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25thAMEUTechnicalConvent ion2015
36 25th AMEU Technical Convention 2015
There is a growing consensus that the successful development and management of utility infrastructure depends on the adoption of appropriate policies and the effective implementation of same. The survival of an industry which is reliant on vast infrastructure is dependent on this infrastructure being functional and well developed. Only if this is the case can it be ensured that services are supplied in an affordable and cost effective way – without which the economy of a country cannot strive.
In Africa, as elsewhere in the world, clear energy sector policies, which are implemented through comprehensive and enforceable legislation and regulation, are key to unlocking investment, improving efficiency and increasing electricity access.
The question however, is whether this restructuring sufficiently supports the recent developments in the Southern African ESI, and what level of change in market design and regulation needs to be planned for, as there are no successful examples of “reform by default”.
The future of the market structure of the South African ESI is uncertain. The vast interest in
Legislative imperatives – A legislative roadmap for energy challenges in SAby At van der Merwe, Aurecon, and Adriaan van der Merwe, CDH
This paper provides a critical analysis of the legislative development and main business drivers for the current energy supply industry in South Africa, with specific emphasis on private sector participation. This analysis is then benchmarked against best practice for energy supply industry reform in other countries. Parallels are drawn with the current challenges (and disrupting forces) experienced in South Africa, and a roadmap for proposed enabling legislative and business interventions to address the current power shortages are put forward.
self-generation, on small and large scale, smart grids and green technologies to name a few, will redefine the industry and lead to catastrophic effects for the supply sector (including municipalities) if not sufficiently catered for.
This paper outlines the main driving and defining factors in the development of the South African ESI. A comparison to other countries is then provided in order to benchmark the South African experience and to understand what the future may hold.
Current electricity supply industry in South Africa
Main business drivers
According to Eberhard [4] three main ESI drivers for reform can be identified internationally. These are:
l The requirement to improve investment and operational efficiencies
l The requirement for new capacity investments that necessitates private sector involvement, as financing is not always available from public sources
l Privatisation, which creates the opportunity
to unlock economic value and reduce government debt.
In a nutshell: The history of ESI reform in South Africa
The history of the ESI reform is summarised in Fig. 1.
Summary
The earlier years (phases one and two) are characterised by no private sector participation and focus on getting the regulatory system in place and a focus on some social requirements (electrification) going. The third phase was a preparatory phase for getting private sector in IPPs into the market in the last phase. The question then is how the future will unfold as far as possible reform in the ESI.
Current South African legislative framework
A snapshot of South Africa's energy legislation
The South African ESI is marked by a tapestry of policy, legislation, regulations and permitting requirements. Some of these are outlined in Fig. 2.
Fig. 1: History of power sector reform in South Africa.
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25thAMEUTechnicalConvent ion2015
Fig. 2: South African ESI’s energy legislation.
The timeline of the South African ESI's legislative reform
When a timeline is constructed for South African ESI's legislative reform, a clear trend can be detected in the development towards a more developed and open market for private sector participation. Fig. 3 depicts this timeline.
Summary
In summary then, and for the purpose of this analysis, private participation in the South African ESI can currently be realised as follows:
l Pursuant to a procurement programme, for which the Minister of Energy will make a section 34 determination under the ERA and in line with the IRP.
l Generation outside of the IRP, pursuant to a deviation application submitted according to section 10(2)(g) of the ERA.
l Any generation plant constructed and operated for own use, according to Schedule 2 of the ERA.
l A non-grid connected supply of electricity, except for commercial use, according to Schedule 2 of the ERA.
Drivers for reform – a benchmark
To understand South Africa’s power sector’s development a benchmarking exercise was undertaken to determine how private sector participation was introduced in the United Kingdom, Kenya and Nigeria. The benchmarking was undertaken to identify similarities, to determine whether the power sector models are the same, to identify elements unique to South Africa’s power sector and to identify how the power sector develop further.
Tables 1, 2 and 3 provide a summary of this analysis.
Current challenges in South Africa
Disruptive forces
The future of the South African ESI's structure is uncertain, and as such it is important that utilities take a clear view on the way their marketplace is likely to evolve due to the business drivers at play.
As certain business drivers have the ability to shape the electricity industry as described above, new business drivers are disruptive
forces to the current sector that will almost certainly shape the new power sector model and will lead to associated policy and legislative changes.
