Jun 29, 2012
Planned ISMO unlikely to be panacea for power sector’s woesBack
SECURITY|Africa|Eskom|Security|System|Africa|South Africa|Security|Contracting|Electricity|Electricity Prices|Electricity Sector|Electricity Woes|Lower Electricity Prices|Power Generation|Power-generation|Regulatory Tools|Renewables Technologies|Security|Steep Electricity Increases|Transmission Network|Undeveloped Electricity Market|Power|Security|ISMO|Renewables Technologies
© Reuse this
The creation of an independent system operator is premised on the belief that shifting system operation functions away from power utility Eskom would assure independent power producers (IPPs) of fair competition and access to the monopoly transmission system, thus encouraging IPP presence in the sector. Market operation functions would reside with the independent system operator, resulting in the creation of an ISMO.
The extent to which the private sector would benefit from such as system, how- ever, is questionable. The contracts being signed by Eskom with IPPs raise questions about whether private-sector interest is being sidelined, since the contracts involved ‘take or pay’ elements. This means that Eskom will pay for the power generated by the IPP, even if it does not take all the power that is produced. As the owner of the transmission system and the procurer of power, Eskom does not stand to gain by denying IPPs access to the transmission network. More simply put, IPPs do not stand to lose anything from the absence of independent system operations.
Currently, facilitation of IPP procure- ment through the National Treasury’s Public-Private Partnership Unit seems to be running smoothly, obviating the need for the ISMO’s market role.
The introduction of an ISMO is also seen as having advantages for electricity prices. It has been argued that, for Eskom to build the required new generation capacity, steep electricity increases will be required, resulting in a negative impact on the economy. Eskom’s ability to build cheaper power plants, in any case, has been put in doubt because of the cost over- runs for the Medupi and Kusile power stations, so there may be some truth to this assumption.
But, as things stand, an ISMO is unlikely to change the current price performance of IPPs; the only change will be the address where IPPs will have to send their bill. If you consider the recent renewables bid, IPPs will certainly compete with one another during the tendering process. However, prices are capped for different renewables technologies. Some will come under the cap or be on a par, and Eskom will have to pay. But where is the real benefit of lower electricity prices? In fact, the ISMO will only end up creating limited competition for an undeveloped electricity market among IPPs only. Eskom will continue to operate without being challenged by market players to enhance its performance.
Further, electricity prices quoted by IPPs would depend on several factors, including the type of procurement process, the efficiency of the procurement process, fuel markets, regulatory tools to create better incentives for efficient production of power and the supply-demand imbalance. So there is no guarantee that the ISMO will lead to lower electricity prices.
There is also the question of how the ISMO will be funded. Given the functions to be performed by the ISMO, it would not have a huge asset base. Its balance sheet would be small, making it difficult to raise capital. A small balance sheet will also reduce confidence in the ISMO’s ability to carry the risks associated with power procurement. The ISMO, as the power procurer, may have difficulty realising contracts with IPPs, unless there is strong payment security from the ISMO or the power purchase agreement is bankable. Since this is unlikely to be the case, given the ISMO’s balance sheet, from an IPP perspective, dealing with an ISMO implies higher risks than dealing with Eskom. Higher risks will translate into a higher risk premium in contracting with an ISMO.
Unlike typical power sector reforms elsewhere in the world, the creation of an ISMO in South Africa is not driven by a desire to improve efficiency through restructuring and competition. Instead, the driving factor behind the ISMO in South Africa is the immediate challenge of underinvestment in new generation capacity by the private sector and the country’s low reserve margin.
The rationale for the ISMO is more political than economic. It is hoped that, by reducing Eskom’s influence, the ISMO will improve governance and the performance of the electricity market. The ISMO may well create an added layer of bureaucracy and an added cost to the system. Shifting billing addresses does not suggest improvements in electricity planning, better demand and supply scheduling, nor cost-effective generation capacity.
Clearly, the creation of the ISMO, in the absence of an overall policy decision on the structure of the electricity industry, is unlikely to help the industry. The ISMO may turn out to be a false solution while the trouble lies elsewhere in the system.
While an ISMO is important for facilitating the introduction of IPPs, in the sense that it brings about transparency, accountability and a level playing field for power producers, given its proposed timing, the absence of larger reforms in the sector and no changes in governance, the ISMO is unlikely to be the saviour of the sector.
Edited by: Martin Zhuwakinyu© Reuse this Comment Guidelines (150 word limit)
Other Saliem Fakir News
Article contains comments
Updated 4 hours ago Despite various challenges related to the extraction of shale oil and gas, as countries grow accustomed to the idea, the use of shale as a form of energy will be more widely pursued, international oil and gas market analyst Michael Lynch said on Tuesday. Speaking at...
Updated 4 hours ago A consortium led by two Kenyan firms won a government tender to build a 1 000-MW, coal-fired power plant, company officials said on Tuesday, part of moves to satisfy rising demand for energy in East Africa's biggest economy. Kenya suffers from regular blackouts due...
Updated 4 hours ago The announcement of the successful bidder for the construction of Durban’s long-awaited passenger cruise terminal was imminent, Transnet National Ports Authority (TNPA) CEO Tau Morwe told delegates at the African Ports Evolution Conference in Durban on Tuesday. ...
Recent Research Reports
Road and Rail 2014: A review of South Africa's road and rail infrastructure (PDF report)
Creamer Media’s Road and Rail 2014 report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Real Economy Year Book 2014 (PDF Report)
This edition drills down into the performance and outlook for a variety of sectors, including automotive, construction, electricity, transport, steel, water, coal, gold, iron-ore and platinum.
Real Economy Insight: Automotive 2014 (PDF Report)
This four-page brief covers key developments in the automotive industry over the past 12 months, including an overview of South Africa’s automotive market, trade figures, production and the policies influencing the sector.
Real Economy Insight: Construction 2014 (PDF Report)
This five-page brief covers key developments in the construction industry over the past 12 months. It provides an overview of the sector and includes details of employment in the sector, infrastructure and municipal spending, as well as insight into companies’...
Real Economy Insight: Electricity 2014 (PDF Report)
This five-page brief covers key developments in the electricity industry over the past 12 months, including details of State-owned power utility Eskom’s generation activities, funding and tariffs, independent power producers and prospects for the sector.
Real Economy Insight: Road and Rail 2014 (PDF Report)
This six-page brief covers key developments in the road and rail industries over the past 12 months, including details of South Africa’s road and rail network and prospects for both sectors.
This Week's Magazine
South African State-owned defence industrial group Denel has announced its fourth consecutive year of profits. The group's results for the financial year 2013/2014 were recently announced at its head office in Centurion, south of Pretoria. Revenues grew by 17%, net...
There is little opportunity for JSE-listed infrastructure company Group Five to grow shareholder value in the domestic market, says CEO Mike Upton. He says value can still be found in the private sector, in the renewable and industrial power sector, as well as in...
The National Association of Automobile Manufacturers of South Africa (Naamsa) has announced the event dates of the 2015 Johannesburg International Motor Show (JIMS). The event will take place from October 14 to October 25, 2015, at the Johannesburg Expo Centre, Nasrec.
UK engineering support services provider Babcock is set to deliver the largest order of global truck manufacturer DAF’s truck tractors in Southern Africa to bulk carrier road-based logistics company Ngululu Bulk Carriers (NBC), with 133 trucks to be delivered in...
Digital radio communications in the African local government space can open up the world, but have many challenges to overcome, notes integration and migration of legacy radio communications infrastructure with digital mobile radio company Emcom Wireless head of...
Next ArticleWhat should be done about concentrating solar power