Independent operator will change electricity arena

The establishment of an independent system and market operator will revolutionise the local electricity market. But the legislation that makes the ISMO possible and the amount of legislation and regulation that needs to be changed to accommodate the new legislation means that it could take years before consumers see any real change.

Ompi Aphane, deputy director-general in the Department of Energy, said the ISMO Draft Bill, which is open for written public comment until today (Monday, June 13), would take about four months to legislate. Crucial to facilitating the introduction of independent power producers (IPPs) to the system, the bill might, however, take another two years to be populated and even longer to become fully operational, admitted Aphane. This could create even more uncertainty for potential IPPs waiting to invest in SA.

Other uncertainty has been caused by a delay in the finalisation of tariffs. Without knowing whether there will be a buyer for the power they produce or how much they would be paid for that power, it is obviously difficult for them to make an investment decision. In fact, IPPs have been waiting about five years for any kind of certainty related to the government and state owned power utility Eskom's plans regarding private investment in the sector.

As Mark Pickering, a partner at Meridian Economics, noted, the government has repeatedly made positive policy statements about its intent to open the power system to IPPs, starting with the Energy White Paper of 1998. In 2001, the Cabinet adopted a resolution that up to 30% of existing generating plants should be sold to the private sector, but little was done to implement the privatisation of Eskom power stations though, and in 2004 the resolution was re-interpreted to imply that 30% of new generation capacity should be built by the private sector. "Once again, little was done to implement this resolution, although the Department of Minerals and Energy, did attempt to procure 1,000 MW of OCGT (Open Cycle Gas Turbine) peaking plant – a process which eventually floundered prior to financial close in March 2007," said Pickering.

Eskom, too, has initiated a number of IPP procurement processes since 2006, most of which have been abandoned "Eskom has also entered into negotiations with a number of cross-border IPP developers. None of these unsolicited proposals have been finalised, and in the course of 2009 Eskom announced that all such initiatives had been put on hold, pending the resolution of its funding model and the implementation of government's policy on new generation capacity," Pickering said in a research report prepared for the University of Cape Town's Energy Research Centre.

The government's policy on new generation capacity is contained in the Integrated Resources Plan, which sets out to diversify the source of the country's energy away from coal, which is used to generate 77% of the country's power. Pickering said the Integrated Resources Plan, together with the ISMO Bill and the National Energy Regulator of SA's new paper on wheeling – which looks at charges for the use of the grid – was a "major leap forward". He said it would lead to the "most fundamental restructuring" of the country's electricity industry since 1924. There is, however, too little detail in the bill for the electricity market to be opened up by any significant extent just yet. Failure to introduce private sector investment, or IPPs, has resulted in SA retaining its vertically integrated electricity market structure, which has one dominant player that is owner and operator of the country's generation, transmission and distribution assets.

What the ISMO Bill aims to do is shift the market to the hybrid model, which will see IPPs generate power and invest in capacity side by side with Eskom. Under the bill, that power will be sold to a state-owned ISMO, which will then use Eskom's transmission and distribution assets to get the power to clients. The Free Market Foundation (FMF), which last week hosted a conference titled Unlocking the Electricity Transmission Grid, suggested that SA needed to go further than this by opening up the entire market to competition. "Inherent in having a single grid owner and operator is the lack of competition," said FMF director Eustace Davie." This lack creates the problem of potential excessive charges and difficulties with obtaining access to the grid. A problem governments generally attempt to solve by regulation and, especially, price control, which are not as effective as competition and consumer choice." In a paper on the electricity transmission grid and its importance to South Africans, Davie said consumers, be they individuals or large organisations, have the obvious problem of lack of choice. "It is important to at least have final distributors who purchase electricity from competing generating companies, transmit it across transmission lines, transform it, and compete with each other for the business of the final consumers," Davie said.

World experience has shown that a vertically integrated electrical generation, transmission and distribution structure is not the best way to organise the supply of electricity. Even if most of the parts of the whole structure remain government-owned, which is not desirable, the entities will function better if they are separated and can concentrate on their core functions. "ISMO and the electricity regulators will hopefully encourage private generating companies who believe there is business to be had, to enter the market. ISMO does not have to weigh the risks on behalf of potential investors; all they need do is to allow access to the grid for their generating plants," said Davie. "An independent grid operator, as long as it is instituted quickly and efficiently, will go a long way towards solving SA's electricity supply problems."

Source: Sherilee L Lakmidas Independent operator will change electricity Arena, 13 June, 2011

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First published by BusinessLIVE, South Africa

FMF Policy Bulletin/ 14 June 2011

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