These forces (to highlight a few) that will result in some reform (either by default or in a managed way) can be summarised as follows:
l The green revolut ion: Where the economic usage of green power sources like solar and wind used to be more academic than every day practise, the reality is that the cost per unit of energy produced is steadily decreasing, leading to greater interest from both a commercial and a technical reliability point of view. The barriers of entry to the distribution sector are also declining. Soon the affordability of these technologies will become so attractive that customer choice, in the residential market, will react on the price signal from distributing utilities and exercise choice on usage that will first benefit the more affluent customers with some detrimental effects on the ability of the distributors for cross subsidisation within tariff classes as well as a deterioration on their revenue.
l Distributed generation and mini-grids: This is a growing market covering a wide spectrum from small- embedded to larger embedded generation, focussing on own use, local networks or distributing to the grid via wheeling arrangements. Included in this space is distributed storage to shift load – all affecting the traditional way of delivery. The penetration of such distributed generation schemes will depend on a variety of business factors amongst others the reliability of current infrastructure and the price signal. No longer are distributing companies shielded by the fact that their business is a monopolistic business where they do have captive customers.
l Regional super grids: Power pools play a much more dominant role in countries
Fig. 3: Timeline of the South African ESI's legislative reform.
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where the grid is interconnected, like is the case in Europe. In sub Saharan Africa the four established power pools are receiving increasing attention as possibilities to interconnect the power grids of countries and to operate in the retail market and to get access to amongst others contestable customers. The SAPP is already playing a role to support landlocked countries to get access to energy sources in southern Africa.
l Increased urbanisation – shortage of supply: One does not have to go far to notice the shortage of energy supplies in Africa, amongst others caused by underinvestment in infrastructure and a growing population in urban areas. The contrary of this would be a greater focus on off-grid supplies and mini-grids as suggested earlier in this paper. It is estimated that the net population growth is expected to occur in urban areas over the next two decades. Power companies will be challenged to provide infrastructure in a way to support orderly urbanisation and economics growth
l Smart technologies: The development of smart grids is essential if the global communi ty i s to achieve shared goals for energy security, economic development and cl imate change mitigation. Smart grids enable increased demand response and energy efficiency, integration of variable renewable energy resources and electric vehicle recharging services, while reducing peak demand and stabil is ing the electricity system. The “smartening” of the electricity system is an evolutionary process, not a one-time event.
A power sector model
Various disrupting factors have necessitated that the existing utility business model be reviewed.
These developments have introduced various “non-utility” players into the traditionally vertically integrated market of the utility. As a result there is new competition at various stages of the value chain, resulting in the introduction of new business drivers in the vertically integrated business model. There is an increased risk for utilities of stranded assets for particular services in the vertical value chain. New and alternative energy options are becoming available to the customer and the result is the early signs of a changing market model where the status quo of a complete captive market is being challenged by the entry of IPPs and special service providers.
In this changing model, focus should be placed on customer contact, satisfaction, service and sales (with utilities being in an ideal position to leverage their existing customer base). The role of the distributor/utility is migrating from electricity (kWh) supplier to electricity partner providing only
Table 1: Types of private participation.
South Africa United Kingdom Kenya Nigeria
Form of private participation
Procurement via RFP
Licencing under ERA
Privatisation of ESI
Electricity Act
IPPs
Geothermal Development Corporation
IPPs
NIPPs (National Integrated Power Projects)
Market reform Private participation (ERA)
Ministerial Determinations
REIPPPP
Restructure ESI (ISMO)
Restructured industry (via Electricity Act)
Privatised by selling state shareholding to private participants
Reform in 1990s, separating regulatory and commercial functions
Facilitate restructuring
Promote private-sector investment
Create competitive wholesale market (Market & Systems Operators).
Create retail competition (long term vision)
South Africa United Kingdom Kenya Nigeria
Focus Introducing private participation
Alleviating the energy shortage
Introducing competition
Creating a common energy sector regulator
Ensure cost-effective, affordable, adequate and quality services
Private sector participation and eliminate government involvement
Competition
Energy security South Africa has to be self-reliant to ensure energy security
The UK can import electricity from EU member states
The East African Power Pool provides access to other energy sources
WAPP, but current Gx shortage
Adequate gas supplies
Table 2: Types of legislation for private participation.
South Africa United Kingdom Kenya Nigeria
Competition Private participation introduced to attract funding. No competition focus (but attained through a IPP procurement process)
Common market ideal led to the a competitive ESI, which is ensured and enhanced by the EU Competition Commission
Minimal competition
Unbundled and privatised to attract private investment
MO and SO established and in operation
Regulation Regulation via NERSA
Regulation via GEMA, and informed by EU policy
Energy Regulatory Commission (ERC)
Federal Ministry of Power and NERC
Table 3: Degree of legislation induced private participation in the power sector.
the networks. While traditionally, utilities only provided few products to all customers, utilities will need to become more flexible, providing multiple products and services to specific segments (e.g. support for distributed generation, rooftop solar, metering services etc.), including appropriately structured pricing options. Tariffs will also need to be restructured (unbundled) to allocate the appropriate fixed and variable costs and reflect the cost of supply.
The utility can take on various “new” roles relating to distributed generation, including planner, builder, installer, operator, facilitator, partner, financer, leaser or risk manager, amongst others.
Fig. 4 provides an overview of these changes.
The future of the South African ESI
The future of the South African ESI may
require some of the following arrangements outlined in Fig. 5.
