The head of Eskom’s Transmission division has outlined some of the progress being made to establish an Independent Transmission System Operator (ITSO) but has also warned that full separation will take time and will also require major policy, legislative and regulatory changes.

The creation of the ITSO is seen as key to levelling the playing field between Eskom power stations and independent power producers (IPPs) and had, thus, been identified as a priority by the Department of Public Enterprises in its ‘Roadmap for Eskom in a Reformed Electricity Supply Industry’, published in November.

The roadmap envisaged functional unbundling of Eskom Transmission by December 2020 and full legal separation of the ITSO as a subsidiary of Eskom by December 2021. Eskom had since highlighted the legal and financial risks associated with full legal separation and had instead received support for a divisionalisation plan that would delay legal separation until about 2024.

Speaking during a webinar on Friday, Eskom Transmission CEO Segomoco Scheppers said that a ringfenced transmission structure was already in place and that the unit had also started piloting a “market operator concept” internally, through which Eskom power stations would compete to supply electricity.

Market rules and processes had been defined and internal day-ahead and balancing markets were operational.

“A market operator is being piloted internally to gauge how the ITSO could support competition between Eskom power stations and we will be looking to see whether we can open up the mechanism to external parties, which would be the ideal,” Scheppers said during the event, which was hosted jointly by Nedbank, EE Business Intelligence and the Joburg Centre for Software Engineering.

He stressed, however, that many internal and external steps were still required to fully transition to a market system, including the introduction, by government, of a formal policy that had been tested with stakeholders.

Market rules and codes would also have to be approved, including how to deal with existing pricing subsidies and legacy costs. Amendments would also need to be made to legislation and the prevailing regulatory model.

Scheepers said that, at this stage, it was envisaged that the ITSO would initially incorporate four main functions, including a central purchasing agency (CPA).

The CPA, which replaces the Single Buyer Office, would maintain long- and short-term system reliability by purchasing capacity and managing legacy commitments in terms of the Eskom fleet and the historical IPP contracts.

He defined the CPA as a “transitional” mechanism ahead of the creation of a market through which generators could sell power and customers could buy it. Nevertheless, he warned that the arrangement might need to be in place for a sustained period.

The other three functions of the ITSO would include:

• a market operator that developed and administered dynamic markets with the intention of supporting competition and customer choice;
• the system operator, which would continue to manage the real-time balancing of the electricity system and, increasingly, procure ancillary services so as to ensure a quick supply or demand response to any network instability; and
• the network service provider, to plan, build and maintain the physical network and ensure fair and open access to sellers and buyers of electricity.

“There are still a number of issues that have to be done, including finalising a pricing design that is aligned with a future electricity system, as the fully bundled electricity tariff is no longer appropriate. We believe it’s going to be necessary to unbundle it so it is clear what is the energy and what is the network charge.”

The information technology platform to support power trading would also have to be developed.

“Further engagements are also needed on what is an appropriate industry policy,” he added, noting that government would ultimately have to make those policy choices and drive the legislative and regulatory reforms required to operationalise the ITSO.

More immediately, Scheepers was also concerned about the transmission investment implications of the Integrated Resource Plan 2019, which envisaged some 10 000 MW of new capacity being added to the grid by 2025.

He noted that it currently took between eight and ten years to add new transmission infrastructure and that there was, thus, a planning misalignment between that and the fact that many renewables technologies could be built in between 12 and 19 months.

The grid investment implications of integrating 10 000 MW had also not been included in Eskom’s revenue application under the fourth multiyear price determination and “therefore we are going to have a challenge in addressing that requirement”.

“Clearly we must exploit whatever capacity we have in the network while seeking to increase the network capacity in strategic locations. In summary, though, this is going to be a huge challenge.”