The global financial crisis and its impact on the Southern Africa Power Pool (Part 2)

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1 The global financial crisis and its impact on the Southern Africa Power Pool (Part 2) by Dr. T J Hammons, University of Glasgow At a Southern African Development Community (SADC) ministerial meeting held in Namibia in July 2004, ministers responsible for energy in the SADC region agreed to address regulation, consider implementing cost reflective tariffs, and adopt regulatory principles that would enhance these tariffs. The status of power supply in SAPP has already been indicated in Table 1,2 and in Figs. 1 and 2 (see part 1). Figs. 3 and 4 illustrate impact of load management ( ) for all SAPP members. If no load management options are implemented, there is a deficit in supply until The situation is improved with load management. Commissioned projects In 2008, SAPP commissioned roughly 1487 MW against a planned target of 1947 MW. 160 MW in DRC and 100 MW in Zimbabwe were not commissioned as envisaged. Tanzania is not yet interconnected to the SAPP grid. The projects commissioned in 2008 and those that are to be commissioned in 2009 are given in Tables 3 and 4. The revised projects commissioning plan for the period is indicated in Table 5. Challenges in project implementation Differences in policies and legislation in different countries cause delays in concluding PPAs and wheeling agreements. There is need for government support for these agreements. There is a lack of cost-reflective tariffs and there are project coordination aspects including the need for a dedicated project coordinator and the need for project development agreements. There is the impact of government internal costs on the costs of the project such as fees for environment impact assessment (EIA) report reviews and approvals, VAT duties and taxes. Other challenges include delays in the approvals of key project documents such as wheeling and power purchase agreements by the Regulators, and need for government to support project structure (SPV or utility structures). Status of project implementation Generation projects Ka r i b a N o r t h B a n k e x t e n s i o n : Construction has started for the (360 MW) 2012 extension. Funding is 85% Chinese and 15% ZESCO. Special project packaging (SPV or utility structures) has been formed. Inga 2: 160 MW refurbishment. Moved from 2010 to Fig. 3: Impact of load management no load management. Fig. 4: Impact of load management load management included. No Utility Country Name Type Units Capacity [MW] 1 Eskom South Africa Camden Thermal Eskom South Africa Grootvlei Thermal Eskom South Africa Komati demoth Thermal ZESA Zimbabwe Hwange rehab Thermal ZESCO Zambia Kafue Gorge Hydro SEC Swaziland Maguga Hydro TANESCO Tanzania Ubungo Gas Total 1487 Table 3: Commissioned generation projects in energize - August Page 30

2 No Utility Country Name Type Units Capacity [MW] 1 SNEL DRC Inga 1 rehab Hydro SNEL DRC Inga 2 rehab Hydro ENE Angola Lobito Thermal Eskom South Africa OCGT Gas Eskom South Africa Grootvlei Thermal Eskom South Africa Komati Thermal ZESA Zimbabwe Hwange Thermal ZESCO Zambia Kariba North Hydro TANESCO Tanzania Tegeta Gas 3 45 Total 2202 Table 4: Generation projects to be commissioned in No Country New generation capacity, MW Total 1 Angola Botswana DRC Lesotho Malawi Mozambique Namibia South Africa Swaziland Tanzania Zambia Zimbabwe Total Table 5: Revised projects commissioning plan Fig. 5: SAPP transmission projects. Botswana: New independent power producer (IPP) open-cycle gas turbine (OCGT) in Botswana 90 MW and 160 MW in 2010 and Morupule B 600 MW in 2012 and Mamabula 1200 MW in 2013/14. Luderitz: (IPP) wind in Namibia. 100 MW in Orange river hydro in Namibia: 1000 MW in Transmission projects Transmission projects are summarised in Fig. 5. They include: 2012: Mozambique Malawi 2010 to 2011: DRC Zambia 2014: Zambia Tanzania 2010 to 2011: Zizabona Westcor 2015: Mozambique backbone. Transmission projects updates Mozambique Malawi line: Financing from World Bank for both sides. Work to start July 2009 on the Mozambique side. Zizabona: IGMOU and JDA have been developed and the target date for signing is July Approach for financing to be backed by wheeling agreements. SAPP-CC is the project coordinator. EPC bids to be opened on 19 May 2009 for Zimbabwe side. Project preparatory funding has been granted to the project by DBSA. Mozambique backbone corridor: TOR for EIA awaiting World Bank no objection; Selection of consultants for feasibility studies to be done (technical, economic financial). Feedback on interconnectors ZESCO-ZESA: O u t o f s e r v i c e 8 S e p t e m b e r , i n s e r v i c e 14 November Some ZESA- ZESCO JTC mitigation measures include: Kariba complex frequency scheme harmonized; transmission lines restored; 330 kv Kariba North Leopards Hill and Dema-Bindura February 2008; technical issues addressed; bush clearing in transmission line corridors has been done; need to strengthen central corridor as a long-term measure. SNEL-ZESCO: Out of service February 2009 for substation construction at Michelo (turn-off). In service 7 February 2009; slightly delayed by bad weather. Interconnector now 220 kv Michelo- Karavia. Other interconnectors: Active Since April 2009, SAPP reported that all the SAPP major interconnectors are in service: no islanded operation; one interconnected network. Demand side management Predicted reduction in demand by demand side management is depicted in Fig. 6. energize - August Page 32