A legislative roadmap for intervention
It is not the intention of this paper to offer a comprehensive analysis of all legislative and/or policy aspects, but rather to highlight some enabling aspects identified during the benchmarking research. Specif ic challenges can be identified, especially for municipalities. As such a road map for intervention must be cognisant of the following:
l Procurement regulations are limiting municipalities in providing reticulation services in innovative ways.
l Uncertainty regarding regulations for small scale embedded generation to allow exporting to the grid (PV rooftop installations, net-metering, unbundled tariffs).
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40 25th AMEU Technical Convention 2015
Fig. 5: A future outlook for SA for the changing power sector model.
l Regulations with regard to trading is unclear (how, who and when can traders enter the market.
l The market is developing from a single buyer to a multi buyer model.
l Uncertainty on how to al low for generation outside the IRP (deviation applications).
l Lack of tried and tested financial models for private participation in the municipal sphere.
Conclusion
Adequate infrastructure investment and the ability to attract investors are of paramount importance for economic development. Learnings from various countries suggest that ESI reform will take place either by design or by default. Reform by default is clearly not a preferred option. Therefore sufficient enabling policy and relevant legislation is of critical importance to direct the reform and to ensure the appropriate level of infrastructure investment.
The development of ESI reform in South Africa is characterised by specific business drivers that have influenced the way in which reform occurred. This paper's analysis has indicated that various disruptive forces cause business drivers that impact the current power sector model. It is therefore important that the reform process be effectively planned and managed to present the desired outcome.
Utility managers and policy makers need to be cognisant of these disruptive forces, to ultimately ensure that market reform occurs in an orderly and planned fashion. It is held that business drivers will reform the South African ESI, either by default or by design, to ensure that there is sufficient private sector participation for infrastructure development in South Africa.
It is held that market reform benefits an economy and a country's ESI, if said reform occurs according to a well-developed roadmap.
References
[1] Utility regulatory fundamentals, Public Utility research centre, University of Florida.
[2] A new Africa energy world, a more positive power utilities outlook, PWC.
[3] www.worldenergy.org.
[4] A Eberhard: “The Political Economy of Power Sector Reform in South Africa,” Working Paper WP-06 Programme on Energy and Sustainable Development, Stanford University, 2004.
[5] Electricity Regulation Act 4 of 2006.
[6] Electricity Regulations on New Generation Capacity.
[7] Independent System and Market Operator Bill GN 290 GG 34289 of 13-05-2011.
[8] Steyn De Jure 541, 2013.
[9] Department of Energy: “Proposed ISMO to Drive Renewable Energy Procurement”, Sabinet Law.
[10] Anonymous: “Planned ISMO unlikely to be panacea for power sector’s woes”, 2012, South African Integrated Energy, http://irp2.wordpress.com/2012/06/29/planned-ismo-unlikely-to-be-panacea-for-power-sectors-woes/.
[11] D de Vos: “Break up Eskom, for all our sakes”, Mail and Guardian, http://mg.co.za/print/2012-11-30-break-up-eskom-for-all-our-sakes.
[12] Heddenhausen: "Privatisation in Europe's liberalised electricity markets – the cases of the United Kingdom, Sweden, Germany, and France", Research Unit EU Integration.
[13] Rotaru: "The UK Electricity Market Evolution during the Liberalization Process" Centre for European Studies Working Papers 268.
[14] Anonymous: "Electricity Reform Abroad and U.S Investment", http://actrav.itcilo.org/actrav-english/telearn/global/ilo/frame/ele.htm.
[15] Anonymous: "Liberalisation, privatisation and regulation in the UK electricity sector", Richard Pond, Working Lives Research Institute.
[16] Anonymous: "Liberalisation, privatisation and regulation in the UK electricity sector", Richard Pond, Working Lives Research Institute.
[17] A Guide to the Nigerian Power Sector, KMPG, 2013.
[18] Overview of the Nigerian Electr ic i ty Industry (Roles, Responsibilities, Structure, Expectation), Presentation at the Nigeria Power Sector Investment Forum – Lagos, Dubai, London, New York and Johannesburg, www.nigeriaelectricityprivatisation.com.
[19] Dr. C Carter-Brown: “The impact on PV Rooftop Installations for distributing companies”, Energize, 15 May 2015.
[20] Chapter 12. Human Settlements, Infrastructure and spatial planning. In Climate Change 2014: Mitigation of cl imate change. Contributions of working Group III. Seto and Dhakal, 2014.
[21] Technology Roadmap, Smart Gr ids: In ternat ional Energy Agency. 2011, www.iea.org
[22] Kenya: Enabling private-sector participation in electricity generation, www.gsb.uct.ac.za/files/Kenya.pdf.
Contact At van der Merwe, Aurecon, Tel 012 427-3325, [email protected]
Fig. 4: The changing power sector model.
