Will an independent system and market operator fly in South Africa?

11th March 2011 By: Saliem Fakir

Anumber of public statements on the issue of an independent system and market operator (ISMO) have been made by government officials in the last year or so. Whether an ISMO is the best route to go or not for South Africa’s electricity sector is open to debate.

The real test of whether an ISMO has succeeded or failed is not an easy question to answer, as a review, a while ago, of the New York State Independent System Operator has shown. You cannot tell with certainty whether any improvements that may have occurred were due to the intervention itself or the result of other factors not influenced by the ISMO?

As the New York experience shows, many factors outside the influence of an ISMO are critical for its success and performance.

Underlying Conditions

The shift to an ISMO could be artificial, as the underlying conditions that determine how the electricity sector and market work would not have changed. Changing the face does not change the system.
One has to be clear about the aims of an ISMO. Simply creating autonomy for independent power producers (IPPs) and a better market is not good enough. If the transmission and management of supply were to be unbundled from Eskom, would this necessarily lead to more affordable prices and improved governance, decision-making and services, as well as a better functioning grid?

Will it save us from blackouts? The debate is not about the concept, but the timing and practicality of an ISMO. An ISMO can easily take five to seven years to set up and, going by what has happened to the proposed regional electricity distributors (Reds), perhaps even longer.

Given the failure to get the Reds off the ground, is the ISMO also going to be bogged down in bureaucratic politics and a legal logjam?

But, perhaps, the fundamental question is: Is an ISMO needed right now? In an ideal world, the idea has a sound basis. The rationale for an ISMO is that it will be a slick agency that manages the demand and supply of electricity for transmission on a grid that maintains an adequate reserve margin, and has some autonomy on decision-making.

The pioneering model for an ISMO was the Spanish System Operator RED Electrica in 1985. RED Electrica buys power from generators and dispatches it over transmission lines that it owns. RED Electrica is also, under Spanish law, allowed to sell a portion of its shares on the European market.

But we do not live in an ideal world. Taking the system operator function out of Eskom is easier said than done. Everybody has a love-hate relationship with Eskom. Everybody wants a well-oiled and functioning electricity sector. But Eskom is only one of many institutions making decisions concerning electricity. It doe not run the show entirely, contrary to popular belief.

The electricity sector is a cobweb of institutions that preside over decision-making with regard to building new plants and issuing power purchase agreements (PPAs) to IPPs. Eskom has often been the scapegoat for all our woes.

Eskom is to be blame for some of our electricity problems, but not all. Decisions regarding the IPPs to be chosen and granted PPAs involve a slew of agencies – from the Department of Energy and the National Treasury to the National Electricity Regulator, the Department of Environmental Affairs and Eskom. Then you have the Department of Economic Development and the Department of Trade and Industry.

You may wonder why this is the case? Well, electricity infrastructure involves the investment of large sums of money and, since these choices involve strategic economic growth and job- creation opportunities, procurement decisions within the power sector become far more intricate. The circle of decision-makers is becoming wider – not without good reason, but there is no simple entry or exit point as a result of the complexity regarding the players who need to be part of the governance and decision-making process.

The idea of an ISMO, though, comes at the wrong time and would be disruptive. Wrong Answer Perhaps, it is the wrong answer to a right question: How do we ensure proper governance and independence with respect to procuring private sources of supply? An ISMO is one of many possible solutions. Have we explored all options open to us?

We have a power crisis and urgently need to get power on the grid. Any restructuring process that will impact on Eskom’s functioning would not solve the country’s electricity challenges.

An ISMO is a great idea, but it leaves you with many unanswered questions. Fundamentally, pulling the system operator function out of Eskom is not the same as saying that, all at once, one will also have changed the nature of electricity governance, decision- making regarding the financing of projects and decisions to enter into agreements with private providers of electricity.