/ 27 January 2012

Private providers out in the cold

A power policy shake-up has begun after two new Bills to amend critical legislation governing electricity regulation and the national energy regulator were gazetted in late December.

The National Energy Regulator Amendment Bill and Electricity Regulation Second Amendment Bill were published by Energy Minister Dipuo Peters on December 8 and 19, respectively.

Although the electricity policy regime needed to be reviewed, the move has sparked concern among industry stakeholders who believe that the proposed changes, particularly those in the Electricity Regulation Second Amendment Bill, may hamper the entry of private players.

It also comes as the National Energy Regulator of South Africa took a decision this week to postpone hearings into its multi-year price determination policy, the framework used to determine tariffs.

The minister has indicated for some months that the department was planning to review its pricing policy, given concerns that electricity prices were rising too steeply while Eskom’s financial stability had improved markedly in recent years.

These developments come at time when South Africa is mulling how it will meet growing future electricity demand. The extension of the country’s nuclear capacity is mooted in the integrated resource plan. Commitments to nuclear energy are required soon if new nuclear plants are to be commissioned by 2023-2024.

But there are divergent views in the government on the best way to meet future demand. The National Planning Commission proposed in its national development plan an investigation into the implications of cost, safety, environmental ­benefits, localisation and employment opportunities, uranium enrichment, fuel fabrication and the dangers of weapons proliferation.

Alternatives should be explored, it said, including the prospect of shale gas, which could potentially provide extensive electricity supply.

Interested parties were initially given until January 20 and 27, respectively, to comment on the two Bills. But the department said that, due to the limited time for public consultation the deadlines would be extended to February 10 and 17.

Mark Pickering, a partner at Meridian Economics, said that with the Independent System and Market Operator Bill, which was introduced last year, the new Bills would make fundamental changes to the structure of the electricity sector and how it was regulated.

South Africa has needed to invest in new generation capacity in the electricity sector for many years, but both the public and private sectors failed to bring sufficient new ­capacity on line in time to meet the rising demand.

Prior to the 2008 electricity crisis, the government had placed a moratorium on investment in new capacity by Eskom and simultaneously failed to create the environment necessary for private sector investment. Following the crisis, attempts to procure new capacity from independent power producers were chiefly led by Eskom.

South Africa has had nine procurement processes involving independent power producers, according to Pickering, eight of which failed to meet their objectives. The ninth is the renewable-energy independent power producer procurement programme that is taking place and looking likely to succeed.

“Importantly, this programme is run by the treasury’s public-private partnership unit rather than Eskom,” Pickering said.

The government has long recognised the need to address Eskom’s conflict of interest as both a generator and the buyer of power, as well as the need to facilitate the entry of independent power producers into the market by means of an independent system and market operator.

In mid-2011 the energy department introduced the Draft Independent System and Market Operator Bill. But the three Bills were “incoherent, did not align and many of the changes that they propose were problematic,” said Pickering.

The scope of the independent system and market operator’s functions is still to be defined but, according to Pickering, broadly speaking it should address the planning of new entrants into the market, the allocation of new opportunities between Eskom and independent power producers, the management of procurement processes and the final buyer function.

But the Electricity Regulation Second Amendment Bill effectively places most of these functions with the energy minister. “This is problematic because the minister does not have the necessary capacity to perform these functions. We need to create competent independent capacity outside of Eskom,” said Pickering.

Furthermore, the regulatory environment allows for open access to the transmission network, which enables private power producers to sell electricity to remote consumers through the grid, but the draft amendments to the Act would seem to prevent this.

“Under the proposed Bill, no one can build any type of power station without a section 34 determination from the minister,” said Pickering. “This gives the minister absolute gate-keeping power.”

Meanwhile, he said the National Energy Regulator Amendment Bill “emasculates” the regulator because many decisions become the prerogative of the minister instead of the regulator. The Bill contemplates a single commissioner to be responsible for the regulation of the electricity sector, piped gas and the petroleum pipelines sector, assisted in this role by deputy commissioners assigned to each of the sectors.

