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Power Sector Governance Issues: New Generation Capacity and the ISMO

Power Sector Governance Issues: New Generation Capacity and the ISMO. Introductory Lecture Institutions and Governance Course UCT Masters in Energy Presented by Mark Pickering Meridian Economics 20 March, 2012. Overview. Generation planning – How have we done?

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Power Sector Governance Issues: New Generation Capacity and the ISMO

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  1. Power Sector Governance Issues:New Generation Capacity and the ISMO Introductory Lecture Institutions and Governance Course UCT Masters in Energy Presented by Mark Pickering Meridian Economics 20 March, 2012

  2. Overview • Generation planning – How have we done? • Generation plan – What has to be done? • A conceptual framework for institutional roles • Proposed institutional reforms – Will they work? • Concluding comments Energy Masters Course, ERC, UCT

  3. Generation PlanningHow have we done?

  4. System PerformanceDemand-Supply Balance 1950 to 2000 15-19% (Source: Eberhard and Mtepa, 2003) Energy Masters Course, ERC, UCT

  5. System PerformanceDemand-Supply Balance 2000 to 2007 Target: 15-19% 2008 load shedding (Source: Chettiar, Lakmeeharan & Koch. 2009) Energy Masters Course, ERC, UCT

  6. Target: 15-19% System PerformanceDemand-Supply Balance 2008 to 2014 (Source: Kannan Lakmeeharan,Eskom. 2010) Energy Masters Course, ERC, UCT

  7. System PerformanceDemand-Supply Balance 2010 to 2030 The draft Integrated Resource Plan (IRP) aims to keep the reliable reserve margin close to or above 15% from 2013 onwards. Decisions need to be made in 2011 on new-build for 2018 in order to ensure security of supply Energy Masters Course, ERC, UCT (Source: Eskom, March 2011. Presentation to Parliament Based on final IRP)

  8. System PerformanceCapacity additions 1970-2028, actual and planned What happened? Energy Masters Course, ERC, UCT (Source: Eskom, 2010. Presentation to Parliament)

  9. System PerformanceOperations • Results of Eskom turbine over-speed test, 9 Feb, 2011 • 600MW turbine destroyed • Estimate R3bn and 18 months to replace • Are operations as safe and effective as they should be? Energy Masters Course, ERC, UCT

  10. System PerformanceDistribution backlog • The maintenance and refurbishment distribution backlog continues to grow. • Will throwing money at the problem fix it? The government is considering an adjustment of the tariff to help fund the R27bn cost of replacing and repairing ageing distribution infrastructure. Poorly maintained and old distribution networks are one of the causes of electricity blackouts and have slowed down the roll-out of electrification as it is not possible to add new connections to them. Some electricity cables in Johannesburg date back to the 1930s. Energy Masters Course, ERC, UCT

  11. System PerformanceEskom R500 billion capital programme (Source: Eskom, March 2011. Presentation to Parliament) Energy Masters Course, ERC, UCT

  12. System PerformanceEskom capital programme Energy Masters Course, ERC, UCT

  13. System PerformanceEskom capital programme Medupi Ingula Kusile (Source: Eskom, March 2011. Presentation to Parliament) All three projects will take a decade or more from start of construction to final COD. How much more time is required beforehand for planning, permitting and financing? Energy Masters Course, ERC, UCT

  14. System PerformanceEskom’s new Build Programme • Significant delays • Are delays reasonable? • Were they avoidable? • What economic cost to the country? (Source: www.eskom.co.za (new build programme) DOE, Nov 2010. Medium Term Risk Mitigation Programme) Energy Masters Course, ERC, UCT

  15. Governance PerformanceGeneration planning - Policy milestones 1998 Energy White Paper • Government will require the use of integrated resource planning methodologies in evaluating further electricity supply investments and the decommissioning of older power stations (7.1.5.6) • The entry of multiple players into the generation market will be encouraged. (7.1.5.8) • Government will initiate a comprehensive study on future market structures for the South African electricity supply industry (7.1.6) • In the long term Eskom will have to be restructured into separate generation and transmission companies (7.1.6.1) Energy Masters Course, ERC, UCT

  16. Governance PerformanceGeneration planning - Policy milestones 2004 Investment decision on Medupi (4800 MW coal), followed by Kusile decision (4,800 MW coal) in 2005 2009 • Nuclear procurement halted • In January and February Minister of Energy issues notice of intent to pass regulations in terms of the Electricity Regulation Act to regulate electricity supply planning and the procurement of new generation capacity • 5 August. Electricity regulations on new generation capacity. Regulation provides for the development of an integrated resource plan (IRP) to regulate the licensing of new generation capacity and the recovery of costs arising from independent power producers. • 31 December. Minister gazettes IRP1 “Determination regarding the integrated resource plan and new generation capacity” (3 pages) • 11 years after the Energy White Paper commitment Energy Masters Course, ERC, UCT

  17. Governance PerformanceStatus of IPP procurement processes After 13 years of pro-IPP policy statements we have yet to sign a significant Power Purchase Agreement Energy Masters Course, ERC, UCT

