Competitive Trading Bilateral Contracts Market (CTBCM)

A Professional Report on Market Design, Merits, Demerits, and International Experience

Executive Summary

The Competitive Trading Bilateral Contracts Market (CTBCM) is a transformative electricity

market reform designed
to transition Pakistan’s power sector from a single-buyer model to a competitive wholesale
market. The CTBCM enables
bulk power consumers (BPCs) to directly contract electricity from generators, fostering
competition, efficiency,
and private investment. This report provides an in-depth overview of CTBCM’s framework, its
benefits and challenges,
and draws lessons from international experiences to assess its success potential in Pakistan.

1. Introduction and Background

Pakistan’s power sector has historically operated under a single-buyer model, where the Central
Power Purchasing Agency (CPPA-G)
procures electricity from generators under long-term power purchase agreements (PPAs) and
sells it to distribution companies (DISCOs).
This centralized procurement structure created inefficiencies, limited consumer choice, and
placed significant fiscal burdens
on the government. To address these challenges, the National Electric Power Regulatory
Authority (NEPRA) introduced the concept
of the Competitive Trading Bilateral Contracts Market (CTBCM) to liberalize the wholesale
market and allow competitive electricity trading.

2. Objectives of CTBCM

The CTBCM aims to establish a competitive electricity market that promotes transparency,
efficiency, and reliability.
Its primary objectives include:
• Introducing competition in the wholesale electricity market.
• Allowing large consumers to choose their suppliers and negotiate prices.
• Encouraging private investment in generation and retail supply.
• Reducing the financial liabilities of the government related to power procurement.
• Aligning Pakistan’s power market with international competitive market practices.
3. Market Structure and Operational Framework

The CTBCM introduces a new market framework where multiple buyers and sellers can trade
electricity through bilateral contracts.
The main components of the CTBCM structure are:
• **Market Operator (MO):** Responsible for administering the market, ensuring transparency,
and maintaining data systems.
• **System Operator (SO):** Manages real-time dispatch and ensures system reliability.
• **Balancing Mechanism:** Adjusts discrepancies between contracted and actual electricity
flows.
• **Settlement System:** Calculates payments between buyers and sellers based on metered
data.
• **Market Participants:** Include generators, suppliers, traders, and bulk power consumers.

4. Institutional and Regulatory Framework

NEPRA serves as the regulator, responsible for defining the market rules, monitoring
compliance, and ensuring fair competition.
CPPA-G is expected to evolve into a fully independent Market Operator (MO), separate from its
current single-buyer role.
The National Transmission and Despatch Company (NTDC) continues to perform system
operation under the System Operator (SO) role,
while DISCOs transition to competitive suppliers for eligible consumers. A Market Surveillance
Committee (MSC) is proposed to
monitor market conduct and prevent anti-competitive behavior.

5. Merits of CTBCM

The CTBCM offers multiple advantages for Pakistan’s electricity sector:

1. **Enhanced Competition:** Encourages competitive pricing and efficiency among generators
and suppliers.
2. **Consumer Choice:** Allows large consumers to negotiate directly with suppliers.
3. **Private Investment Attraction:** Opens the market for independent power producers and
traders.
4. **Efficient Price Discovery:** Bilateral contracts reveal market-driven price signals.
5. **Reduced Government Burden:** Minimizes fiscal exposure from guaranteed payments in
PPAs.
6. **Encouragement for Renewable Energy:** Competitive procurement can facilitate the
integration of renewable projects.
6. Demerits and Risks of CTBCM

Despite its advantages, CTBCM implementation poses several challenges:

1. **Market Power Concentration:** Dominance of a few large players can distort prices.
2. **Balancing and Reliability Issues:** System balancing requires robust infrastructure and IT
systems.
3. **Complex Transition:** Converting from the single-buyer model to competition requires
legal and financial adjustments.
4. **Price Transparency Concerns:** Bilateral contracts may lack transparency compared to
centralized markets.
5. **Institutional Weakness:** Requires strong market and system operators with technical
expertise.
6. **Legacy PPAs:** Existing long-term contracts complicate the transition to competitive
trading.

7. International Experience

Many countries have successfully transitioned to competitive electricity markets using bilateral
contracts:
• **United States:** Regional markets like PJM and ERCOT combine bilateral contracts with
centralized balancing mechanisms.
• **Europe (Nord Pool):** Utilizes a hybrid model with bilateral contracts and transparent spot
markets.
• **Chile:** Pioneered long-term bilateral contracting while maintaining strong regulation for
market monitoring.
• **Georgia and Turkey:** Emerging markets that have gradually introduced bilateral
contracting with varying degrees of success.
The key international lesson is that successful bilateral markets depend on strong institutions,
transparent balancing mechanisms,
and robust regulatory oversight.

8. International Success Ratio and Lessons Learned

Globally, around 70–85% of electricity trading occurs through bilateral contracts. The success
ratio of bilateral markets depends
on three key factors: reliability, transparency, and market liquidity. Markets with hybrid
models—combining bilateral trading
with power exchanges and balancing mechanisms—demonstrate the highest success rates.
Countries that implemented reforms
without adequate institutional capacity faced challenges such as price volatility and reliability
issues.
9. Challenges in Implementing CTBCM in Pakistan

1. **Financial Health of DISCOs:** High circular debt and poor recovery rates threaten financial
stability.
2. **Institutional Capacity:** CPPA, NTDC, and NEPRA require capacity-building and
modernization.
3. **IT and Metering Systems:** Advanced metering infrastructure and real-time data are
essential for accurate settlements.
4. **Legal Reforms:** Existing laws and contracts must be updated to enable true competition.
5. **Consumer Readiness:** Large consumers require awareness and capability to engage in
market participation.
6. **Coordination among Stakeholders:** Smooth interaction among regulators, operators, and
market participants is vital.

10. Recommendations for Effective Implementation

1. **Phased Implementation:** Start with pilot projects for large consumers before expanding
market scope.
2. **Strengthen Market Institutions:** Establish an independent Market Operator and Market
Surveillance Committee.
3. **Capacity Building:** Invest in human resources, IT systems, and regulatory training.
4. **Transparent Balancing Mechanism:** Develop clear rules for deviations and imbalance
settlements.
5. **Legal and Contractual Reforms:** Align existing PPAs and regulations with competitive
frameworks.
6. **Stakeholder Engagement:** Conduct regular consultations to build consensus and
confidence.
7. **Integration with Renewable Energy:** Facilitate green energy trading under the CTBCM
framework.

11. Conclusion

The Competitive Trading Bilateral Contracts Market (CTBCM) represents a landmark reform for
Pakistan’s electricity sector.
Its success depends on strong regulatory oversight, institutional readiness, transparent market
mechanisms, and gradual transition.
International experience demonstrates that with the right governance and technological
support, CTBCM can lead to a more
efficient, reliable, and consumer-oriented electricity market in Pakistan.
12. References

1. NEPRA, “Detailed Design of the Competitive Trading Bilateral Contracts Market (CTBCM),”
2021.
2. CPPA-G, “CTBCM Implementation Roadmap,” 2022.
3. SDPI, “The Case of Competitive Trading Bilateral Contracts Market in Pakistan,” 2023.
4. World Bank, “Global Electricity Market Liberalization: Lessons for Developing Countries,”
2020.
5. Oxford Institute for Energy Studies, “Electricity Market Reform and Bilateral Contracting,”
2019.