Given the decision by the Eskom board not to sign further power purchase agreements (PPAs) with Independent Power Producers (IPPs), a window of opportunity has been opened to evaluate the role of Eskom as the sole buyer of renewable energy in SA.
This decision by Eskom is on the basis that demand and supply conditions, the refurbishment of its generation assets and the commercial operation of its newly installed plants — which it forecasts will be in a surplus position by 2022 without increasing the renewable energy capacity — justify its reluctance to commit to further IPPs.
This stance has thrown the future of the renewable energy independent power producer programme (REIPPPP) into question and created uncertainty in the market, possibly undermining future investment into the sector.
The programme has been heralded as a successful landmark initiative in boosting the economy through the expansion of private and institutional investment into the renewable energy market that, through the REIPPPP, has seen the development and award of tenders for solar, onshore wind, biomass, landfill gas and hydro technologies.
Since its inception in 2011, 6.3GW of renewable energy has been procured by the Department of Energy, representing about 15% of SA’s installed power generation capacity.
At the end of 2015, 2.2GW of the 6.3GW procured had been installed, connected to the grid and commissioned.
Built on lessons learnt from an earlier unsuccessful effort to encourage local investment in renewable energy, based on feed-in tariffs, the REIPPP framework provided an incentive for private sector participation and has enabled a fast and effective roll-out of new generating capacity with multiple bid winners.
The department has developed and updated the Integrated Resource Plan (IRP), providing the official policy position from which the generation procurement needs of the country are determined. Through the REIPPPP, which is aligned with the IRP, the department facilitates the procurement of renewable energy from IPPs, which submit their project proposals in a competitive bid process to state-owned power utility Eskom as the single buyer.
The government recognises IPPs as privately financed greenfield generation plants with support of non-recourse or limited recourse loans, backed by long-term Power Purchase Agreements (PPAs) signed with Eskom. These PPAs are approved by the National Energy Regulator of SA, and the framework allows Eskom to pass associated reasonably incurred costs of these PPAs through to retail customers.
In the market, core electricity network operator and market functions are performed by Eskom. In addition to providing the majority of SA’s generation capacity, Eskom is also the single buyer of power and the main distributor of power to municipalities, direct large customers, smaller customers in certain municipalities, and in most rural areas.
To support the IPP market, and in accordance with the single-buyer model outlined in SA’s electricity policy, Eskom established the single buyer office (SBO) as the purchasing arm of Eskom responsible for PPAs between Eskom and IPPs.
The SBO is accountable for the following IPP programmes: REIPPPP, small renewable IPP programme, medium-term power purchase programme (MTPPP) and the open-cycle gas turbine (OCGT) programme, as well as municipality generation and short-term contracts for security of supply.
The Eskom SBO has been very active in the REIPPPP and is working to conclude PPAs for preferred projects selected under the expedited round 4.5 (3).
It is widely acknowledged that Eskom has played a significant role in supporting the influx and growth of IPPs through its bankable SBO as the power off-taker. It can, however, be said that there is a need to further optimise the electricity market system to allow the continued growth of IPPs to provide healthy competition for Eskom to the benefit of SA.
The 1998 Energy Policy White Paper publication prompted Cabinet’s acceptance of a 70-30 generation split between Eskom and the private sector, and consequently the commencement of work towards the increased participation of the private sector in the electricity-supply industry.
In addition, it called for open and nondiscriminatory access to the grid for all generators of power, and soon after an Independent System and Market Operator (ISMO) Bill was drafted to implement some of the policies set out in the white paper. However, the impending generation shortages saw the prospective wholesale market idea abandoned in favour of Eskom as the off-taker in the existing single-buyer model, and the bill was watered down and then abandoned.
The choice of a single-buyer model was due to various technical, economic and institutional factors, and is in fact a popular model still implemented in many Asian, African and Eastern European countries today. The model facilitates the balancing and matching of electricity supply and demand given that Eskom is responsible for real-time dispatch, as well as the exclusive right to buy from IPPs or generators and to sell to distributors.
Other merits include the simplification of price-regulation by maintaining a unified wholesale price; protection of IPP lenders from market risk, thereby making projects more commercially viable and bankable through PPAs; and preservation of the key role of the department in decisions on investment in generation capacity.
The Eskom SBO has allowed the department to procure capacity and energy cost-effectively, in alignment with the IRP. In addition to renewable energy, the SBO has enabled the procurement of more expensive peaking and mid-merit dispatched plant generation to cover fluctuations in renewable energy production.
Eskom has played, and continues to play, a significant role in the development of a private electricity sector through the SBO. However, there have been some noteworthy shortcomings in the SBO model, potentially hindering the continued progress of the IPP sector. Now that the grid system has regained some stability, Eskom is backing away from long-term PPAs at prices that, once agreed, are non-negotiable for 20 years.
Competition in the REIPPPP has seen renewable energy tariffs fall since its inception, thereby posing a threat to Eskom’s money-making generation business.
Eskom’s generation plants and installed capacity are the largest component on Eskom’s balance sheet. As supply to the grid meets and exceeds demand, contrary to what was envisioned in the 1998 Energy Policy White Paper, Eskom’s monopoly over the entire value chain of transmission and, to an extent, distribution systems creates a conflict of interest in an electricity market based on the single-buyer model.
This suggests the fate of the private sector hinges on Eskom’s fortunes and does not align with the best interests of the power sector and country as a whole, and it might be time to reconsider some form of ISMO.
As some have suggested, the single-buyer model can be seen as a transitional arrangement in place before the conditions for a more liberalised power sector are satisfied.
In the case of SA, this is true: the Eskom SBO has indeed supported the development of the private sector by offering a bankable off-taker for the capacity produced.
Furthermore, the REIPPPP and other IPP programmes have provided the necessary building blocks for an ultimately diversified buyer and seller market.
With a less constrained grid new, independent, low-cost generation could be viewed as competing with Eskom’s own generation fleet, the income-generating arm of the business, and thus creates a conflict for Eskom as both single buyer and generator
— conflict for Eskom
As the power market and REIPPPP participants have become more familiar with the process and framework, there is a need to shift the focus from "establishing the market" through Eskom’s SBO to improving the electricity supply market and process.
The creation of a state-owned ISMO, with Eskom generation, transmission and distribution as separate entities, is an important next step in further optimising the electricity market system and process.
A state-owned ISMO eliminates Eskom’s conflict of interest and avoids the costs and possible disruption associated with privatisation of the process while maintaining a bankable off-taker for IPP investment. In addition, the creation of a well thought-out state-owned ISMO would create a truly competitive electricity-supply market, fostering the evolution of the power sector in SA.
Until recently, Eskom as a single buyer has been an effective model for the procurement of power from IPPs as, in a capacity-constrained market, it has been in Eskom’s interest to work with the department to procure additional generation capacity.
With a less constrained grid new, independent, low-cost generation could be viewed as competing with Eskom’s own generation fleet, the income-generating arm of the business, and thus creates a conflict for Eskom as both single buyer and generator.
A state-owned ISMO power market model, although really just a more advanced form of the single-buyer model, could provide the necessary push for a more competitive and liberalised power market for the good of SA.
• Oliphant, a former principal executive officer of the Government Employees Pension Fund, is executive chairman of Thirdway Investment Group, which has interests in renewable energy, infrastructure investments and asset management
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