Willem Theron General Manager: Business Development Southern African Energy Unit Eskom

1. “South Asia International Conference on Cross Border Electricity Trade” International Experience in the Regional Power Market: Learning from Emerging Economies and International Best Practices in Cross Border Trade, for the Southern African Power Pool Willem Theron General Manager: Business Development Southern African Energy Unit Eskom

2. Contents Evolution of regional power market Existing trading agreements Existing supply, demand and transmission constraints Organization, governance and enabling polices of participating countries of such regional power market Operational and trading guidelines, Power pricing: bidding/auction procedures Transmission system pricing and open access requirements Congestion management procedures Documentation, settlement system Regulatory and monitoring of the market: Key problems experienced and solutions

3. Evolution of regional power market

4. DRC Tanzania Malawi Angola Zambia Zimbabwe Namibia Mozambique Botswana Swaziland South Africa Lesotho Evolution of regional power market Geographic • 12 Countries • 250 Million people • Average Electricity growth rate 3% p.a. for South Africa demand growth was 4.9% in 2007 and for whole region 4.6% Historic 1950s: DRC – Zambia 1 x 220kV, 210MW 1960s: Zambia – Zimbabwe 2 x 330kV, 1,400MW 1975: Mozambique – South Africa 500kV HVDC, 2,000MW

5. Hydro Northern Network Thermal Southern Network Evolution of regional power market DRC • The two networks were linked by weak lines 220kV & 132kV via Botswana until 1995 when the 400kV was constructed • The interconnection of the northern and southern networks created a platform for regional trade and cooperation • In 1995, the Ministers responsible for energy in the Southern African Development Community (SADC) signed an Inter-Government MOU that lead to the creation of a power pool under the name, Southern African Power Pool (SAPP) Tanzania Malawi Angola Zambia Zimbabwe Namibia Mozambique Botswana Swaziland South Africa Lesotho

6. Evolution of regional power market SAPP Creation and Aim SAPP Vision Ensure sustainable energy developments through sound economic, environmental & social practices To promote her vision, the SAPP is: Changing from a co-operative pool to a competitive power market Reviewing membership to allow for more players Expanding both transmission & telecommunication links between members Expanding generation capacity and attract high intensive energy users Enhancing Human Capacity development and expansion A Coordination Centre was established in Harare, Zimbabwe, in February 2000 • The SAPP was created in August 1995 through the signing of the Inter-Governmental MOU • The Aim was to optimise the use of available energy resources in the region and support one another during emergencies SAPP Vision • The SAPP Vision is to: • Facilitate the development of a competitive electricity market in the Southern African region • Give the end user a choice of electricity supply • Ensure that the Southern African region is the region of choice for investment by energy intensive users

7. Evolution of regional power market Funding of SAPP Activities Governing Legal Documents 1. Inter-Governmental MOU Established SAPP Signed by SADC Member Countries in 1995 Revised document signed on 23 February 2006 2. Inter-Utility MOU Established the Management of SAPP Revised document signed on 25 April 2007 3. Agreement Between Operating Members Signed by Operating Members only Revised document was signed in April 2008 4. Operating Guidelines & Market Guidelines Under Review\Development • SAPP-CC activities are funded as follows: • Annual Contribution from all Members using an agreed formula defined in the IUMOU • Administration Fees levied on Market participants • Projects are mostly funded by Donors: • The Government of Norway (NORAD) • Sida (Sweden) • The World Bank • Development Bank of Southern Africa • Others such as USAID, DFID and DANIDA

8. Evolution of regional power market Conclusion on SAPP overview • The SAPP was initially an Association of National Power Utilities residing in the SADC region • SAPP Membership has now been extended to include all the eligible Electricity Enterprises residing in the SADC region • Electricity Enterprises outside of the SADC region have to be approved by the SADC Energy Ministers • Participation in energy trading is open to all SAPP Members and Observers residing in the SADC region

