Market Development Policy

✓

4 Modification to Regulatory Framework

✓

5 Assignment of PPAs ✓6 CPPA Bifurcation ✓ ✓ ✓7 MO Creation ✓ ✓ ✓8 SPS Creation ✓ ✓ ✓9 IAA Creation ✓ ✓ ✓10 New Commercial Code/Grid Code ✓11 SO Strengthening ✓ ✓ ✓12 DISCOs Strengthening ✓ ✓ ✓13 Formalize TNO ✓ ✓ ✓14 NTDC as Planner / Metering Service

Provider✓ ✓ ✓

15 Credit Cover Payment Mechanism ✓ ✓16 Readiness for Commercial

Operation✓ ✓

17 COD ✓ ✓

I don’t see actions that are needed for strengthening the Regulatory and for that matter the Policy makers w.r.t market development. Well to some extent you are correct, here, legal, policy regulatory process actions are mentioned but actions related to strengthening these entities are not deliberated.

ConclusionMujahid: “So we now all understand that every market has be design keeping in view goals, the local conditions, in-flexibilities, the readiness of

15


people, processes and technology and all such aspects. Above all it well said by a wise person Keep it Simple Stupid, no acronyms please (-:

We have also understood that almost 90% or even more actions identified under CTBM are even required for any market design even the current single buyer model. What are going to do is to add a bit 10% extra effort to operationalize a competitive wholesale market in Pakistan that will bring big improvements for consumers as a small improvement at the wholesale level means a lot.

So who will conclude in a few very easy steps, what are we trying to design and implement here.”

Pervaiz: I will concisely define the design part of wholesale market:

Market Design:1) Bi-lateralize the contracts legally and if not possible than through SPS2) Improve payment discipline in wholesale market by implementing

some sort of centralized payment mechanism, so that non-paying DISCOs get some sort of signal from the market to improve their behavior

3) Introduce an imbalances settlement mechanism for capacity and energy, an essential index for competitive trading

4) Market is all about contracts; design flexible contracts keeping in view the dynamics for non-eligible and eligible consumers

5) Moving away from Sovereign Guarantees to credit covers6) Introducing capacity obligations for demand participants to improve

security of supply7) Auction design to be made part of approved Market Design and new

contract should be bi-lateralized and not to be signed by a single buyer. The Eligible consumers will have option to have their bilateral contracts directly.

8) Improve transparency of market by using state of the art tools for studies and publishing data and information

9) Strengthen, NPCC, CPPA, DISCOs, NTDC to implement these actions10) Alignment of internal and external processes (legal, policy and

regulatory) with approved market design

Results: There will be following results: 1. Industries will be allowed to conduct bilateral trading in the capacity

of BPCs2. New capacity will be inducted as per the actual demand

16


3. There will be competition in the market and for the market4. Elimination of sovereign guarantees5. Generators will be paid in accordance with their actual generation6. Payment culture will be improved

Implementation: Needless to repeat, this we have already discussed 1. People2. Processes3. Technology

EMT will create the momentum and we can implement it by mid of 2020. I do also suggest some tasks for EMT Team (please refer Annexure-4)”

Danish: “Dreams turning into reality at last. Seems to be a perfect timing to join the Electricity Market Team.”

Mujahid: “Yes you can now join this team and reap the benefits of becoming pioneering component of a significant change that the power sector of Pakistan has to see in a couple of years. The Electricity Market Team is expanding. They are now spreading our message to the deeper levels of their respective organizations. They are willing to work, to do something positive for their sector and their Country.

There are certain ideas in the pipeline to make the most out of this team5. Moving forward, there will be the regional leaders in the Electricity Market Team who will lead the process of market development within their domains. There will be a proper hierarchy, an organized structure of the team. An Association of the DISCOs will also be formed to connect all the DISCOs for a single cause. And as it is not an easy task to get the idea accepted in the existing mindset of people who are habitual of working with the single-buyer model, we will also work jointly to manage this change6 in the power sector of Pakistan. So I invite you all to join this team for a common goal.”

Ali: “I am in!”

Danish: “I am up to it!”

Mujahid: “What about you, Pervaiz.”

