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The South African Electricity Industry—ISMO and the Road to Reform

  • August 2014
  • -
  • Frost & Sullivan
  • -
  • 64 pages

Summary

Table of Contents

The First Step Towards the End of Eskom's Monopoly

Opening up the power generation sector to independent power producers is imperative as Eskom has shown some of its limits, such as severe funding shortfall, an extremely tight power system, and new-build projects being continuously delayed while power demand shoots. The dominant position of Eskom in power generation, transmission, and distribution prevents third parties from having an open and equal access to the transmission grid. Therefore, the Department of Energy developed the Independent System and Market Operator (ISMO) Bill with the aim to transfer some transmission-related functions from Eskom to the ISMO. The aim of this research service is to understand the functions to be endorsed by the ISMO and its consequences on Eskom.

Key Findings
-Opening up the power generation sector to independent power producers (IPPs) is imperative as Eskom Holdings SOC Limited (Eskom) has started to show its limits— a current severe funding shortfall, an extremely tight power system, and new-build projects being continuously delayed while power demand has been growing.
-The dominant position of Eskom in power generation, transmission, and distribution prevents third parties from having an open and equal access to the transmission grid.
-This is the reason why the Department of Energy (DoE) has developed the Independent System and Market Operator (ISMO) Bill with the aim to transfer some transmission-related functions from Eskom to another independent state-owned entity, the ISMO.
oThe primary objective to introduce an ISMO in South Africa is, thus, to encourage IPP participation in power generation in order to alleviate the electricity supply crisis.
-The draft bill was first published for public comments in 2011. An amended version was released in 2012.
-Despite being close to adoption by Parliament in 2013, the bill was withdrawn pending further amendments. This resulted in the despair of many interested (private) parties. Certain stakeholders believe it to be an outcome of political interests in protecting Eskom's control over the country's electricity transmission grid.
-One can expect the bill to be revived in the future, with support from the DoE and backing from the re-elected President Jacob Zuma, as mentioned in his State of the Nation Address in June 2014. Challenges will be in obtaining the vote of Eskom and the Department of Public Enterprises.
-According to the latest version of the ISMO Bill (B9B-2012), the ISMO would take over the following functions:
oFrom Eskom: Planning (but final responsibility remains within the DoE which compiles the Integrated Resource Plan (IRP)), buyer, system operation.
oFrom the DoE: Procurement
-However, a confusion remains as to who shall be the owner of the transmission assets—Eskom (current owner) or the ISMO?
-The transfer of functions from Eskom to the ISMO will require a cautious and scrupulous, phased-out approach in order not to jeopardise the security and continuity of electricity supply, which is currently in a critical state.
-Finally, as long as the transfer of functions reflects the economic value of the transferred assets and electricity tariffs are adequately set, the financial viability of Eskom and the ISMO should not be jeopardised.
-Creating an ISMO is one of the many steps that will allow for a more efficient and transparent industry structure, thanks to arm’s length transactions between the different entities operating in power generation, transmission, and distribution.

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