9. Existing trading agreements

10. Existing trading agreements Bilateral Market • The bulk of cross border trading in electricity is governed by fixed co-operative bilateral contracts • Generally cover a period from 1-5 five years, could be longer • The agreements provide for assurance of security of supply but are not flexible to accommodate varying demand profiles and prices • The pricing of electricity depends on the consumption period; Peak, Standard and off-peak • Essential for financing of new generation & transmission projects • Price: Negotiated between willing buyer & seller

11. EARLY YEARS CURRENT AND FUTURE • Bilateral contracts • Bilateral contracts • Day-Ahead Market (DAM) – From 2009 • Energy Imbalance Settlement – From 2010 • Ancillary Services Market – From 2013/14 • Balancing Market – From 2014 • Financial Markets – From 2014/15 FROM YEAR 2001 • Bilateral contracts • Short-Term Energy Market (STEM) – 2001 • Post STEM (Balancing Market) - 2002 Existing trading agreements SAPP Trading Markets

12. Existing trading agreements The Day-ahead Market (DAM) 2. DAM Main Features Market for secure, effective and non-discriminatory trade of electricity: Trading to be concluded daily for delivery next day Forward bidding up to 10 days Participants submit bids (purchase) & (sale) offers Closed market – only market operator and participant know the details of the bid / offer Provides a neutral reference price Price discovery Could provide reference for bilateral contracts • DAM Goals and Methodology • GOALS of the SAPP DAM design: • Ensure an efficient and competitive marketplace • Ensure that consumers benefit from the market • Methodology: • Development of consistent market mechanisms • Efficient price signals for the procurement and transmission of electricity • Assurance of fair and open access to the transmission system • Optimization of generation & transmission capacity

13. Existing trading agreements Conclusion on SAPP Markets • Electricity Markets are a reality world wide. The SAPP believes that the creation of a competitive market would: • Help to optimise the use of regional resources • Assist in determining the correct electricity price in the pool • Send signals for investments and real time utilization of existing assets; transmission, generation and consumption • Enable the demand side to respond to the supply side price signals • Market Oversight is key to market confidence • Requires efficient & transparent Market Surveillance

14. Existing supply, demand and transmission constraints

15. Existing supply, demand and transmission constraints • The region is currently experiencing both generation and transmission constraints • Various generation and transmission projects are underway in the various countries in the region • The generation and transmission constraints are hindering trade both in the bilateral and Day Ahead Market • The priority transmission projects are those that: • will connect non-operating members of the SAPP (Malawi, Tanzania and Angola) into the SAPP grid • Will alleviate current transmission constraints • Will to evacuate power from generating stations to the load centres.

16. Existing supply, demand and transmission constraints Demand-Supply Balance Note: Peak Demand is Suppressed Demand

17. Existing supply, demand and transmission constraints SAPP Planned & Required Capacity 2015 Critical For Capacity 2016 Critical For Energy

18. Existing supply, demand and transmission constraints Reserve Margin Tight Reserve Margin Position for SAPP Members

19. Existing supply, demand and transmission constraints DRC 2015: Mozambique- Malawi 2015: RSA Strengthening 2016: ZIZABONA 2016: Zambia - Tanzania 2016: DRC - Angola 2017: Mozambique Backbone 2018: Namibia - Angola 2020: Central Corridor Strengthening to 765kV Tanzania Angola Malawi Zambia Zimbabwe Mozambique Botswana Namibia Swaziland Lesotho South Africa

20. Organization, governance and enabling polices of participating countries of such regional power market

21. The management & governance of SAPP is described in the Inter-Utility Memorandum of Understanding SAPP Governance SADC-DIS Executive Committee Management Committee Markets Sub-Committee Operating Sub-Committee Planning Sub-Committee Environmental Sub-Committee Coordination Centre Board Coordination Centre

22. Operational and trading guidelines, Power pricing: bidding/auction procedures

23. Operational and trading guidelines, Power pricing: bidding/auction procedures • Bilateral Agreements • Price agreed bilaterally and scheduled on a daily basis • Day Ahead Market • Based on market bidding/auction method, run on a Day Ahead Basis • Governed by Market Guidelines and Market Operator Participation Agreement • Adopted from the Nordic Power Market concept • Utilizes transmission available after the bilateral agreements have been allocated transmission path • Current trade volumes less than 1% of power traded in the region