3 Commercial lighting Implementation strategy is to be developed for the next stage and technology will be rolled out with enough verification methods. Impact of demand side power station (DSPS) on load forecasts. This is indicated in Fig. 7. SAPP energy efficiency programme The European Union (EU) is assessing SAPP on whether it qualifies as an international organisation that is governed under international public law. Thereafter, an institutional audit will be done. Funds are to be considered for energy efficiency programs in SAPP. Other issues include other technologies that are to be rolled out in stages and demand forecast should be adjusted accordingly. Presentation of recommendations of the pool plan study SAPP commissioned a study to review the 2001 integrated generation and transmission expansion plan, in short known as the pool plan. The study which was finalised in 2008 was funded by the World Bank. The following are some of the highlights: Capacity deficit will continue up to High cost coal displaced by low cost hydro. The alternative case adds 8400 MW less thermal and 5600 MW more hydro than the base case. Most new coal fired generation projects were not accepted in the least cost plan. Interconnecting non-operating members should be accelerated. A central transmission corridor from DRC to South Africa via Zambia and Zimbabwe is recommended. The study highlighted the benefits that can be derived for members from coordination of their individual expansion plans. The most important benefits of regional integration, coordination, and optimisation are the cost savings, mostly reduction in capital costs. A total cost saving of $48-billion is achievable by developing power projects as a region instead of member states implementing projects individually. Presentation of the SAPP tariff study At the adhoc SADC ministerial meeting held in Namibia in July 2004, ministers responsible for energy in the SADC region agreed to address regulation, consider implementing cost reflective tariffs, and adopt regulatory principles that would enhance those tariffs. They mandated SAPP and the Regional Electricity Regulatory Association of Southern Africa (RERA) to spearhead a tariff study for the SADC region with a view to review tariff setting principles, and issues surrounding tariffs and electricity pricing in Southern Africa. The following recommendations of the study are of note: Tariff guidelines Fig. 6: Predicted reduction in demand by demand side management Fig. 7: Impact of DSPS on load forecasts indicating SAPP load forecast, after DSPS, and capacity required. SAPP and RERA should establish a set of general tariff guidelines, focusing on transparency and unbundling in price setting, especially as regards network tariffs. RERA should produce an annual tariff publication highlighting, among other things, the comparative tariffs in the SADC region. Marginal cost SAPP and RERA should attempt to ascertain the likely role for marginal cost concepts in tariff determination over the next few years. This should be done with an eye toward providing guidance to utilities and regulators on the inevitable disputes that arise when marginal cost pricing concepts are used. The need for effective communication between utilities and regulators of respective SADC countries in setting tariff principles and determining the tariffs is imperative. Pricing models SAPP should determine what types of internal network pricing models are compatible with increased trade and improved network service quality. Location-sensitive pricing for network capacity and services should be investigated. Accounting methods SAPP should adopt the harmonisation of accounting methods and techniques and move towards unification. Cost methodology SAPP members should continue to use cost plus methodology and cap approaches to network costs and consider moving towards marginal cost analysis and pricing until systems are fully built. Subsidies Subsidies to specific user groups, especially if they comprise a significant proportion of the consuming public, will rob the utility of the resources it needs to provide adequate service and the utility company and its consumers will fail to benefit fully from trade and new technologies. If a government wishes to favour specific groups of consumers, then both the beneficiaries of the program and other consumers or taxpayers will be better off if the program is funded directly by the government. energize - August Page 33

