Click to edit Master subtitle style 5/24/12Parliamentary Hearings on the ISMO Bill Public Hearings...

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5/24/12 Parliamentary Hearings on the ISMO Bill

Public Hearings on the ISMO Bill [B9 – 2012]

Parliamentary Portfolio Committee on Energy

Presented by Mark PickeringMeridian Economics15 May, 2012


Why is the ISMO Important?


22

Cape Times of May 1882: "The House of Assembly

continues to be lighted by the electric light and the

result has so far been highly satisfactory. The light is full, clear, pervasive and steady,

and greatly improves the appearance of the chamber."

Electricity Supply Commission

(ESCOM) established by the

government of South Africa in

terms of the Electricity Act

(1922).

All assets of the Victoria Falls Power

Company expropriated and taken over by

Escom in accordance with the Power Act of

1910 and the Electricity Act of 1922.

The Electricity Supply Commission (Escom) replaced by

an Electricity Council and a Management Board. Escom

renamed as Eskom

Government targets 30% Independent

Power Producers

1882 1923 1987 20121948

100% 100%

~20% ~5%

Gvt 30% IPP

policy

• Since 1923 legislation and government action has actively encouraged state-owned power production, and actively discouraged private power production.

• The ISMO potentially represents the most fundamental shift in power sector legislation since 1922.• But will the ISMO achieve government’s policy goal to facilitate investment by IPPs?

Private power production over time (% of total)

2001

<5%

ISMO to be established

Source: http://heritage.eskom.co.za


Why is the ISMO Important?

• We have had favourable Government policy on private investment in power generation since the 1998 White Paper on Energy – but very little has been achieved.

• By 2012 private investment decisions account for less than 2% of new generation capacity.• Even if the entire REIPPPP (3,725MW) is included, private investment is still under 20%. 5/24/12 Parliamentary Hearings on

the ISMO Bill33

2001 2004 2010 20122006

New generation investment decisions since 2001

Government targets 30%

Independent Power

Producers

Government approves Eskom investments:Camden RTS (1,520MW) Grootvlei RTS (1,200MW) Komati RTS (1,000MW)Medupi (4,800MW)Kusile (4,800 MW)Ingula (1,300 MW)

Cabinet decision. DOE to procure 1,000MW of OCGT peaker from IPPs. Eskom to build 1,000 MW

2003

Government approves additional

1,000MW of Eskom OCGT peaker plant

Eskom signs Power Purchase

Agreements (PPAs) with IPPs

under the MTPPP for

273MW

DOE announces Preferred

Bidders for 1,415 MW of

renewable IPPs

Eskom ~16,000 MW

273 MW1,000 MW

14,620 MW

1,000 MW

IPPs 273 MW


The Standard Model of Institutional Reform

• Government is not following the standard reform model.

• Instead we are pursuing a Hybrid Model. 5/24/12 Parliamentary Hearings on

the ISMO Bill44

Generation

Transmission

Distribution

Plan

ning

Vertical and horizontal

disaggregation

G G

Wholesale Market

G

Transmission

Retail Market

C

G

Distrib Distrib Distrib

C C C

Vertically Integrated

State-Owned Utility

Competitive markets with regulated monopolies

Competition

Competition

Monopoly

Monopoly


The Hybrid Model

• What functions need to be isolated from Eskom to make the Hybrid Model function effectively?


55

Generation

Transmission

Distribution

Plan

ning

Legal and organisational

reforms

Vertically Integrated

State-Owned UtilityEskom

Key functionsremoved

Eskom


The Hybrid ModelSix key functions must be performed

Parliamentary Hearings on the ISMO Bill

66

Who should be responsible for generation expansion planning & security of supply?

Will plans be indicative or mandatory? Exclusive or flexible?

How will new-build opportunities be allocated between the incumbent SOE (Eskom) and IPPs?

How should we deal with unsolicited bids?

Who should manage the procurement of IPPs? Who should be responsible for contract negotiations? Who should approve long term PPAs?

How do we avoid potential conflicts of interest when a SOE is the Single-Buyer?

How do we ensure fair dispatch between SOE generators and IPPs?

How do we ensure equitable grid access?

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Allocation

Procurement

Buyer

System Operator

Transmission

Planning


ISMO

Effect of Draft Legislation ISMO Bill and ERA 2nd Amendment Bill

77

Eskom Holdings

C C C

D (Regions 1-6)

KIC

C

Mun

KSACS

Mun

Planning

Allocation

Procurement

Buyer

System Operator

TransmissionEffect of the draft legislation• ISMO reports to MOE• ISMO performs just three of the

six functions• MOE takes the key decisions on

Planning and Allocation• Transmission remains with

Eskom.

Will this be effective?


Scenarios

Determinations

Eskom Gx Imp Exp

IPPs

Minister of Energy


Draft LegislationComment

• We welcome the decision to restructure the electricity industry by creating the ISMO.

• We agree that the Hybrid Model is a practical way forward.

• This model may be more difficult to implement than it may first appear.

• Better integration of the six key functions will lead to better results.

• We recommend that all six functions should be housed within one institution – the ISMO

– more commonly known as a Transmission System Operator or TSO.


88

Planning

Allocation

Procurement

Buyer

System Operator

Transmission

ISMO


Planning and Allocation FunctionsWho will implement IRP2010?

