Feature Article: What has happened to the ISMO Bill?

The last of the several versions of the Independent System and Market Operator (ISMO) Bill is no longer on the Parliamentary schedule. Is this good or bad news?

Bad news, if the withdrawal of the Bill means that government has decided to throw in the towel and give up trying to solve the serious problems that exist in the structure of SA’s electricity generation, transmission and distribution system. Good news, if government intends to revise the bill to make it a truly functional piece of legislation that will assist in removing the blockages causing SA’s dire electricity shortage.

At a meeting of the Energy Parliamentary Portfolio Committee on 27 March 2013 the Department of Energy (DOE) said that “ISMO would be an autonomous state owned company, mandated to assist in the development of Generation Resource Planning, buying of power from generators, as the Department was currently not well established to be procurers of energy so ISMO would be the dedicated procurer.” And that “It would also deal with electricity trading at a wholesale level and (would carry out) system operations.” According to the DOE, “Bias could not be eliminated unless an autonomous entity was set up to deal with these issues and the playing field was levelled.”

The DOE listed the following reasons why Independent Power Producers (IPPs) “had not been forthcoming in significant volumes”:

·           Perceptions of conflict of interests in vertically integrated Eskom

·           Perceptions that government was not serious about reforming the industry

·           Perceptions about long-term viability of the present electricity supply industry (ESI) structure

·           Lack of clear policy specifically aimed at IPPs

·           Lack of enabling legal/ regulatory framework to facilitate IPPs.

In its written and oral evidence on the ISMO Bill, the FMF pointed out that the ISMO could not possibly be independent if it did not own the high voltage electricity transmission grid that it was expected to operate. If ownership of the transmission grid was not transferred to the ISMO, conflict between the ISMO and Eskom managements would be inevitable due to their differing objectives.

The ISMO’s task would be to procure sufficient electricity from a multiplicity of electricity generators to meet total demand, electricity that would have to be transmitted on a transmission grid owned and maintained by Eskom. Eskom’s task would continue to be the generation of electricity, the maintenance of the high voltage transmission grid, and the maintenance of the distribution grids that are currently under its control. Under the circumstances Eskom undoubtedly will fight fiercely for the retention of its monopoly position and government will have to stand firm and resolute to bring about reform.  

If the version of ISMO returned to Pretoria were adopted, the National Energy Regulator of South Africa (NERSA) would have the unenviable task of setting prices for the electricity purchased by the ISMO from Eskom; the transmission charges that Eskom would levy against the ISMO for the electricity transmitted; Eskom’s charges for connecting IPPs to the grid; establishing rules for the maintenance and extension of the grids owned by Eskom but operated by the ISMO, and presumably, acting as an arbitrator in the potentially endless disputes arising from the conflicts of interest between the two state-owned enterprises.

In the UK government’s re-organisation of its country’s electricity generation, transmission and distribution, one of its first acts was to separate the high voltage transmission grid from electricity generation, making the grid independent. The UK grid is now owned and operated by the privately owned National Grid Company, which also operates grids in Scotland and the US. The UK experience has shown that an independently owned and operated grid is an essential feature of a sound electricity system where there is open competition between a multiplicity of generation companies. The European Union and other countries have learned from the UK experience and have opened up their electricity systems to facilitate the entry of IPPs.

The opening up of the electricity supply systems in the EU countries resulted in electricity price reductions of up to 20%, revealing that monopoly government electricity supply is not in the best interests of consumers. After the introduction of competition in the UK electricity business it took 20 years for electricity prices to double; Eskom’s above-inflation price increase for the nine years 2009/18 will be more than double (2.35 times) and before inflation quadruple (4.03 times).   

Transmission grids in most countries are considered to be natural monopolies and their transmission charges are agreed with national regulators. In the UK, this function is performed for both electricity and gas by the Office of Gas and Electricity Markets (Ofgem). In describing its role, Ofgem says, “We work effectively with, but independent of, government, the energy industry and other stakeholders within a legal framework determined by the UK government and the European Union.” In other words, the regulator has a high level of independence, including from government intervention, an independence that will be entirely missing in SA if the current NERSA is replaced by government officials as described in another bill called the National Energy Regulator Bill that was published in December 2012.

All the evidence shows that SA’s electricity supply problems will not be resolved without drastic changes. First and foremost, an independently owned and operated high voltage electricity transmission grid is clearly an essential first step. Government’s 1998 White Paper mentioned “open, non-discriminatory access to the transmission system” and “introducing competition into the industry, especially the generating sector”. Not following through on those policy proposals has imposed an enormous cost on the SA economy, in lost investment, unnecessary costs, reduced economic growth, and lost jobs, apart from the black-out threat.

The first published ISMO Bill included the transfer of the transmission assets to the proposed new state enterprise (ISMO), an aspect that was eliminated from later versions. The evidence is compelling that the asset transfer was the right thing to do. We can only hope that government has looked at the evidence and has concluded that establishing an independently owned and managed electricity grid is not only the best, but is in fact the only way to restructure the SA electricity delivery system to remove the electricity supply constraints and black-out threats that hang like a Sword of Damocles over the SA economy.

When the ISMO Bill once again emerges from Pretoria, we hope it will describe a structure that will create an enabling environment for a dynamic, competitive 21st century electricity generation, transmission and distribution system, with independent power producers, electricity markets, competing suppliers at the retail level, consumer choice, and a futures market in electricity. A modern structure is needed that will enable SA to regain and exceed its previous productive capacities and allow its people guaranteed access to an adequate electricity supply.

Author: Eustace Davie is a director of the Free Market Foundation and a member of the Energy Policy Unit. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation

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