For decades, Pakistan’s electricity sector operated largely under a single-buyer model. Generation, transmission and distribution were predominantly organized around state-controlled institutions, while electricity producers ultimately depended on a central purchasing arrangement. The introduction of private power generation under the 1994 Power Policy brought substantial private investment into generation, but it did not fundamentally alter the structure of the electricity market: there was still essentially one major buyer. That longstanding model is now approaching a significant transformation.
Pakistan’s Competitive Trading Bilateral Contract Market (CTBCM) is designed to move the country from a single-buyer arrangement towards a competitive electricity market in which large consumers can choose their electricity suppliers. NEPRA approved the CTBCM framework, with the objective of enabling bulk power consumers with loads of 1 MW or above to purchase electricity from the DISCO or from a competitive supplier of their choice.
The reform has taken years to develop, involving regulatory changes, market design, system studies and extensive stakeholder consultations. A particularly important recent development was NEPRA’s approval of the electricity Wheeling Charges / Use of System Charges (UoSC), which are necessary for electricity transactions involving use of the transmission and distribution network. ISMO has now moved towards practical implementation, including the first 400 MW wheeling auction, for which proposals are due by end of November 2026. At the same time, Pakistan is pursuing private-sector participation in the distribution sector. The first batch comprises FESCO, GEPCO and IESCO, for which the Privatization Commission has advanced the transaction process.
The combination of CTBCM and a changing distribution landscape could significantly reshape Pakistan’s electricity market. But how will it actually work?
Direct B2B Electricity Sales: One of the most important features of CTBCM is the possibility of business-to-business (B2B) electricity transactions. A qualifying large consumer can enter into a bilateral arrangement with a competitive electricity supplier rather than relying exclusively on the traditional supply arrangement of its local DISCO. The electricity would still use the national transmission or distribution network where wheeling is required. Consequently, the consumer would pay the applicable Use of System Charges. These charges compensate the network owner for providing access to its infrastructure. Under the recently determined UoSC framework, charges vary according to the applicable network and consumer category. For example, the approved charge for certain B3 consumers connected at 11 kV is PKR 6.23 per unit. In addition, certain existing system-related charges, including the DSS component referred to in the CTBCM framework, may remain applicable. There is another important element is that electricity injected into the system must account for applicable network losses. Thus, the economics of a B2B transaction cannot be assessed merely by comparing the generator’s selling price with the consumer’s existing tariff. The complete calculation must include generation cost, wheeling charges, losses and applicable statutory or market charges.
Nevertheless, the model can become attractive where electricity can be generated at a competitive cost. Renewable resources such as solar and wind, agricultural-residue biomass and Thar coal could potentially provide electricity at costs that make direct bilateral transactions commercially interesting.
An important development is the recognition of on-site supply arrangements. Where the generator and consumer are sufficiently close and electricity does not require use of the DISCO’s network, the transaction can potentially avoid the wheeling structure and associated network charges.
Importantly, a consumer does not necessarily have to abandon its existing DISCO connection. The existing connection can provide electricity when the contracted supplier is unable to meet the consumer’s requirement, subject to the applicable regulatory and Supplier of Last Resort arrangements. This provides an important element of supply security and makes the transition towards competitive procurement less disruptive.
The Alternative: Selling Electricity to the Grid at SMP: A generator participating in the competitive market will also have the option of selling electricity to the grid at the applicable System Marginal Price (SMP), subject to the market rules. SMP means the Variable Generation Cost of the most expensive generation unit that would be dispatched to supply electricity to the system on hourly basis. It excludes plants that are more expensive to operate but are dispatched anyway due to system constraints (technical or commercial) such as Must Purchase, Transmission Must Run, Voltage Support, Reliability Must Run requirements, etc. However, investors need to understand an important caveat. Some expensive power plants may continue operating because of system requirements rather than purely economic merit. These may include plants operating for reliability, voltage support, transmission constraints or other technical reasons.
Such constrained operation can affect the SMP calculation. Therefore, a generator that relies entirely on SMP revenue may face uncertainty because the market price may not always reflect the cost of the more expensive plants operating for system-security reasons. For investors, this is not necessarily a flaw in the market, but it is a commercial risk that must be properly modelled before committing capital.
Direct Power Purchase by DISCOs: Another potentially important development is the possibility of direct power procurement by electricity suppliers. DISCOs can make direct power purchase agreements with power generators. The Electric Power Procurement Regulations require DISCOs to plan procurement and prepare a rolling five-year Power Acquisition Program. The program considers demand, existing contracted capacity and energy, capacity obligations and proposed future procurement. Procurement agreements are subject to the regulatory approval framework.
This creates a potential pathway for future DISCOs, particularly commercially oriented private distribution companies to procure electricity from generators through structured competitive procurement.
A generator located outside a DISCO’s traditional service territory could also potentially supply that DISCO through a wheeling arrangement, subject to applicable transmission requirements. This could create a broader national market in which electricity is purchased on the basis of price, reliability and contractual terms rather than simply geographic location. For large housing societies and industrial estates that operate their own internal distribution networks, such arrangements could also become increasingly relevant.
What Must Change?: CTBCM is an important reform, but opening the market alone will not guarantee cheaper electricity. Several issues will require careful attention.
First, distribution companies should have sufficient commercial flexibility to procure competitively priced electricity. If a privately managed DISCO can reduce its procurement cost, the regulatory framework should allow an appropriate mechanism through which some of that efficiency can ultimately benefit consumers.
Second, competition in generation will gradually become more meaningful as the country’s existing long-term power purchase agreements expire. Until then, a substantial portion of the system will continue to be influenced by legacy contractual commitments. So, the methodology for calculating SMP may require periodic review as the market matures. A transparent and commercially credible price signal is essential if investors are expected to commit capital to merchant or competitively contracted generation.
Finally, the transition must remain aligned with transmission capacity, system reliability and realistic electricity demand. Competition cannot function effectively if the physical grid is unable to deliver the electricity that has been commercially contracted.
A New Chapter for Pakistan’s Power Sector: Pakistan’s electricity market is finally moving beyond the traditional single-buyer paradigm. CTBCM provides the architecture for direct contracting, competitive procurement and greater consumer choice, while the evolving distribution-sector reforms could introduce stronger commercial incentives for DISCOs. The first 400 MW wheeling auction is therefore more than another procurement exercise; it is an early practical test of whether Pakistan can make competitive electricity trading work in the real world.
The transition will undoubtedly encounter regulatory, commercial and technical difficulties. But markets are not built in a day. What matters is that the institutional framework is now taking shape. If implemented with transparency, regulatory consistency and adequate grid investment, CTBCM could gradually transform electricity from a centrally purchased commodity into a competitive commercial product, giving generators greater market access and consumers greater choice. For Pakistan, that could mark the beginning of a fundamentally different electricity market.
Corresponding Author: Dr. Muhammad Farhan is an engineer by profession with nearly two decades of experience in the energy and power sector.