IEMO Bill proposes separated power purchasing

…. article June 2019….   

   Eskom to become major energy supplier…

Now tabled is the DA’s plan to create an Independent Electricity Market Operator (IEMO) on a phased basis with the responsibility of centralised purchasing of electricity from both Eskom and independent power producers (IPPs).

The proposal is that the IEMO will carry out its operation duties by dispatching all generation plants into the national grid. In addition to operation, the IEMO Bill also confers ownership of the grid on the IEMO, with Eskom retaining ownership of the generation arm.

Starting grid

The responsibility  for consumer distribution will be under the care of this independent regulatory entity which will be responsible as a centralised agency for the purchase of energy and the registration of IPPs to feed the grid, the enormous system that conveys power across the width and breadth of South Africa.

The national grid is, apparently, like the rest of Eskom infrastructure in need of restorative maintenance and upgrading, funds intended for this purpose having been “diverted” by Eskom personalities now being named, one by one, in the Zondo Commission inquiry.

With Parliament closed at this time and the Portfolio Committee on Public Enterprises not formed, it is the Speaker that will gather comment on the DA Bill now circulated, this for later assimilation.

As far as the IPPs still sitting on the side-lines waiting for action, this is not before time.   All now await to hear how the concept of a Regulator’s office is unpacked and how this office is related to the grid.

 Top gun

The IEMO Bill comes under the name of MP Natasha Mazzone, the DA’s shadow minister of public enterprises.  Opposition Leader, Mmusi Maimane, has been indicating such a move for over six months and has been vocal on the fact that decisions must be made urgently in moving the energy distribution sphere forward since investors have been waiting for far too long.

The Bill was tabled quite soon after President Cyril Ramaphosa’s stated requirement that the concept of splitting up Eskom into three parts will be followed, namely power generation, power supply through the grid, and distribution to customers.

A line-up of six successive energy ministers and a recalcitrant president have reduced the Department of Energy to a shambles.  Maybe Mazzone’s Bill is a possible shaft of light after years of Eskom and Public Enterprises Department having done nothing about IPPs, nor encouraged any form energy diversification.

Motives not clear 

In the meanwhile, Ms Mazzone has always been a vociferous critic of Eskom management for a number of years, describing previous Minister of Public Enterprises, Lynne Brown, as public enemy number one.  She has called for Eskom to be unbundled in the public interest and has been untiring in her attacks on the failure of Eskom to provide continuity of power supply thus damaging SA’s investment potential, she says.

What is not clear is whether this tabling is a move from the DA to attempt to seize the initiative ahead of the Department of Energy (DOE), busy at the moment being absorbed back into the Mining portfolio under new Minister Gwede Mantashe, or whether the ANC might have some inkling of what it needs to progress on the issue of power generation and will accept what is tabled.

Whatever is behind closed doors, the DA have taken the initiative by starting the ball rolling and for IPPs sitting on the side-lines, it is not before time.

Badlands

The partnership of the portfolio of energy and mining, which was broken some ten years ago by Jacob Zuma for reasons never really explained, still sits like unallocated baggage that needs sorting out. The suspected reason is that Zuma wanted Eskom under Brian Molefe in DPE under acolyte past minister Lynne Brown.

What currently is confusing to the industry players is that a slow phased-in process designed to protect Eskom has been proposed by the DA.  Their original proposals called for an immediate break-up to reduce the pain and cost of a lengthy separation process.

It may be that reality has crept in and despite chastising past successive ministers of energy for not producing the  previous idea of an ISMO (Independent Supply Management Operator) Bill to meet the need of IPPs perhaps they are now tempered by the fact that Eskom, whilst a currently an over-indebted business failure, the ship should be righted first, and the system restored.

Better times

Previous chairperson of the Energy Portfolio Committee, Thembisile Fikile Majola – a tough critic of Energy Minister Radebe in the failure of Luthuli House to brief Parliament on energy policy matters – is now Deputy Minister of Mining and Energy.

This appointment by President Ramaphosa, presumably in the light of Majola’s union background, gives further credence to the belief that both he and Mantashe would be a good team to handle coal mining issues from the unions resulting from a breakup and re-sizing and also better equipped to handle the Eskom transformation in terms of integrated energy supplies.

Going ahead

It seems be therefore accepted by the way the Bill is tabled that new IEMO Bill may gain better traction under the aegis of the Portfolio Committee on Public Enterprises, rather than as before under the Portfolio Committee on Energy.   However, Minister Pravin Gordhan has stated on a number of occasions that the Public Enterprises portfolio is only managing SOEs in the interim until all are returned to their appropriate ministries.

The specifics

The Bill came with a notice of intention which states, “This Bill will eliminate Eskom’s effective monopoly on the production of electricity by splitting the entity into two parts. These are Eskom, which will continue to function as an electricity generator and ISMO, which will take ownership and control over the national electricity grid.

The notice states that a Regulator “will serve as the central buyer and distributor of electricity from all electricity generators. It will also seek to allow metropolitan municipalities to purchase electricity directly from IPPs in certain circumstances.”

This is, of course, brings into the frame the critical issue of adopting a business approach to energy distribution.

Business wholesalers

On the subject of independent purchasing of electricity from sources other than Eskom, the proposal further states, “ISMO will be required to purchase power from the generators, including IPPs through power purchase agreements.  IEMO will then sell this power to distributors and large customers at a wholesale tariff.”

The notice concludes, “The IEMO will be expected to include in the wholesale tariff its operational cost in accordance with the approval of the Regulator. The Regulator will regulate the wholesale tariff in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006) (ERA).”

Rights to trade

An introduction to the Bill, looking at details of the new structure, states, “The issue of wholesale trading refers to the buying of power from generators at different prices and selling it to large customers and distributors at a wholesale tariff.    The IEMO will also be responsible for the system operation function through dispatch.”

It adds that the IEMO “will undertake dispatch from all generation plants into the national grid except for self-dispatched plants, including but not limited to wind and solar plants”.

Big bang or not

Whatever happens, “big bang” approach or not, a vigorous debate is about to happen.  Many critics, especially the IPPs, have expressed the view that the slow “phasing in” is just another ploy in a drawn-out process to mollify the unions on potential job loss issues by buying time.   Industry players who have dealt with the backlash of the last Eskom strike, say the unions are panicking and creating a problem to be solved in order to be seen by their members at work on their behalf.

But whatever happens, all know that coal will always be, by far, the major contributor to energy with Eskom hopefully learning how to reduce CO2 emissions. The entity will have to pay triple carbon tax rates in the future for failure.  Most industry players also predict that SA’s extensive coal reserves will be switched over in the long term to export led initiatives.

Comments on media also see the exit of Eskom as a distributor being a contribution to the task of reducing Eskom’s ballooning staff complement.

Bold steps required

The costs of a “big bang” separation would, of course, be bound to put irreconcilable pressure on state coffers, say financiers, but more serious energy investors and industry players say there will always be few short-term visitors waiting in the wings and these are the parties who get disappointed.

Energy investment, they say, is based upon long term results and is viewed as thus by big money companies since geology and resources are finite.  In global terms, the situation can always wait until the conditions suit exploitation. It can take fifteen or twenty years to build a gas field of note and build the appropriate infrastructure, they say.

However, the running of Eskom is the short-term issue right now and keep the lights on.  Its survival is the main critical item on South Africa’s balance sheet at the moment.

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