  18. System PerformanceSummary • South Africa’s generation planning system clearly failed in the period 1990-2005 • Was there even a system? • Eskom’s new build programme has made progress, but it has experienced significant delays • Very large scale projects that take a decade to build • Procurement issues • Human resource challenges • Shareholder failure to finalise the funding model until late 2010 • No significant IPP participation in the system • What do we learn from all this? Energy Masters Course, ERC, UCT

  19. What is the proposed generation expansion plan?

  20. 7 90% 90% 16% 15% 25% 5% 5% 23% 5% 5% 9% 6% 0% 0% 6% 5% < 0,1% < 0,1% 15% 9% 0% 0% 30% 42% 10,1 0,0 0,05 0,0 1,0 1,0 35,5 1,8 2,1 0,0 2,4 0,0 65,5% 65% 20% 20% 5% 6% 0,8% 1% < 0,1% 0,2% 7,5% 9% IRP 2010Comparison of Revised Balanced Scenario and Policy-Adjusted IRP Before consultation process: Revised Balanced Scenario (RBS) After consultation process: Policy-Adjusted IRP Total additional new capacity (without committed) until 2030 in GW Total additional new capacity (without committed) until 2030 in GW 25 25 Share of total new GW 20 20 17,8 15 15 8,4 Solar PV 11,4 9,6 9,6 10 10 Import 1,0 CSP Own build 6,3 6,3 5,8 Import 1,3 3,9 5 5 3,3 8,4 Wind 2,6 2,4 1,9 5,0 0 0 Coal Nuclear Hydro Gas - CCGT Peak - OCGT Renew- ables Coal Nuclear Hydro Gas - CCGT Peak - OCGT Renew-ables Committed new builds 10,1 0,0 0,05 0,0 1,0 1,0 Existing fleet (2010) 35,5 1,8 2,1 0,0 2,4 0,0  = 260TWh in 2010 Energy share  = 454TWh in 2030 (Source: DOE, March 2011) Energy Masters Course, ERC, UCT Decreasing costs of renewables allows for a higher renewables share at the same total system cost

  21. 5 IRP2010Price path of Policy-Adjusted IRP similar to RBS' price path Average electricity price in 2010-ZAR/kWh Policy-Adjusted IRP Revised Balanced Scenario (Source: DOE, March 2011) Energy Masters Course, ERC, UCT

  22. IRP2010Rising cost of electricity impacts relative competitive position (Source: DOE, March 2011) Energy Masters Course, ERC, UCT

  23. IRP2010Long lead times for power generators & related infrastructure Firm commitment necessary now Final commitment in IRP 2012 • A substantial portion of the IRP requires investment by non-Eskom parties in 2011 and 2012: • Coal IPPs • Regional hydro and transmission • Gas import • Renewables • Potentially even nuclear. • How will these decisions be made? (Source: DOE, March 2011) Built, owned & operated by IPPs Commitment necessary due to required high-voltage infrastructure, which has long lead time Commitment necessary due to required gas infrastructure, which has long lead time Possibly required grid upgrade has long lead time and thus makes commitment to power capacity necessary Energy Masters Course, ERC, UCT

  24. IRP201Summary • IRP2010 represents an outstanding improvement on IRP2009 • Government has asserted authority over Eskom • Consultation was broad and inclusive, and appears to have impacted on policy choices • Data transparency has improved, but still some way to go • Regulatory framework remains unclear • NewGenRegs published • ISMO proposed • Implementation is a much bigger challenge than planning • Who will implement the plan? • Eskom cannot possibly do it alone (financially and otherwise) • How will IPPs be attracted into the sector? Energy Masters Course, ERC, UCT

  25. How will the IRP be implemented?Towards a framework for institutional reform

  26. Institutional ReformDrivers for power sector reform in developing countries • Inefficiencies in investment and operations • soft budgets, poor governance, regulatory failure, no competition, few incentives for cost reduction • deterioration or collapse of services • Financing for capacity expansion • public resources insufficient -> private • Part of overall economic restructuring • macro-economic constraints or crises • state re-defines relationship to SOE’s • Technological innovation • Changing economies of scale and scope • New possibilities for competition • Sector reform as a fad? • international role models Financial constraints may become the key reform driver in South Africa. (Source: Eberhard, 2010. UCT GSB) Energy Masters Course, ERC, UCT

  27. Institutional ReformEmergence of the “standard model” of reform Done Vertically-integrated, publicly-owned monopoly Commercialisation and corporatisation Independent regulation Unbundling to separate potentially competitive elements from non-competitive elements Private sector participation Introduction of competition IPPs for the market or wholesale competition in the market eventually customer choice and retail competition Not done (Source: Eberhard, 2010. UCT GSB) Energy Masters Course, ERC, UCT

  28. Institutional ReformEmergence of the “standard model” of reform Energy Masters Course, ERC, UCT (Source: Eberhard, 2010. UCT GSB)

