SA needs an independent system operator

8th July 2011 By: Saliem Fakir

Previously, I noted some reservations about the idea of an independent system and market operator (ISMO).

In principle, I am for it, but the reservations about the ISMO have largely been based on the fact that it is one thing to have a good idea and another knowing how to bring the idea to fruition.

The draft ISMO establishment Bill was published in May for comment. The draft Bill calls for the establishment of a State-owned company that would be responsible for planning generation capacity, entering into power purchase agreements with generators, dispatching the power generated and coordinating the wholesale market for the generation of electricity.

The ISMO will also operate a national control centre and be responsible for the implementation of the Integrated Resource Plan (IRP2010).

Given the latest round of uncertainty around the procurement of the first batch of renewables from independent power producers (IPPs) and given a situation where one agency of State does not know what the other does, having a well-functioning system operator in the long term may be the answer.

The latest news about the renewable- energy feed-in tariff (Refit) is that it may not conform to the Public Finance Management Act (PFMA) and the Department of Energy has to conduct a bidding process to comply with the rules of the PFMA. This is all fine, but was this not figured out at the outset? The fact that this was not done amazes everybody. Confusion has been let loose on the market because there has been poor communication on decisions and progress with respect to the IPP process.

The Refit idea has been around for years and, internationally, the Refit system has proved to be the most efficient and effective way to ramp up a renewables build programme. There is some urgency about doing this, given that new coal-fired and nuclear power stations have very long lead times. Failure to implement an urgent newables build programme means that the reserve margin will increasingly dwindle. We are likely to encounter a phase of energy disruptions very soon because the general gross domestic product growth rate is poised to increase, if various projections are to be believed.

However, the fracas over the Refit programme shows up the inefficiency in the system, conflicting interpretations of the purpose of the programme and the best way to proceed on the procurement of the first renewables IPPs. It also suggests incoherence in policy and implementation. It is not that nothing is happening – it is simply that something is happening in fits and starts, stop and go.
The consequence is high levels of uncertainty and institutional and investment risk.

It is important that South Africa sends positive signals. These signals are that the country is serious about renewables as part of its future energy mix, that renewables will contribute to a reduction in our carbon emissions and that we are laying a good platform for the roll-out of the next batch of renewables, as articulated in the IRP2010.

Confidence in South Africa’s ability is at stake. Failure to timeously deliver the first round of renewables will damage South Africa’s image, both domestically and internationally – the country’s reputation is already on a knife-edge. The confusion over Refit is placing nervous developers – who work on shoestring budgets– on financial death row.

The ISMO should remedy this situation in the long term, as it would be a specialised agency focused entirely on the planning and buying of power. Currently, the policy for the electricity sector, especially the development of generation capacity, is not at its most efficient. It is quite fractured and agencies tend to be prone to turf battles.

The ISMO would not be inventing policy on the hoof, but would be solely focused on implementing policy. However, the ISMO is a long way from being a done deal. The Bill does not adequately address how the transition from the current concentrated system to the creation of a new agency is to take place. This is a detail that will have to be worked out.

Other advantages of the ISMO will be that it will have its own balance sheet, so it will not borrow or make investments.

The timeline for implementation is unknown and it seems the transmission system itself will not be owned by the ISMO, as its role has been reduced to one of coordinating transmission access. There is some ambiguity about this, and it needs to be resolved, as this leaves the ISMO somewhat vulnerable. It can procure from generators but what if the generator cannot get the nod from the owner of the transmission line to connect to the grid?

On the whole, the idea of the ISMO needs to be debated, and the Bill needs to be strengthened with an operational strategy. Clear timelines should be set for the implementation of the ISMO, and the cost of this transition should be spelt out.