How the New Electricity Market Will Work?

How the New Electricity Market Will Work

Pakistan has opened the bidding process for its first 400 MW electricity wheeling auction, marking the country's initial move away from the traditional single-buyer model that has governed power procurement for decades.

The Old System

For decades, the government has acted as the central buyer of all electricity in Pakistan. It purchased power from generators under long-term arrangements and channelled supply through distribution companies to end consumers — a model that left industrial users with no direct relationship with their power supplier and no ability to negotiate.

What Changes Under the New Model

Under the new system, large consumers — particularly industrial users — can negotiate electricity directly with producers through bilateral contracts, bypassing the government as an intermediary.

The basic model works as follows.

A large electricity consumer identifies a supplier and negotiates a bilateral power purchase agreement. The supplier uses the existing transmission and distribution network to deliver electricity to that buyer. Both parties pay a wheeling charge, also called a Use of System Charge, for using that network. Available network capacity is then allocated through competitive bidding under the new auction mechanism.

An example: an industrial consumer that needs 50 MW can approach an electricity producer and negotiate a deal for that supply directly. The government does not need to be a party to the transaction at all.

The Wheeling Charge

The electricity still has to travel through the national transmission and distribution network, which is operated by distribution companies and the National Grid Company. A producer cannot bypass the wires. The wheeling charge is essentially a toll for using the national grid.

NEPRA has approved variable wheeling charges ranging from Rs. 6.23 to Rs. 19.62 per unit for participating bulk consumers, depending on their category, along with a fixed grid charge of Rs. 1 per kilowatt per month.

The 400 MW Auction

The auction is the mechanism for deciding who gets access to available network capacity. The government has set a base level, while participants compete for the available share. Economist and Power Ministry adviser Ammar H. Khan, who explained the model in detail, argues that competitive bidding can determine a market-clearing price and direct limited capacity to those with the highest willingness to pay.

The current framework provides for 800 MW to be auctioned over five years, with 400 MW offered in this first phase.

What Could Come Next

Khan describes the auction as only an initial step. Several further developments could follow.

Independent power producers could eventually sign direct contracts with industrial buyers without requiring the government to enter into another long-term power purchase agreement, which would reduce the government's role as central purchaser substantially.

Competitive suppliers that aggregate electricity from multiple smaller sources could also emerge. A supplier could purchase excess electricity from a large number of solar installations, combine that supply and sell it to customers at a negotiated market price — a model that requires further development of the competitive framework but is technically straightforward.

On transmission pricing, Khan has argued for location-based Use of System Charges rather than the current flat rate, so that charges better reflect the actual cost of moving electricity from a specific generator to a specific buyer.

He has also raised a structural question about financing: whether consumers should continue to fund large new power projects through their electricity bills, or whether projects with significant water benefits — large dams, for instance — should be financed through the government budget or water charges instead.

Why It Matters

Pakistan's current power sector structure is at the heart of a fiscal problem that has persisted for years. Capacity payments to generators under long-term government purchase agreements have created a cost that falls on consumers and the government regardless of how much electricity is actually used. A competitive market, where producers must attract buyers rather than rely on guaranteed government off-take, shifts that risk back toward the generators — and potentially toward more efficient investment decisions over time.

The 400 MW auction is a small experiment in whether that model can work here. The answer will come from whether industrial consumers actually engage with it, what prices the competitive bidding produces, and whether the wheeling charge structure makes bilateral contracts genuinely attractive compared to the existing utility supply.