The withdrawal of the ISMO Bill: good or bad news for SA?
The withdrawal of the Independent System and Market Operator (ISMO) Bill: good news or bad news for SA? Bad news if the government has given up trying to solve the serious structural problems in SA’s electricity generation, transmission and distribution system. Good news if the government intends to revise it into a truly functional piece of legislation that will assist in removing the blockages causing SA’s dire electricity shortage.
On 27 March 2013 at a meeting of the Energy Parliamentary Portfolio Committee, the Department of Energy (DOE) said, “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 cited perceptions of conflict of interests in vertically integrated Eskom as one of several reasons why Independent Power Producers (IPPs) “had not been forthcoming in significant volumes”.
In written and oral evidence on the ISMO Bill, the Free Market Foundation (FMF) said that for the ISMO to be independent it must own the high voltage electricity transmission grid to avoid inevitable conflict between the ISMO and Eskom caused by different management objectives. This would put a “T” in ISMO making it ITSMO.
FMF director and EPU member Eustace Davie said “If it did not own the transmission, the ISMO’s task would be to procure sufficient electricity from a multiplicity of electricity generators to meet total demand, 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. Hardly surprising then that Eskom undoubtedly will fight fiercely to keep its monopoly but will the government stand firm and resolute in order 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 the prices paid 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. This would be bad news for SA.
There is international good evidence to support an independent grid. When the UK government reorganised electricity generation, transmission and distribution, the high voltage transmission grid was separated 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 many generation companies.
The European Union and other countries followed suite and opened up their electricity systems to allow the entry of IPPs which saw price reductions of up to 20%. It took 20 years for UK electricity prices to double, yet Eskom’s above-inflation price increase over the period 2009-2018 will be more than double (2.35 times) and before inflation quadruple (4.03 times) the March 2009 price...
Transmission grids in most countries are considered to be natural monopolies and their transmission charges are agreed with national regulators. In the UK, the regulator for both gas and electricity, Ofgem, has a high level of independence, including from government intervention. This independence 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; 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. Davie said, “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 South African electricity delivery system to remove the electricity supply constraints and black-out threats that hang like a Sword of Damocles over the SA economy”.
He continued, “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”.
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Note to the editor
The Free Market Foundation (FMF) is an independent, non-profit, public benefit organisation, created in 1975 by pro-free market business and civil society national bodies to work for a non-racial, free and prosperous South Africa. As a policy organisation it promotes sound economic policies and the principles of good law. As a think tank it seeks and puts forward solutions to some of the country’s most pressing problems: unemployment, poverty, growth, education, health care, electricity supply, and more. The FMF was instrumental in the post apartheid negotiations and directly influenced the Constitutional Commission to include the property rights clause: a critical cornerstone of economic freedom.
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