  29. Institutional Reform Reality is different from “standard model” • Power sector reform in many developing countries has not followed the standard model • Few countries have fully unbundled their utilities • Private sector participation often limited to IPPs • Wholesale and retail competition often absent • Instead, hybrid power markets have developed • Incumbent state-owned utilities have retained dominant market positions • Independent Power Producers (IPPs) are being introduced on the margin • both State Owned Enterprise (SOEs) and IPPs undertake new generation investments (Source: Eberhard, 2010. UCT GSB) Energy Masters Course, ERC, UCT

  30. Algeria (2): Kahraba, Kahrama Morocco (3): Tetouan, JorfLasfar, Tahaddart Tunisia (2): El Biban, Rades II Egypt (3): Sidi Krir, Port Said, Suez Senegal (2): GTI Dakar, Kounoune I IPP* Burkina Faso (1): Hydro Afrique Ethiopia (1): Gojeb* Cote D’Ivoire (2): Vridi Ciprel, Azito Congo (1): Sonda (X) Kenya (4): Westmont, Iberafrica, OrPower4, Tsavo Nigeria (3): AES Nigeria Barge, Okpai, Afam* Ghana (1): Takoradi II Tanzania (4):Tanwat, IPTL, Songas, Mtwara Mauritius (4): Belle Vue, Deep River, FUEL, St Aubin Angola (1):Chicapa* Institutional ReformGreenfield IPPs in Africa 40 IPPs 15 Countries 10,000MW US$8 billion 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. Energy Masters Course, ERC, UCT (Source: Eberhard, 2010. UCT GSB)

  31. Institutional ReformHybrid Markets need six key functions to be performed Planning Allocation Procurement Buyer System Operator Transmission Energy Masters Course, ERC, UCT

  32. Institutional Reform Historic structure of the ESI Eskom Holdings • Historically: • Vertically integrated utility • Eskom performed all the functions • Very little IPP procurement • The outcome has been: • A supply-side bias • Erratic fluctuations between over and under capacity • An unsustainable reliance on coal Gx IPP Planning Allocation Procurement Buyer System Operator Imp Exp Transmission KSACS D (Regions 1-6) Mun Mun KIC C C C C Energy Masters Course, ERC, UCT

  33. Institutional Reform Allocation of functions under the 2009 Newgen Regulations Eskom Holdings IPPs Gx System Operator Planning MOE MOE, MOF Allocation Procurement Buyer? System Operator Imp Exp Government has been heavily reliant on Eskom to execute generation Planning and IPP Procurement. This is a very unhealthy situation, which has led to considerable frustration and wasted resources for aspirant IPPs. Transmission KSACS D (Regions 1-6) Mun Mun KIC C C C C Energy Masters Course, ERC, UCT

  34. Institutional Reform Presidential commitment to an ISMO “To ensure reliable power supply, we have established an Inter-Ministerial Committee on Energy, to develop a 20-year integrated resource plan. Among other things, this will look at the participation of independent power producers, and protecting the poor from rising electricity prices. We will establish an independent system operator, separate from Eskom Holdings. Eskom will continue to build additional generation capacity and improve the maintenance of its power stations.” (President Zuma. 2010, 11 February. State of the Nation Address) So, what functions will the ISMO perform? Energy Masters Course, ERC, UCT

  35. Institutional ReformDraft legislation • No policy consultation process • No discussion document, green paper or white paper • No response to public comments • Key questions remain unanswered. Energy Masters Course, ERC, UCT

  36. Institutional Reform Proposed Independent System & Market Operator (ISMO) Eskom Holdings Imp Exp IPPs Eskom Gx MOE ISMO Scenarios Planning Procurement Allocation Buyer Determinations System Operator • Effect of draft legislation • MOE takes key decisions for ISMO to implement • ISMO reports to MOE • Transmission remains with Eskom Transmission KSACS D (Regions 1-6) Mun Mun KIC C C C C Energy Masters Course, ERC, UCT

  37. Concluding Comments

  38. Conclusion • The performance of South Africa’s power system has deteriorated in some key respects over the last two decades • Generation planning has been particularly poor, leading to dangerously low reserve margins, costly load shedding and inhibited economic growth. • Investment decisions have been non-transparent and debateable. Some project choices (Medupi and Kusile) have probably increased the risk of shortages, due to their size, approach to construction and uncertain funding. Smaller projects and a more open market may have led to greater security of supply? • Despite repeated policy statements favouring IPPs very little has been achieved and many investors left the country • In general, the governance of the sector has been unimaginative and reactive, with little willingness to experiment with market forms and frequent failures to complete processes. Energy Masters Course, ERC, UCT

  39. Conclusion • South Africa is clearly not following the Standard Model for power sector reform, although some elements have been in place for over a decade • South Africa is beginning to recognise the challenge of managing a hybrid system, but has yet to undertake institutional reforms to ensure that the functions of Planning, Allocating, Procuring and Buying are performed effectively and independently of Eskom. • South Africa should seriously consider unbundling Eskom and establishing a Transmission System Operator over time. Energy Masters Course, ERC, UCT

  40. What would you advise government to do? Energy Masters Course, ERC, UCT

  41. Thank You

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