Jun 29, 2012
Planned ISMO unlikely to be panacea for power sector’s woesBack
Africa|Eskom|SECURITY|System|Africa|South Africa|Contracting|Electricity|Electricity Prices|Electricity Sector|Electricity Woes|Lower Electricity Prices|Power Generation|Power-generation|Regulatory Tools|Renewables Technologies|Steep Electricity Increases|Transmission Network|Undeveloped Electricity Market|Power|ISMO|Operations|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
Unconventional reserves, unlike cheap conventional sources, remain vulnerable to market conditions, technology and geological characteristics. Transplanting from one country condition to another will always remain a challenge, given the different conditions that...
Recent Research Reports
Steel 2015: A review of South Africa's steel sector (PDF Report)
Creamer Media’s Steel 2015 report provides an overview of the key developments in the global steel industry and particularly of South Africa’s steel sector over the past year, including details of production and consumption, as well as the country's primary carbon...
Projects in Progress 2015 - First Edition (PDF Report)
In fact, this edition of Creamer Media’s Projects in Progress 2015 supplement tracks developments taking place under the Renewable Energy Independent Power Producer Procurement Programme, which has had four bidding rounds. It appears to remain a shining light on the...
Electricity 2015: A review of South Africa's electricity sector (PDF Report)
Creamer Media’s Electricity 2015 report provides an overview of State-owned power utility Eskom and independent power producers, as well as electricity planning, transmission, distribution and the theft thereof, besides other issues.
Construction 2015: A review of South Africa’s construction sector (PDF Report)
Creamer Media’s Construction 2015 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; the key participants in the sector; local construction demand; geographic diversification;...
Liquid Fuels 2014 - A review of South Africa's Liquid Fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2014 Report examines these issues, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing, competition in the sector, the...
Water 2014: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2014 report considers the aforementioned issues, not only in the South African context, but also in the African and global context, and examines the issues of water and sanitation, water quality and the demand for water, among others.
This Week's Magazine
Today’s organisations execute projects within increasingly complex environments – particularly in the engineering sector. The ability to successfully execute these projects is what drives the realisation of successful projects and, ultimately, the achievement of...
South Africa’s distribution grid is a twentieth-century relic, which must be changed to serve the country’s modern electricity needs, says South African National Energy Development Institute (Sanedi) Smart Grid Programme manager Dr Minnesh Bipath. “What we are...
There is a disparity in government funding provided to integrated transport networks – bus rapid transit (BRT) networks ¬¬– and that given to conventional bus services, says Putco executive director Thys Heyns. “We have neglected and strangled conventional bus...
The Johannesburg Social Housing Company (Joshco) is building 502 rental housing units, valued at R200-million, in Dobsonville, Soweto, which are scheduled for completion in June 2016.
Automotive component manufacturer and distributor Metair is centralising its research and development (R&D) work in Turkey, in an attempt to bolster the company’s ability to produce affordable start/stop batteries. The new R&D centre is part of an expansion plan in...
Next ArticleRenewables: facts and fiction