Ismo could solve Eskom’s conflict of interest



Published Jul 29, 2016


Johannesburg - Unresolved issues have a way of rearing their ugly heads. Currently there is a raging debate about the letter that Eskom chairman Baldwin Ngubane sent to Energy Minister Tina Joemat-Pettersson, expressing Eskom’s decision not to sign any new power purchase agreements with independent power producers (IPPs) beyond the latest bidding round.

Read also: Eskom postpones signing IPP agreement

The shock and anger at this move perhaps presents an opportunity to look at the possible sources of the tension between Eskom and the IPPs. This tension manifests shortcomings in the current nature of the transmission leg of South Africa’s electricity supply industry.

At the moment Eskom dominates the entire value chain of electricity generation, transmission and, to an extent, distribution. With a view to lure private-sector investment in the electricity sector, the government a few years ago initiated the establishment of an Independent Systems and Market Operator (Ismo).

The central aim of the Ismo Bill was to remove the operation of the electricity grid from Eskom and place it in an independent but still state-owned entity.

That was a noble idea.

The independent operator would buy energy from Eskom, co-generators and IPPs. Even the government had lofty expectations from Ismo.

To paraphrase the former energy minister, Dipuo Peters, the mooted entity was intended to level the playing field and eliminate conflicts of interest while protecting all players from potential market abuse.

With the South African electricity market opening up as a result of the now successful renewable energy IPP programme, the need for this independent operator has become more urgent. Over time, it has also become clear that, unless the proverbial playing field is levelled, IPPs are always going to view Eskom with suspicion. It does not help that Eskom is also a player and a referee in the renewable energy sector.

Read also: Eskom review threatens green power

On the other hand, Eskom has its own concerns about renewable energy. Eskom chief executive Brian Molefe is certainly not happy that IPPs’ share of Eskom’s primary energy costs increased from 12 percent in the 2014/15 financial year to 18 percent in the past financial year (2015/16).

This is despite the fact that IPPs’ share of electricity production had remained at 4 percent in the period. In that period, Eskom has reduced its own share of primary energy costs from 84 percent to 78 percent.


Before the Department of Energy, which has oversight over energy policy in South Africa, withdrew the bill from parliamentary processes, it had become apparent that setting up the entity would not be easy. The development of the legislation had been painstakingly slow with refinements and consultations.

All along there were overwhelming concerns that breaking up Eskom would be disruptive especially as the power utility had, until recently, been battling with power constraints.

In a submission to Parliament a few years ago, Eskom said it was important not to embark on any restructuring while the power system was constrained and recommended a phased approach towards the creation of Ismo.

The dilly-dallying and eventual U-turn on Ismo is interesting considering that Ismo was not conceived in a vacuum. The 1998 Energy White Paper, South Africa’s first energy policy post-1994, envisaged increased private-sector participation in the electricity supply industry. Along with that, it called for open and non-discriminatory access to the transmission network. “Eskom will be restructured into separate generation and transmission companies,” the white paper stated boldly.

While Eskom has not elaborated on the concerns that prompted the letter to Joemat-Pettersson, it is worth noting that the letter coincides with the change in Eskom’s fortunes.

There was a time, not long ago, when Eskom was gobbling up all the available IPP electricity capacity. Faced with a constrained power system, Eskom’s focus at the time was on keeping the lights on.

The picture has now changed. The power utility is putting its generation woes behind. Eskom’s generation fleet is increasingly available to produce power. The energy availability of Eskom’s power stations reached 81 percent in June, a level last achieved in July 2013.

In addition to that, Unit 6 of the Medupi power station has been producing electricity since last year and President Jacob Zuma this week launched Unit 4 of the Ingula pumped storage scheme in KwaZulu-Natal.

Eskom plans to increase its generation capacity by 17 384 megawatts in the next five years.

Now that the system has recovered, Eskom questions the wisdom of entering into long-term power supply contracts with the IPPs at prices they cannot negotiate.

But why should the fate of multibillion-rand renewable energy projects hinge on Eskom’s fortunes? Why should this nascent renewable energy industry be burdened with uncertainty?

Best interests

The SA Photovoltaic Industry Association (Sapvia) said the stalled Ismo process should be revived.

“It is increasingly becoming clear that a vibrant independent power producer sector is not sustainable without an adequately resourced independent transmission company,” Sapvia said.

SA Wind Energy Association (Sawea) chief executive Johan van den Berg said Eskom’s mandate should align with the best interests of the country.

“Being both grid operator and electricity generator creates a conflict of interest that naturally leads to the debate occurring now. A clear separation of these functions into distinct state-owned enterprises would level the playing field and lead to the deployment of energy on a scientific decision-making basis.

“Our modelling shows clearly that very high penetrations of wind power are essential to building the lowest cost future electricity system for the country and we trust that good decision making will see the country continue along this road,” said Van der Berg.

Is Ismo the magic wand? Not necessarily. After all, there are good and bad state-owned entities.

There is no guarantee that it is going to be in the good bunch. But such an entity would certainly remove the real or imagined conflict of interest on Eskom’s part when it comes to renewable energy.


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