Eskom’s plan to control market

A wholly independent systems and market operator (ISMO), which could change the face of South Africa’s electricity market, is unlikely to be establised for at least five years, if not double that period, according to Eskom.

Instead, there are plans for an interim ISMO to be created, ring-fenced within the utility. This has raised the concerns of industry players that this would allow Eskom to continue to dominate the electricity sector and prevent independent power producers from competing with the parastatal.

However, Eskom said the company was committed both to the creation of an ISMO and to the entry of independent producers. But the process had to be managed carefully to avoid unnecessary risks to the system. Also, it would have to be backed by a clear business plan that would not result in financial difficulties for the utility or its shareholder, the government.

In an interview with the Mail & Guardian Paul O’Flaherty, Eskom’s chief financial officer, and Kannan Lakmeeharan, the head of system operations and planning, said that the interim ISMO would begin signing agreements, particularly with renewable energy suppliers, while the details of how to go about legislating and establishing a fully fledged body were being determined.

But an internal Eskom discussion document on the establishment of an ISMO has raised concerns that an ISMO within Eskom will not secure the entrance of independent producers, at a time when the country faces grave power shortages. Eskom has yet to finalise funding for the Kusile power plant, which, with its forerunner Medupi, form the basis of the company’s plans to create new power generation capacity.

The entrance of independent power providers (IPPs) is critical to meet the capacity shortages. Without legislating for a wholly independent entity there would be no clear signal to the market that South Africa was serious about allowing IPPs into the electricity sector, an industry expert, who did not want to be named, said.

The draft document, which sets out the terms of reference and project plan for the ISMO, points to a number of issues that need addressing to create a ring-fenced body inside Eskom. These include the policy framework, particularly at government level, and organisational and implementation issues.

The document states that until it is clear what the desired end state for the industry is, and that this is supported by a clear business case, it is “not prudent” for Eskom to work towards anything beyond ring-fencing the ISMO internally.

It also says that while the work will not necessarily aim to support full independence, it should “recognise that a different end state is possible” and allow for this in future.
The Eskom document follows a concept paper drawn up by the department of energy that recommended the creation of a completely independent ISMO housed outside of the utility.

The department intends to introduce the first draft of proposed legislation on the ISMO to the inter-ministerial committee on energy at the end of this month, according to the department’s deputy director general, Ompi Aphane.

But, he said, the proposed Bill was in the very early stages of drafting and would be subject to further discussions within the government.

The government and Eskom have denied that two separate and competing processes are under way to create an ISMO.

Lakmeeharan said that governance principles of transparency and independence would form the basis of any interim structure that was set up. “We are flexible to move to any end state, but that end state must be really well thought through and everyone must get on board. It must not be done in isolation by any one entity,” he said.

He said Eskom was obliged by the most recent tariff determination by the National Energy Regulator of South Africa to spend more than R11-billion in the next three years on IPPs.

“To make the money work, to get the IPPs on the grid now, this [internal ISMO] we believe is the most effective way to do it,” said O’Flaherty.

Many renewable energy projects are in the pipeline, which could mitigate some of the stresses on the system. Renewables such as wind and solar power can also be brought on line much sooner than larger suppliers of base load power, provided the necessary policies are in place.

Large companies, such as Exxaro, are working towards creating their own energy in part to ensure they have security of supply.

According to Ernst Venter, executive general manager of business growth at Exxaro, the mining house wants to establish its own clean energy company that includes solar and wind generation. It has two projects — one for wind and one for solar that could provide up to 400MW of power — at pre-feasibility stage.

For these projects to go ahead the company needs to sign a power purchase agreement (PPA) with an ISMO and, as long as the processes were transparent, there was no concern about where it would be located, said Venter.

“The only [organisation] capable of guaranteeing a PPA right now is Eskom,” said O’Flaherty.

Lakmeeharan said that according to international benchmarks it would take a minimum of five years to set up an ISMO, although in some countries it had taken up to 10 years. He said an interim ISMO could possibly be set up within a year, subject to government approval.
LYNLEY DONNELLY | CAPE TOWN, SOUTH AFRICA – Aug 07 2010 18:58 Mail & Guardian