New build options

Coal (PF, FBC,

imports, own build)

Nuclear Import hydro Gas – CCGT Peak – OCGT Wind CSP Solar PV

MW MW MW MW MW MW MW MW

2010 0 0 0 0 0 0 0 02011 0 0 0 0 0 0 0 02012 0 0 0 0 0 0 0 3002013 0 0 0 0 0 0 0 3002014 5001 0 0 0 0 400 0 3002015 5001 0 0 0 0 400 0 3002016 0 0 0 0 0 400 100 3002017 0 0 0 0 0 400 100 3002018 0 0 0 0 0 4004 1004 3004 2019 250 0 0 2373 0 4004 1004 3004 2020 250 0 0 2373 0 400 100 3002021 250 0 0 2373 0 400 100 3002022 250 0 1 1432 0 805 400 100 3002023 250 1 600 1 1832 0 805 400 100 3002024 250 1 600 2832 0 0 800 100 3002025 250 1 600 0 0 805 1 600 100 1 0002026 1 000 1 600 0 0 0 400 0 5002027 250 0 0 0 0 1 600 0 5002028 1 000 1 600 0 474 690 0 0 5002029 250 1 600 0 237 805 0 0 1 0002030 1 000 0 0 948 0 0 0 1 000Total 6 250 9 600 2 609 2 370 3 910 8 400 1 000 8 400

Firm commitment

necessary now

Final commitment

in IRP 2012

1. Built, owned & operated by IPPs 2. Commitment necessary due to required high-voltage infrastructure, which has long lead time 3. Commitment necessary due to required gas infrastructure, which has long lead time 4. Possibly required grid upgrade has long lead time and thus makes commitment to power capacity

necessary

(DOE, March 2011)

The IRP will clearly require significant investment by IPPs.

These investments have very long lead times.

5/24/12 99 Parliamentary Hearings on the ISMO Bill


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Planning and Allocation Functions

Who will implement IRP2010?

• The Minister has had responsibility for Planning and Allocation functions under the ERA since 2006

• The Minister has still to determine which portions of the plan should be done by Eskom and which should be done by IPPs

– The Minister has indicated that she will issue a determination that 3,725 MW of renewables should be done by IPPs, but has still to gazette this.

• NERSA cannot license investments outside of the IRP

• Without a positive determination it is very risky for an IPP to invest in project development.


1010

Total additional new capacity (without committed) until 2030 in GW

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Policy-Adjusted IRP

Import

15%

23%

6%

6%

9%

42%

Share of total new GW

(DOE, March 2011)


Investment OutcomesGreenfield IPPs in Africa

Source: based on WB PPI database as well as author’s compilation. Notes: (X) designates projects were cancelled; * designates projects are under construction; emergency power units not depicted.

Morocco (3): Tetouan, Jorf Lasfar, Tahaddart Tunisia (2): El Biban, Rades II

Algeria (2): Kahraba, Kahrama

Egypt (3): Sidi Krir, Port Said, Suez

Ethiopia (1): Gojeb*

Kenya (4): Westmont, Iberafrica, OrPower4, Tsavo

Tanzania (4):Tanwat, IPTL, Songas, Mtwara

Mauritius (4): Belle Vue, Deep River, FUEL, St Aubin Angola

(1):Chicapa*

Senegal (2): GTI Dakar, Kounoune I IPP*

Congo (1): Sonda (X)

Nigeria (3): AES Nigeria Barge, Okpai, Afam*

Ghana (1): Takoradi II

Cote D’Ivoire (2): Vridi Ciprel, Azito

Burkina Faso (1): Hydro Afrique

(Eberhard, 2010. UCT GSB)

5/24/12 1111 Parliamentary Hearings on the ISMO Bill

Hybrid Markets:• 40 IPPs• 15 Countries• 10,000MW• US$8 billion

investedIt can be done!



• We recommend that the ISMO rather than the Minister should be responsible for the Planning and Allocation functions

– Capacity and expertise will reside within the ISMO– The ISMO will hold demand and supply side data– Accountability for results should be clearly allocated– Planning needs to be closely linked to procurement


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Planning

Allocation

Procurement

Buyer

System Operator

Transmission

ISMO



• We recommend that the Minister should NOT be responsible for the Planning and Allocation functions

– The Ministry lacks capacity to perform the highly technical and complex planning function

– The Minister already has sufficient powers to determine policy and influence planning and allocation

• e.g. government’s 30% IPP policy– The Minister should avoid conflicts of interest

• Minister should not develop projects– Sound governance processes require checks and

balances• NERSA and Minister should have powers of review

• We therefore recommend that the legislation should be amended to transfer Planning and Allocation functions to the ISMO, with provision for Ministerial guidance via explicit regulations and NERSA review.


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Planning

Allocation

Procurement

Buyer

System Operator

Transmission

ISMO


Transmission Function

• Access to the grid is essential for generation projects

• We recommend that the Transmission function should be transferred to the ISMO in order to:

– Overcome Eskom’s conflict of interest as the dominant generator and grid owner/operator

– Strengthen the ISMO’s balance sheet– Promote a balanced approach between Supply-side

and Demand-side solutions• Vertical disaggregation is a common industry

reform which lenders and investors should be familiar with. 5/24/12 Parliamentary Hearings on

the ISMO Bill1414

Planning

Allocation

Procurement

Buyer

System Operator

Transmission

ISMO


Conclusion• South Africa requires massive investment in new

generation capacity. • Eskom and government cannot afford to do this alone. • IPPs bring innovation and capital, as the REIPPPP is

demonstrating.• The introduction of IPPs needs to be speeded up by

establishing a dedicated, competent, state-owned entity that is independent of Eskom.

• Hybrid markets require effective integration of the six functions. This is best done within one institutions – the ISMO.

Parliamentary Hearings on the ISMO Bill

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Planning

Allocation

Procurement

Buyer

System Operator

Transmission

ISMO

5/24/12

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