The ISMO: A Policy Perspective

1. The ISMO: A Policy Perspective Free Market Foundation Conference Presented by Mark Pickering Meridian Economics 9 June, 2011

2. A Policy Perspective ISMO Conference

3. Towards a Problem StatementWhat’s the problem? • South Africa has no shortage of electricity policies … but we do have a shortage of electricity. • What problem is the ISMO expected to solve? • Do we have a clear vision for the ESI? ISMO Conference

4. Towards a Problem StatementPower sector in transition • The South African power sector is undergoing a transition • Unlike power sector reforms in other countries, South Africa is not driven by objectives of: • Privatising state assets, or • Improving efficiency through competition • South Africa’s immediate challenge relates to under-investment in new generation by both public and private sectors. This has led to • A dangerously low reserve margin, and • Uncertainty as to how the sector will become sustainable. • Government has given no indication that it intends to break up Eskom’s hold on generation, and appears to have abandoned proposed reforms to distribution (REDs). • We appear to be following a HYBRID MODEL. Eskom G IPPs T D C ISMO Conference

5. Towards a Problem StatementImplementing the hybrid model • To work well, hybrid models require careful attention to the design of systems for Planning, Allocation of new-build opportunities, Procurement, Price aggregation, Systems operation and grid Access. • Vertically integrated utilities are conflicted and cannot perform these functions effectively in a hybrid model • Governments typically remove the functions from the utility and assume them, or create one or more new entities to perform the functions ISMO Conference

6. ISMO Functions Six functions the ISMO might perform Planning Allocation Procurement Buyer System Operator Transmission ISMO Conference

7. 15% 90% 23% 5% 6% 5% 6% 0% 9% < 0,1% 42% 0% 10,1 0,0 0,05 0,0 1,0 1,0 35,5 1,8 2,1 0,0 2,4 0,0 65% 20% 5% 1% < 0,1% 9% ISMO FunctionsIntegrated Resource Plan 2010-2030 Planning • 2009 New Generation Regulations • IRP 2010 -2030 finalised in 2011 • Extensive public consultation • Adequate consideration of demand side resources? • Major step forward Total planned additional capacity Excluding committed build programme 2010-2030 in GW 25 Share of total new GW 20 17,8 New capacity (GW) 15 8,4 Solar PV 9,6 10 1,0 CSP 6,3 Import 3,9 5 8,4 Wind 2,6 2,4 0 Coal Nuclear Hydro Gas - CCGT Peak - OCGT Renew-ables Committed new build (GW) Existing fleet (2010)  = 260TWh in 2010 Energy share  = 454TWh in 2030 ISMO Conference

8. ISMO FunctionsIntegrated resource planning/generation expansion Planning “16. With respect to the Integrated Resource Plan (IRP), the Minister may require ISMO to provide assistance for the purpose of developing, implementing, and monitoring the IRP.” (ISMO Bill) • Planning is technically complex, requires vast amounts of data and must be undertaken on a continuous basis with mandatory consultation procedures • Why not allocate this function to the ISMO, under the guidance of government policy? ISMO Conference

9. ISMO FunctionsAllocation of new build Allocation “5.(l) Having regard to the need for new generation capacity as provided for in the integrated resource plan, the Minister may undertake or commission the buyer or another party to undertake feasibility studies in respect of such new generation capacity requirement.” (2011 Electricity Regulations on New Generation Capacity) • Why not allocate this function to the ISMO? • even if final authority remains with the Minister? • Why not allow for market-based processes? • Let Eskom compete with IPPs for the right to build new capacity? • Why the emphasis on generation capacity only? • How do demand-side resources compete? ISMO Conference

10. ISMO FunctionsSystem operator System Operator • The ISMO Bill clearly transfers system operation functions to the ISMO ISMO Conference

11. Procurement ISMO FunctionsProcurer and Buyer Buyer Apparent conflict: • 2011 Newgen regulations • Minister to determine who will procure new capacity • Minister to determine the Buyer • ISMO Bill • appears to make the ISMO the sole procurer and buyer • Newgen regulations need to be revised again, or preferably incorporated into the ISMO Act ISMO Conference

12. ISMO FunctionsPower market beyond the single buyer? Buyer • Neither the Newgen Regs or the ISMO Bill clarify the intended market structure • Limited competition for the market amongst IPPs • All generators to sell to ISMO, except generators “exempted by [NERSA] license” • No provision for competition in the market • Market for ancillary services? • No clarity on bilateral power deals and wheeling ISMO Conference

13. ISMO FunctionsPower market beyond the single buyer? Buyer • NERSA’s consultation paper on wheeling tariffs • Issued 27 May. Comments due 27 June • Amplifies the Electricity Regulation Act’s requirement that network operators provide open access • Consumers have the “right to purchase energy from a third-party generator “ • Envisages “Contestable Customers” • Defines framework for TUOS and DUOS tariffs • Envisages bilateral power purchase agreements and mechanisms for energy reconciliation • The capacity of embedded generators to not exceed 300MW • Are DOE and NERSA pursuing the same vision? ISMO Conference

14. ISMO FunctionsTransmission Transmission • Access to the transmission system will be critical for IPP growth • ISMO Bill does not provide for the transmission function to be transferred from Eskom to ISMO • Memorandum of incorporation must provide ISMO with authority to: • “make recommendations with regard to planning for required additions to the national transmission power system and transmission network” • South Africa has a single integrated transmission system under public ownership, and is therefore in an ideal position to create a national transmission company • Why not transfer transmission, or at least provide for this in future? • At the very least give ISMO authority over grid planning. ISMO Conference

15. ISMO Governance • ISMO Bill proposes a standard public entity governance model • In practice system/market operators must work closely with stakeholders and their governance systems must therefore guarantee stakeholder involvement • On board or advisory bodies • Obligation to consult • Obligation to report • Opportunity for recourse ISMO Conference

16. Hybrid SystemIs this the vision? ISMO Eskom Holdings Min of Energy Policy/ authority Planning Bi-laterals? IPPs Imp Exp Eskom Gx Allocation Procurement Buyer Transmission System Operator Energy flows D (Regions 1-6) Financial flows Financial flows Mun Mun C C C ISMO Customers ISMO Conference

17. ConclusionCommendable progress, but some gaps remain • The ISMO could achieve key elements of the Hybrid Model, depending on implementation and governance • The ISMO, IRP and NERSA paper on wheeling are, together, a major leap forward, for which DOE and NERSA need to be congratulated • Key outstanding issues are: • Market structure and rules? • Future of transmission? • Regional Electricity Distributors? • ISMO governance? • Government should publish its vision for ESI reform, rather than piecemeal consultation. ISMO Conference

18. Thank You ISMO Conference