24. Transmission system pricing and open access requirements

25. Transmission system pricing and open access requirements • Only buyers pay for transmission usage currently in the SAPP • Transmission pricing is based on a MW/Mile method (Based on distance) • The SAPP is investigating migrating to an entry/exit based methodology of transmission pricing where both buyers and sellers pay for transmission usage • Asset owners can first right of access to the transmission network • Bilateral Agreements take second priority based on the age of the agreement • The Day Ahead Market is utilizes the remaining transmission capacity

26. Congestion management procedures

27. Congestion management procedures • Transmission constraints are a major challenge in the SAPP currently • SAPP has a criteria for allocating transmission capacity to trades that prioritizes asset owners followed by bilateral agreements and then the Day Ahead Market • Within the Day Ahead Market, where a transmission constraint exist the market splitting market mechanism is used • This results in a congestion income to the market operator

28. Documentation, settlement system

29. Documentation, settlement system • All members are signatory to all SAPP governing documents • Bilateral agreements are settled bilaterally between the market players • The Day Ahead Market trading platform settles the trades in the Day Ahead Market and issues invoices • The Market Operator Manages flow of funds between member accounts which are administered by the Market Operator

30. Regulatory and monitoring of the market: Key problems experienced and solutions

31. Regulatory and monitoring of the market; Key problems experienced and solutions • Each member of the SAPP is regulated by their respective country regulators • There is no regional regulator in the SADC region while an association of regulators exist in the form of Regional Electricity Regulators Association (RERA) • The Day Ahead Market is monitored by a Market Monitoring & Surveillance Team (Still at inception stage)

32. Regulatory and monitoring of the market; Key problems experienced and solutions • Trading Challenges • The main challenges faced in Trading include: • Low Number of Market Participants • The number of active participants on the DAM for most months is around four (4). This is not good enough to achieve competition • Transmission constraints • Transmission constraints are response for low volumes traded on the market when compared to bids received. Energy matched could not go through in some cases due to transmission constraints • Mismatch of prices between buyers and sellers • This also affects bids that are eventually matched Operational Challenges Other Challenges Reducing Green House Gas Emissions SAPP’s energy mix, 70% coal fired vs. 30% others Increasing Renewable Energy Projects in a situation where tariffs are largely not cost reflective Different levels in implementing Environmental protection legislation in different countries • The SAPP is faced with the following operational challenges: • Migration from a cooperative pool to a competitive pool • Implementation of a competitive market • The provision of a reliable power supply • The implementation of cost reflective tariffs and the adoption of regulatory principles that would enhance those tariffs • Skills development and retention of trained personnel

33. Regulatory and monitoring of the market; Key problems experienced and solutions Challenges with Project Implementation Differences in policies and legislation in different countries cause delays in concluding PPAs and Wheeling Agreements Need for government support for PPAs and/or wheeling agreements to underpin investment projects Lack of cost-reflective tariffs Project Coordination Aspects including the need for a dedicated Project Coordinator, the need for Project Development Agreements (IGMOU and IUMOU) Impact of government internal costs on the cost of the project, e.g. fees for EIA report reviews and approvals; VAT duties and taxes Delays in the approvals of key project documents such as wheeling and power purchase agreements by the Regulators Need for government to support Project Structure (SPV or utility structures)

34. Durable Framework for System Planning & Operation Equitable Commercial Framework for Energy Trading Common Legal and Regulatory Framework • Commercial rules of practice • Internal dispute resolution mechanism • Minimum capabilities of the system operator • Intergovernmental MOU • Inter-Utility MOU • Regional Electricity Framework law • Regional Independent Regulator • Power pool organisational structure • Interconnection planning framework • Systems operations framework Regulatory and monitoring of the market; Key problems experienced and solutions Conclusion The three building blocks that form the framework for successful regional power pools are as follows:

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