http://www.engineeringnews.co.za
  SEARCH
Login
R/€ = 13.83Change: -0.12
R/$ = 11.04Change: -0.17
Au 1172.85 $/ozChange: 3.68
Pt 1231.00 $/ozChange: -0.50
 
 
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
 
Agriculture   Automotive   Chemicals   Competition Policy   Construction   Defence   Economy   Electricity   Energy   Environment   ICT   Metals   Mining   Science and Technology   Services   Trade   Transport & Logistics   Water  
What's On Press Office Tenders 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
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|Operations|Renewables Technologies
SECURITY|Africa|Eskom|Security|System|Africa||Security|Contracting|Power Generation|Power-generation|Security||Power|Security|Operations|
security|africa-company|eskom|security-company|system|africa|south-africa|security-facility|contracting|electricity|electricity-prices|electricity-sector|electricity-woes|lower-electricity-prices|power-generation|power-generation-industry-term|regulatory-tools|renewables-technologies|security-industry-term|steep-electricity-increases|transmission-network|undeveloped-electricity-market|power|security-person|ismo|operations|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 (150 word limit)
 
 
 
 
 
 
 
 
Other Saliem Fakir News
The Brazil, Russia, India, China and South Africa (Brics) meeting held in Fortaleza, Brazil, in July, ended with the establishment of the Brics bank, called the New Development Bank, raising not only important questions about the role of the bank but also South...
After a long process of consultation, the Integrated Urban Development Framework (IDUF) has been released for further discussion and debate. The IDUF is a slim document but contains numerous ideas and thoughts on how to take forward the National Development Plan’s...
Debates on living wages or minimum wages are not unique to South Africa. You will find similar debates in France, the UK and the US following a recession and growing household debt in these countries. Because of the globalisation of the world labour pool, low- and...
Article contains comments
Article contains comments
More
 
 
Latest News
The retail price of 95-grade petrol in South Africa will drop by 45 cents or 3.3 percent a liter from next Wednesday, while wholesale diesel will decrease by 4.9 percent, the government said on Friday. Petrol will cost 13.16 rand ($1.20) a liter while the wholesale...
Special purpose vehicle GreenCape will, by the end of 2014, make an application to the Department of Trade and Industry (DTI), the Western Cape provincial government and the City of Cape Town to declare Atlantis, on the Western seaboard, a special economic zone...
The German government has committed a further R70-million towards the second phase of the Non-Motorised Transport (NMT) programme. The NMT programme forms part of the Department of Environmental Affairs’ 2010 FIFA World Cup National Greening Legacy Programme.
More
 
 
Recent Research Reports
Defence 2014: A review of South Africa's defence industry (PDF Report)
Creamer Media’s Defence 2014 report examines South Africa’s defence industry, with particular focus on the key participants in the sector, the innovations that have come out of the sector, local and export demand, South Africa’s controversial multibillion-rand...
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 road...
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.
 
 
 
 
 
This Week's Magazine
In the next 20 years, it was expected that, in Africa, more people would live in cities and towns than in rural areas, United Nations Habitat executive director Dr Aisa Kirabo Kacyira said at the Human Settlements Indaba that took place earlier this month in...
Tough-talking Human Settlements Minister Lindiwe Sisulu has committed government to building 1.5-million low-cost houses over the next five years, telling the Human Settlements Indaba in Johannesburg on Wednesday that the State would achieve this target through the...
Over the past 20 years there has been persistent concern about deindustrialisation in South Africa, as well as the fact that locally produced manufactured products have been increasingly displaced by imports.
Financial agreement for Ghanian independent power producer (IPP) Cenpower Generation Company’s $900-million, 350 MW combined-cycle gas-turbine power plant was finalised earlier this month, paving the way for the project’s construction to begin before 2015 in Tema,...
The revenue implications for South Africa of ‘base erosion and profit shifting’ by corporate taxpayers are firmly in the crosshairs of the Davis Tax Committee (DTC) and Judge Dennis Davis hinted last week that recommendations were being considered to “detect and...
 
 
 
 
 
 
 
 
 
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