http://www.engineeringnews.co.za
  SEARCH
Login
R/€ = 14.50Change: 0.09
R/$ = 10.50Change: 0.06
Au 1294.90 $/ozChange: -0.67
Pt 1413.00 $/ozChange: -15.50
 
 
Note: Search is limited to the most recent 250 articles. Set date range to access earlier articles.
Where? With... When?








Start
 
End
 
 
And must exclude these words...
Close Main Search
Close Main Login
My Profile News Alerts Newsletters Logout Close Main Profile
 
Nelson Mandela 1918 - 2013   Agriculture   Automotive   Chemicals   Competition Policy   Construction   Defence   Economy   Electricity   Energy   Environment   ICT   Metals   Mining   Science & Technology   Services   Trade   Transport & Logistics   Water  
What's On Press Office Suppliers Directory Research Jobs Announcements Contact Us
 
 
 
RSS Feed
Article   Comments   Other News   Research   Magazine  
 
 
Jun 29, 2012

Planned ISMO unlikely to be panacea for power sector’s woes

Back
Eskom|South Africa|Electricity|Electricity Prices|Electricity Sector|Electricity Woes|Lower Electricity Prices|Regulatory Tools|Renewables Technologies|Steep Electricity Increases|Transmission Network|Undeveloped Electricity Market|ISMO|Renewables Technologies
eskom|south-africa|electricity|electricity-prices|electricity-sector|electricity-woes|lower-electricity-prices|regulatory-tools|renewables-technologies|steep-electricity-increases|transmission-network|undeveloped-electricity-market|ismo|renewables-technologies-technology
More Insight
© Reuse this



The proposal to introduce an independent system and market operator (ISMO) into South Africa’s power generation sector seems to have found favour with government. However, it remains to be seen whether an ISMO would help to resolve the country’s electricity woes by encouraging and benefiting private-sector involvement and keeping electricity prices low or further disrupt the electricity sector.

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.
So, if the intention of establishing an ISMO immediately is to eliminate the dispatch risk for IPPs in the absence of separation of the transmission function from Eskom, there is no reality to this at present. Eskom will still provide key grid connectivity in the medium term and the status quo will remain. There is no proposal to unbundle Eskom that we know of that gives any sense that the ISMO’s role will be advantageous other than merely in name.

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
 
 
 
 
 
 
 
 
Other Saliem Fakir News
On the surface, the relation between high electricity and oil prices and food inflation can be perceived as linear rather than dynamic. There is a relation but it is more complicated. Here are few insights that may help us understand the dynamic. Final food prices...
The latest version of the Integrated Resource Plan (IRP) has some interesting changes, which could have far-reaching consequences for South Africa’s electricity mix. This IRP is a vast improvement on the 2010 plan, featuring more flexibility to respond to real-life...
The recent rise in electricity prices is eating away at everybody’s pockets. While energy-intensive users are the largest consumers of electricity, in terms of total share, they receive prices at wholesale rates rather than retail prices. What ordinary citizens...
More
 
 
Latest News
Few would argue with the notion that unemployment, which stands at around 25% on the narrow definition as reported by Statistics South Africa, remains one of the country’s most pressing challenges. Fewer still could contest the view that South Africa’s education...
Renewable-energy projects, such as this Northern Cape solar farm, seen as key to low‐carbon energy supply.
Upfront investment costs will and should remain a critical consideration as South Africa moves to upscale and accelerate its infrastructure programmes. But one of the lead authors of the latest Intergovernmental Panel on Climate Change (IPCC) argues that the...
The barrier to efficient water service delivery in South Africa was not of a technological nature but rather related to legal and Constitutional challenges, Water Research Commission (WRC) CEO Dhesigen Naidoo said on Thursday. Opening a WRC debate under the theme...
More
 
 
Recent Research Reports
Steel 2014: A review of South Africa's steel sector (PDF Report)
Creamer Media’s Steel 2014 report provides an overview of 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 steel and stainless...
Projects in Progress 2014 - First Edition (PDF Report)
This publication contains insight into progress at the delayed Medupi and Kusile coal-fired projects, in Mpumalanga and Limpopo respectively, as well as at the Ingula pumped-storage scheme, which is under construction on the border between the Free State and...
Automotive 2014: A review of South Africa's automotive sector (PDF Report)
The report provides insight into the business environment, the key participants in the sector, local construction demand, geographic diversification, competition within the sector, corporate activity, skills, safety, environmental considerations and the challenges...
Construction 2014: A review of South Africa's construction sector (PDF Report)
Construction data released during 2013 hints at a halt to the decline in the industry during the last few years, with some commentators averring that the industry could be poised for recovery. However, others have urged caution, noting that the prospects for a...
Electricity 2014: A Review of South Africa's Electricity Sector (PDF Report)
This report provides an overview of the state of electricity generation and transmission in South Africa and examines electricity planning, investment in generation capacity, electricity tariffs, the role of independent power producers and demand-focused initiatives,...
Defence 2013: A review of South Africa's defence industry (PDF Report)
Creamer Media’s 2013 Defence Report examines South Africa’s defence industry, with particular focus on the key players in the sector, the innovations that have come out of the defence sector, local and export demand, South Africa’s controversial...
 
 
 
 
 
This Week's Magazine
The Electronic Systems Laboratory (ESL) of the Department of Electrical and Electronic Engineering at Stellenbosch University is strongly reaffirming its position as one of South Africa’s leading centres for satellite technology and expertise. It is currently...
MORE IN SA Phase 2 should see local content on the mainline locomotive increase from 65% to 80% by the end of 2014
The world’s lowest-cost diesel-electric locomotive is not made in China, but in Pretoria, at RRL Grindrod Locomotives’ newly upgraded 30 000 m2 plant. The company’s locomotive pricing is “more competitive than any other original-equipment manufacturer (OEM)...
The South African Defence Review 2012, released to the public at the end of last month (despite the year given in its title) recommends the creation of the post of Chief Defence Scientist. This official would be responsible for the management of defence technology...
AltX-listed engineering technology company Ansys has been awarded an R188-million contract by Transnet to supply integrated dashboard display systems to the freight rail utility’s locomotives. Black-owned and controlled Ansys developed the bespoke integrated system...
South Africa’s sole nuclear power station Koeberg, which is located in the Western Cape, breached a major operations milestone on April 4, which marked the thirtieth anniversary of Unit 1 having been connected to the grid. Eskom, which operates the two-unit plant,...
 
 
 
 
 
 
 
 
 
Alert Close
Embed Code Close
content
Research Reports Close
Research Reports are a product of the
Research Channel Africa. Reports can be bought individually or you can gain full access to all reports as part of a Research Channel Africa subscription.
Find Out More Buy Report
 
 
Close
Engineering News
Completely Re-Engineered
Experience it now. Click here
*website to launch in a few weeks