4 Regulators T h e S A D C g o v e r n m e n t s s h o u l d consider establishing regulators in their own countries to be responsible for electricity regulation and to ensure transparency in price setting across the region. Regulators should approach tariff adjustments with the aim of ensuring that the service is sustainable and there are sufficient incentives for system expansion. Multi-year price determination SADC governments and regulators s h o u l d c o n s i d e r, w h e n e v e r appropriate, the move to multi-year price determinations in the region so that utilities and customers can see price certainty supportive of the massive investment programmes that are needed to address the diminishing generation surplus capacity. It should be noted that RERA is in the process of producing an annual SADC electricity tariffs publication, which will among other things provide comparative tariff levels and show migration path towards cost reflectivity in the region. The ministers considered and adopted the above recommendations that form an integral part of an enabling environment for investment in the power sector as ensuring viability of the utilities. Creation of an enabling environment for the implementation of power sector projects RERA was tasked to propose measures at creating a conducive environment for implementation of power sector projects in the SADC electricity supply industry (ESI). As part of fulfilling its task, RERA has done the following: SADC electricity supply industry survey With the support of the USAID Southern Africa global competitiveness hub (USAID trade hub), RERA carried out a survey on Fig. 8: Cost reflective tariffs in the SADC region. the status of policy and institutional and regulatory frameworks in the SADC ESI for the purposes of comparing, monitoring and benchmarking. The survey will serve the purpose of enhancing and harmonising the variant frameworks to facilitate investment and trade, and the developing good regulator y practices in the SADC region. A draft report prepared by the USAID trade hub highlights, among other things, the following recommendations: Regularly review and update ESI policies in line with regional and international practices, and develop strategies for effective policy implementation. Complete the ESI industry reforms in line with adopted policies. Where possible, eliminate the monopolies and introduce regulations to level playing field. Ensure sustainable electricity prices and tariffs in the sector and develop strategies to move towards cost reflective levels in order to make the ESI viable. This necessitates ring fencing of the ESI business units to determine the true cost of supply. D e v e l o p a n d h a r m o n i s e l e g a l a n d r e g u l a t o r y f r a m e w o r k s t o promote regional trade. This entails strengthening the sector institutional capacity and enhancing the capacity o f c r i t i c a l s e c t o r s t a k e h o l d e r s (government, regulatory and utility personnel). RERA is currently implementing the following activities: Implementation of a regional project aimed at defining the potential roles that national electricity regulators could play to facilitate electricity exports and imports in SADC. This project is supported by the World Bank and is expected to be completed by end of September Production of an annual SADC electricity tariffs publication giving a comparative analysis of tariffs and selected performance indicators. The USAID trade hub supports this initiative and the publication is expected to be ready by end of April Development of the license guidelines for the special purpose vehicles (SPVs) in the region such as WESTCOR and ZIZABONA. The USAID trade hub supports this initiative and the draft guidelines are expected to be ready by end of June Review of issues in power purchase agreements (PPAs) negotiations with a view to conducting a benchmarking exercise and developing a course on PPAs. This initiative will be carried out before the end of RERA has been directed to carry out a further analysis to identify the reasons for many policy reversals in the region resulting in no implementation of the reforms Projects financing Status of arrangements for power sector investors roundtable The DBSA is facilitating the preparations of a regional investors roundtable for the power sector. A consultant has been engaged to identify and package regional projects which are within two years of reaching financial closure. The output from the exercise will be project information reports (PIRs) that will be presented at the roundtable meeting. The roundtable was initially scheduled to take place in August 2008, however due to delays in mobilising the consultants and lack of responses from utilities and member States in providing information on power projects the date had been shifted to mid July The slow progress being made in collecting project information from member states and the effect this has on convening the investors roundtable should be noted. Member states are urged to cooperate with the consultants and make information available to avoid further postponement of the roundtable. The roundtable will now be held on the July 2009 in Livingstone, Zambia. The SADC Secretariat in conjunction with the SADC group of ambassadors, the German Business Association and the Chamber of Commerce and Industry in Germany, are making arrangements for a targeted power sector infrastructure development seminar in Germany in October The Secretariat is also liasing with the SADC Ambassadors in Brazil for a similar targeted power sector investment seminar. The convening of the power sector infrastructure development seminar in Germany has been approved. energize - August Page 34