This is a change from the board structure of four full-time and five part-time members. From the four full-time members the minister appoints a chief executive and a member primarily responsible for gas, electricity and petroleum. The Bill also introduces an appeals board and appeals procedure.

The chairman of the energy intensive users’ group, Mike Rossouw, expressed concern about the Electricity Regulation Second Amendment Bill, which, he said, created a centralisation of authority under the minister. The Bill also made all new generation capacity, including own-generation capacity, subject to the determination of the minister. “This will work against private ­participation. It appears to create more centralisation instead of freeing up the market.”

The workings of the regulator did need to be reviewed, said Rossouw. The changes could speed up the regulating process, but there needed to be clarification on how the body’s independence would be retained.

But the energy department said the amendments, notably to the Electricity Regulation Act, would not give further power to the minister, but rather better align the legislative and regulatory regime.

In response to concerns that the Independent System and Market Operator Bill needed to be finalised before the other Bills could be contemplated, the department said amendments to the Electricity Regulation Act would not affect the establishment of an independent system and market operator, but the manner in which it performed its function. The Bill went to the National Economic Development and Labour Council following its release in 2011. “This process is expected to be completed in January and the Bill will probably be tabled in Parliament in the first quarter of 2012,” said department spokesperson Thandiwe Maimane.

She said the amendment gave no new powers to the minister. In terms of the Electricity Regulation Act the minister may issue a determination for building new generation capacity. The provisions of the Electricity Regulation Second Amendment Bill were aimed at aligning the integrated resource plan, the current Act and the electricity regulations on new generation capacity.

“It should be noted that most of the proposed amendments are already provided for in the new generation-capacity regulation. The department launched the independent power producer procurement programme in accordance with the new generation-capacity regulation and there was overwhelming response from the private sector,” Maimane said.

The bidding programme was also not properly aligned with the licensing framework by the regulator, she said. “There is the risk that an independent power producer may go through all the bidding requirements and fail to get a licence from the regulator.

“Therefore, the amendments attempt to align the licensing framework by the regulator and the bidding process by the procurer [the department at this point but this function will be migrated to an independent system and market operator] to give confidence to independent power producers.”

Policy shake-up puts price review on hold
The move to review the country’s electricity pricing policy is a glimmer of hope for beleaguered consumers. Rising administered prices have drawn the ire of the likes of Gill Marcus, governor of the Reserve Bank, which is battling to keep consumer price inflation within the target band of 3% to 6%.

Eskom spokesperson Hilary Joffe said that although it was appropriate for the country to review administered prices, there was a need for regulatory certainty and a predictable price path.

The National Energy Regulator of South Africa (Nersa) postponed hearings this week on its multiyear price determination, the framework used to determine tariffs, after the department of energy told the regulator that it was reviewing the electricity pricing policy.

“The price determination framework is broadly informed by the electricity pricing policy. It would, therefore, be premature to finalise it while the electricity pricing policy is under review,” it said.

The announcement comes as Eskom is preparing its application for new tariffs in line with the framework’s processes. The previous tariff determination, which extends to mid-2013, saw, and will see, multiyear price hikes of roughly 25% during the 2010-2011, 2011-2012 and 2012-2013 financial years.

“It is appropriate to review administered prices in the light of job creation and the economic growth needs of the country,” said Joffe. “We do, however, believe regulatory uncertainty and a ­predictable price path is important for investors, Eskom and our customers.”

Until the pricing review is complete, effectively Nersa cannot begin its deliberations, or the public hearing process, to decide on new tariffs. Joffe said Eskom had not finalised its next tariff application as it was seeking a closer alignment with its stakeholders.

Eskom is required to send its application to the treasury and the South African Local Government Association, which need 40 days to review it and make recommendations. Eskom must then submit it to Nersa, giving it sufficient time to examine the application and hold public hearings.

The process must be completed by early 2013 for municipalities to incorporate new tariffs in their budgets. The current framework process ends on April 1 next year for Eskom customers and June 1 for municipalities.