20
CONSTRUCTION WORLD
JUNE
2014
ENVIRONMENT
That is the word fromGIBB’s Power and Energy Sector general
manager, Paul Fitzsimons, who said in mature markets
different power generators sell electricity to a central inde-
pendent buying office, which then sells the electricity on to
energy wholesellers and retailers via distributors. “While in many coun-
tries there are varying degrees of vertical integration, at the moment
the majority of the entire process in South Africa – from generation and
transmission to distribution to the end user – is controlled by Eskom,
but with municipalities and metros playing the role of retail distribu-
tors and on-sellers in many cases.
“Although South Africa’s Renewable Energy Independent Power
Producer Procurement Programme (REIPPPP) is a step in the right
direction, independent power producers continue to bid electricity to
the Department of Energy, and transfer it back to Eskom, meaning the
man in the street can not choose where he gets his electricity from.”
One of the greatest challenges with electricity supply systems –
anywhere in the world – is getting the electricity from the generator
to the end user. The process always requires a single transmission and
distribution network and these are in reality natural monopolies.
“In a ‘perfect’ market there would be many generators competing
to provide electricity into a single network operator. The electricity
would be transmitted to a number of distributors and while the assets
are geographically fixed it is also possible to open up operations of
such systems to some form of competitive process through fixed term
management and operating contracts. While users may be stuck with
a particular distribution network by virtue of geography, they would
be able to buy their electricity from anybody, and the introduction of
competition in operations would naturally drive up performance and
drive down cost,” said Fitzsimons.
This type of model was introduced
in the United Kingdom (UK) during
the Thatcher years. “Competition was
forced into the system and an open
bidding pool was established to buy
electricity from different generators.
Different qualities of electricity (base
load; peak-time) were priced differ-
ently. Prices were published and there
was a high degree of transparency.
“Today, with UK electricity prices
rocketing, there has been a lot of
discussion
around
whether
this
model works or not. Generating
companies have been accused of
creating internal middlemen to sell
electricity to themselves at inflated prices before on-selling it to the
customer,” said Fitzsimons.
While the UK model is largely deregulated, Fitzsimons said a degree
of regulation is required to ensure the system is not abused. “Perhaps
a good example is the United States (US) where utilities are private-
ly-owned, but the sector remains highly regulated. This is, of course,
notwithstanding some spectacular failures such as the California
energy crisis of 2000/2001,” he said.
Importantly, proper demand sidemanagement is where consumers
are given the choice as to which supplier they buy their electricity
from. This would be possible in a market characterised by independent
transmission and distribution grids and Independent Power Producers
(IPPs) competing in an open electricity market and characterised by
the emergence of various market driven demand management solu-
tions such as demand aggregators, energy brokers and similar risk and
liquidity measures.
“While it has been criticised, the forward selling of bulk electricity
for large scale industrial users is a perfectly normal market driven
response and a form of price hedging widely practiced in competitive
commodity markets. In South Africa, industry reform has been on the
agenda for some time. The Independent System and Market Operator
(ISMO) Bill, which proposes placing the operation of electricity grid in
an independent, but state-owned entity, is a positive move towards
reform, but has been put on hold twice this year,” said Fitzsimons.
Eskom is the third largest electricity generator worldwide. “This
does not make sense given the size of our population. The east coast of
the US is probably ranked first and China second – which seems reason-
able considering their large populations.
“SA is similar in size to the UK,
but we probably have less people
connected to the grid. While the UK
has six major electricity generators,
three or four major generators would
probably make sense for us.”
Fitzsimons said to avoid recurring
energy crises, South Africa needs to
seriously consider deregulation of the
market. “Of course, the system can
get highly complicated and relies on
transparency and moral integrity, but
it can have an enormously positive
spin-off in the form of newly created
businesses, a more secure power
supply, increased foreign investment
and more jobs for South Africans.”
MORE COMPETITIVE
electricity market required
The spotlight was once again on South Africa’s power
supply system when Eskom recently declared a power
supply emergency. While the state-owned power
utility is better positioned to handle the constrained
situation we face than it was in 2008, in the longer
term the country needs to consider a more market-
driven demand side driven and competitive model to
overcome some of its challenges.
Gibbs’ Power and Energy Sector general
manager, Paul Fitzsimons.
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