5 Appropriate financing model for transboundary power projects A study to explore an appropriate financing model for cross border projects is be commissioned in an effort to try and find solutions to some of the challenges encountered during implementation of interconnector projects. The benefits of regional power integration, coordination, and optimisation based on the findings of the SAPP pool plan are cost savings, mostly reduction in capital costs of up to $48-billion and the development of the environmentally friendly hydro projects in the north for transmission to the south. SAPP, with funding from the DBSA engaged a consultant to carry out the study, and a preliminary report has been submitted. Preliminary findings of the study indicate that regional projects particularly those within the pool plan need to be signed off by SADC heads of state and government in order to obtain the requisite commitment to give confidence to investors. The findings also proposed the institutional reform of SAPP to give it the additional mandate to coordinate regional projects and that there is need for a regional regulatory oversight and definite funding plan for the regional projects. Operational challenges and opportunities in power trade Under normal conditions prior to the present diminished installed surplus capacity, some countries in SAPP had excess generation capacity, others had deficit and the result in energy flow between member countries was in the form of energy trading. The northern network in the SADC region is predominantly hydro and the southern network isthermal, leading to good generation mix that mitigates drought and general sharing in the resulting benefit. Presently bilateral power contracts take up 90 95% of energy trade (15 20 TWh) at peak and standard times. The short term energy market (STEM) was introduced in April 2001 as a precursor to full competition. This market caters for 5 10% of energy trade (0,8 4,3 TWh) and operates on daily and hourly contracts during offpeak periods. The development of a competitive market in the form of a day-ahead market (DAM) started in 2003 but there is no trading under these arrangements due to supply shortages. The following operational challenges in power trading should be noted: Limited transmission capacity leads to congestion There is a lack of monitoring systems at the SAPP coordination centre to trace transactions (contracts) There is a lack of adherence to schedules leading to inadvertent energy Difficulties exist in handling of imbalances Ancillary services trading System disturbances and lack of operational discipline Supply shortfalls. T h e m i n i s t e r s d i r e c t e d S A P P t o make recommendations aimed at resolving the challenges above for their consideration at the next ministers meeting, and commended the SADC Secretariat, SAPP and RERA for the achievements made towards the implementation of the SADC energy programmes, the power sector roadmap and creation of the enabling environment in the power sector despite having inadequate capacity. The ministers further urged the SADC institutions to maintain their drive towards meeting the energy challenges in the region. Cost reflective tariffs Fig. 8 shows the number of countries in the SADC Region for which: current tariffs are able to provide the right signals for new investment and efficient use of electricity; cost reflective tariffs have been determined and; the price path has been approved. They have been compiled by RERA. Some results Return on assets for most utilities is below benchmark percentage figures. Changes in average revenue/ kwh in real terms is decreasing for some utilities. Depending on the economic v a r i a b l e s, a v e r a g e r e t a i l t a r i f f s r a n g e f r o m $0,025 $0,11/kWh. New supply options (expressed in 2008 values) Gas (Peaking) $0,22/kWh. Integrated gas combined cycle $0,105/kWh. Nuclear $0,10/kWh. Coal (conventional) $0,075/kWh. CCGT $0,072/kWh. Hydro $0,06~$0,08/kWh. This is only generation cost. Average retail tariffs range from $0,025 $0,011/kWh. Way forward Publication is being finalised with inputs from SAPP. Publication and the database is to be developed to include all electricity related data for the SAPP region. Contact Dr. T J Hammons, University of Glasgow, t.hammons@btinternet.com v energize - August Page 35