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Energy services developments in the Southern African region

Energy services developments in the Southern African region

29 Mar 2010

JB Cronjé, tralac Researcher, discusses the energy services developments in the Southern African Region.

The energy sector provides essential backbone support to almost all economic activity and its cost, quality and availability will inevitably have an impact on the competitiveness of firms. Electricity trading in the SADC region is conducted through the Southern African Power Pool and its members (the members consist of the state-owned power utilities of the different member states). Eskom is South Africa’s state-owned power utility. It generates about 95% of the country’s electricity, mostly from coal-fired stations, and produces 45% of the continent’s output. Although it doesn’t have exclusive generation rights it does have a practical monopoly on bulk electricity supply. In addition, it operates the transmission system and distributes directly to large consumers such as mines, large industries and commercial farmers. It also distributes electricity to municipalities which in turn supply to consumers. In short, the South African electricity market is vertically integrated. Fortunately, this situation is about to change.

In President Zuma’s State of the Nation address on 11 February 2010 he stated: “To ensure reliable power supply, we have established an Inter-Ministerial Committee on Energy, to develop a 20 year integrated resource plan. Among other things, this will look at the participation of independent power producers, and protecting the poor from rising electricity prices. We will establish an independent system operator, separate from Eskom Holdings. Eskom will continue to build additional generation capacity and improve the maintenance of its power stations.”(emphasis added). In other words, Eskom will no longer be the buyer of generated power and transmitter and distributor thereof. The procurement of electricity will in future be done by an independent and neutral entity. This is an important step to level the playing field for private producers of electricity because Eskom’s “single buyer” position was up to now a major deterrent to new investment in the generation market.

The, yet to be established, Independent System Operator (ISO) will be responsible for the operation of the high voltage transmission system. All power generators will from now on supply their generated electricity to the national grid which will be transferred over the system by the ISO against a (presumable) cost for the generator or consumer. The restructuring of competition in the electricity market sends the right signals to independent power producers which will no longer be required to negotiate and conclude power purchase agreements with their competitor, Eskom. However, national legislation will have to be enacted to establish the ISO with a properly defined mandate and an adequate funding model to execute its functions. The Ministry of Energy promised to provide more information about the legal framework for the proposed ISO in March this year.

However, changing the buyer does not change the risk allocation for renewable energy producers caused by the current power purchase agreement impasse. The stalemate between Eskom and renewable energy producers is caused by the unbalanced Power Producer Agreement Guidelines which, for example, make it possible for the buyer (Renewable Electricity Purchasing Agency, currently housed in Eskom) to terminate a contract should the supplier not meet 100% of its contracted output over a two-year period. These perceived imbalances stand in the way of real investment.

Another important building block (apart from the contracting parties and terms of contract) for the creation of a favourable investment climate for private electricity generation is the setting of a competitive price. The renewable energy feed-in tariff (refit), for private electricity generation was fortunately established late last year. The refit pre-determines the price at which the buyer must purchase electricity from renewable energy generators using qualifying technologies. The refit determination is important to secure the recovery of cost of generation and reasonable returns on the investment.

In addition, government announced a three-year 10% target in electricity generation from independent power producers. This would provide private producers the opportunity to assess the investment potential in the renewable energy market. These are all positive new developments to tackle South Africa’s ever-increasing demand for electricity.

Looking further afield, South Africa is a net importer of electricity that is sourced from its neighbours on the basis of long-term bilateral agreements. South Africa is also a member of the Southern Africa Power Pool (SAPP) which aims to increase interconnectivity between the SADC countries and to facilitate cross-border electricity trading and power pooling. Several transmission grids in the region have been interconnected since the conclusion of the Intergovernmental Memorandum of Understanding establishing the SAPP, but many electricity markets in the region are still vertically integrated as in the case of South Africa. Independent power producers are still excluded from participating in the excess power trading market. This situation must change in light of the insufficient capacity in the region to supply electricity demand.

South Africa hasn’t made any international commitments on the liberalisation of energy services. However, the energy sector has been earmarked for liberalisation at the regional level in terms of the SADC Draft Services Protocol. This could include the liberalisation of services incidental to transmission and distribution on a fee or contract basis of electricity to household, industrial, commercial and other users. This may mean that the ISO would be in a position to source electricity from the most competitive generators in the SADC region and not only in the instance of national shortfalls. In order for this to happen the region will need to move from cooperative power pooling to competitive cross border trading.

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