Pervaiz: “Let me think about it.”5

6 Please see Annexure-4 for Change Management Matrix that provides the guidance on the actions needed to handle a change.

17


Mujahid: “Let me tell you a true motivational story about teamwork which I witnessed myself. During the devastating earthquake of 2005 in Pakistan, many countries, international organizations and non-governmental organizations immediately went into action as a team and offered relief aid to the affected regions. They gathered thousands of workers, from volunteers to frontline disaster specialists, who mobilized into a community of purpose. The common factor among those people: they did great work, and they did it together. It didn’t matter whether they were belonging to different nations, races and religions, they all were united to serve just one noble purpose.

Don’t let Sheeda once again to hinder you in becoming part of something significant and huge. You are running out of time.”

Pervaiz: “Mujahid, it seems your knowledge is not current, Sheeda used to be in trouble in past, now Teefa is in Trouble my fried. Wake-up and count me in, we will do it together!”

18


Annexure-1: McKinsey 7S Model

McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since the introduction, the model has been widely used by academics and practitioners and remains one of the most popular strategic planning tools. It sought to present an emphasis on human resources (Soft S), rather than the traditional mass production tangibles of capital, infrastructure and equipment, as a key to higher organizational performance. The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a company. The key point of the model is that all the seven areas are interconnected and a change in one area requires change in the rest of a firm for it to function effectively.

Although this model was originally identified for implementation in organizational settings but its principles could be applied in understanding and designing any change effort that even require various institutions to work together and achieve a common goal.

Below you can find the McKinsey model, which represents the connections between seven areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes interconnectedness of the elements.

In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’ areas. Strategy, structure and systems are hard elements

1


that are much easier to identify and manage when compared to soft elements. On the other hand, soft areas, although harder to manage, are the foundation of the organization and are more likely to create the sustained competitive advantage.

Strategy is a plan developed to achieve sustained competitive advantage and successfully compete in the market or achieve a target. What does a well-aligned strategy mean in 7s McKinsey model? In general, a sound strategy is the one that’s clearly articulated, is long-term, helps to achieve competitive advantage and is reinforced by strong vision, mission and values. But it’s hard to tell if such strategy is well-aligned with other elements when analyzed alone.

The Electricity Market Development strategy has already been agreed upon from wholesale market to retail competition. The high-level market design can also be included here.

Structure represents the way business divisions and units are organized and includes the information of who is accountable to whom. In other words, structure is the organizational chart of the firm. It is also one of the most visible and easy to change elements of the framework.

In our case the structure to design and facilitate implement the market includes the Market Operator, EMT, MIMG, Regulator, re-structuring within institutions and different roles already identified.

Systems are the processes and procedures of the company, which reveal business’ daily activities and how decisions are made. Systems are the area of the firm that determines how business is done and it should be the main focus for managers during organizational change.

If we consider it under the perspective of how market will be made operational which is the common goal than it will include the alignment of Legal, Policy and Regulatory framework and institutional backend business processes, implementation of IT systems etc.

Skills are the abilities that firm’s employees perform very well. They also include capabilities and competences. During organizational change, the question often arises of what skills the company will really need to reinforce its new strategy or new structure.

Extremely important aspect that need to be addressed to implement the market.

2


Staff element is concerned with what type and how many employees an organization will need and how they will be recruited, trained, motivated and rewarded.

Style represents the way the company is managed by top-level managers, how they interact, what actions do they take and their symbolic value. In other words, it is the management style of company’s leaders.

We need to build the momentum and exhibit that CTBCM project can implemented with leadership provided within.

Shared Values are at the core of McKinsey 7s model. They are the norms and standards that guide employee behavior and company actions and thus, are the foundation of every organization.

Here Vision, Mission and Core Values of EMT become very important, do we have them?

