Cabinet described the establishment of the ISMO as key to fostering a more “disciplined, open and transparent electricity sector” and said it should assist in facilitating the participation of IPPs, which remain almost absent for the market currently. But owing to the country’s serious supply deficits, and Eskom’s funding stresses, the introduction of private generation is seen as a way of reducing the financial burden on the State and spreading the risk burden.
It is also apparent from the newly endorsed integrated resource plan, or IRP2010, IPPs are perceived as central to diversifying South Africa’s coal-heavy energy mix to include gas, hydro imports, nuclear, biomass, renewable energy, in addition to encouraging energy efficiency.
While details have not been published, the decision to scale up the contribution of renewables to 42% of the yet-to-be-development generation mix, as opposed to the 30% initially envisaged by 2030, is also suggestive of a desire to encourage greater private sector participation, with Eskom itself having a strong focus on coal and nuclear. This, notwithstanding the fact that two of the initial renewable energy projects – the 100 MW Sere wind farm and a 100 MW concentrated solar power plant for Upington in the Northern Cape – will be pursued by the State-owned utility.
The adjusted IRP2010 apparently sets aside 15% for new coal, down from 16% in the draft, and 23% for new nuclear, as opposed to 25% in the draft. It also sets aside 6% for imported hydro and 6% for imported gas and the balance for peaking open-cycle gas turbines.
But to encourage the level of investment envisaged, the rules of the game will have to be transparent and will need to be perceived as fair. Therefore, much scrutiny will be given to the ISMO Bill and whether it offers the “level playing field” sought by investors in the context of a market structure that will probably remain dominated by Eskom for years to come.
Minister Dipuo Peters has already indicated that a phased-in approach has been favoured over a “big bang”, but told journalists this week that a structure, or institution, is needed to facilitate 30% of new power generation arising from IPPs.
The Bill apparently proposes a phased model, where various stages of independence are outlined, beginning with an entity ring-fenced within Eskom. The migration to full independence could also be guided by milestones rather than by specific timelines, apparently in a bid to reduce the risk associated with such a fundamental restructuring exercise.
However, the proposal to vertically separate the transmission system from Eskom in stages is still likely to attract criticism, particularly from those who view the lack of an independent grid company as a key impediment to further investments by IPPs. Those in favour of the immediate unbundling of Eskom’s transmission business are convinced that it would help attract IPPs, the emergence of which has already been slowed by legislative, pricing and regulatory constraints.
But Eskom has naturally cautioned against immediate separation and has argued that potential conflicts of interests will be mitigated by the fact that the IRP2010, rather than the utility, will dictate what new capacity should be introduced. IPPs highlighted in the plan would receive take-or-pay contracts, which would reduce the financial incentive for Eskom to favour its own capacity over private production.
Nevertheless, many renewable energy IPP developers remain cautious about Eskom’s perceived role of “player and referee”, and believe that the utility remains an impediment to thesigning of IPP contracts.