3


Annexure-2: Gradual Implementation Comparison Across Countries

1


2


3


Comparison of Power Sector of Pakistan with Other Countries

Parameter Pakistan India Bangladesh

Turkey Brazil USA

Real GDP CAGR (2016-25)

5.1% for S. Asia 7.7% 5.1% for

S. Asia1.7% for Europe 1.9% 2%

GDP Per Capita (USD) 1,547 1,939 1,516 10,540 9,821 59,531

Population (Million) 200 1,339 164 80.7 210 325

HDI (Rank) 148 131 140 72 79 11

Ease of Doing Business (Rank)

147 100 177 60 125 6

CES (Unemployment) %

6 8.8 4 11 11.8 4.4

Elct. Market Structure

Single Byer Multiple Seller

Multiple Byer Multiple Seller

Single Byer Multiple Seller

Competitive

Competitive

Competitive

Installed Generation MW

31,000 330,000 13,846 80,000 154,000 1,074,00

0

Dominant Fuel for Electricity Generation %

(58% coal)

(66% Gas)

(34 % Coal)

(Hydro 64%)

(Gas & Coal 30%

4


each)

Peak Demand MW 26,700 160,000 14,000 46,000 85,000 800,000

apprx

Energy Generation TWh

107 1,236 57 300 585 4,013 (3304)

KWh per Capita (2014) 471 KWh 806 310 2,855 2,601 12,984

Watts per person (2014) 46 128 40 294 287 1,377

T&D Losses % (2014) 17% 20% 11 15 16 6

Demand Growth CAGR in medium term % 5.4% 7%

approx7% next 5 years

4% approx. -

From negative to around 1 % by 2050

5


6


Annexure-3: Change Management Matrix

Stage Guidance on Actions Needed Possible PitfallsEstablish a sense of urgency

Examine markets and competitive realities for potential crises and untapped opportunities

Convince at least 75% of your managers that the status quo is more dangerous than the unknown

Undermining the difficulty of driving people from their comfort zones

Becoming paralyzed by risks

Form a powerful guiding coalition

Assemble a group with shared commitment and enough power to lead the change effort

Encourage them to work as a team outside of normal hierarchy

No prior experience in teamwork at the top

Relegating team leadership to an HR, quality or strategic-planning executive rather than a senior line manager

Create a vision Create the vision to direct the change effort

Develop strategies for realizing that vision

Presenting a vision that is too complicated or vague to be communicated in five minutes

Communicate the vision

Use every vehicle possible to communicate the new vision and strategies for achieving it

Teach new behaviors by examples of the guiding coalition

Under communicating the vision

Behaving in the ways unethical to the vision

Empower others to act on the vision

Removes or alter systems and structures undermining the vision

Encourage risk taking and non-traditional ideas, activities and actions

Failing to remove powerful individuals who resist the change effort

Plan for and create short-term wins

Define and engineer visible performance improvements

Recognize and award employees contributing to those improvements

Leaving short-term successes up to chance

Failing to score successes early enough

Consolidate improvements and produce more change

Use increased credibility from early wins to change systems, structures and policies undermining the vision

Hire, promote and develop employees who can implement the vision

Reinvigorate the change project with new projects and change agents

Declaring victory so soon-with the first performance improvement

Allowing resistors to convince troops that that the war has been won

Institutionalize new approaches

Articulate connections between new behaviors and corporate success

Create leadership development and succession plans consistent with the new approach

Not creating new social norms and shared values consistent with changes

Promoting people into leadership positions who personify the new approach


Annexure 4- EMT Suggestive Actions

1) People EMT: Each member understands the Dynamics of Market (self-

learning and motivation) C-Level: Engaged through workshops and targeted meetings Spread Awareness to Masses: Stakeholders within entities

are made aware through EMT IPPs and Private Sector: Consultation workshops Academia: Joins in on sustainable basis and moves with EMT

2) Processes

Sector Level: Approval of Market Design Alignment of Legal, Policy and Regulatory Framework

Institutional:

For Market Operator (market design, product design and market operations) and System Operator for strengthening

For Regulator to have internal structure for approvals and market monitoring

For DISCOs to have a Market and Regulatory Function For Planner NTDC to strengthen it

3) Technology: Planner tools and databases AMR Metering at CDPs Market Operator IT systems DISCOs new tools and databases Data institutionalization and information publishing; portals and

systems

mckinsey’s 7s model - cppa study-competive... · web viewmckinsey 7s model was developed in 1980s...

Documents