Most municipalities will have to continue with distribution arrangements with power utility Eskom.
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Only a handful of municipalities are likely to meet the requirements to participate in the looming South African Wholesale Electricity Market (SAWEM), as most do not meet the prudential requirements and technical criteria.
Making a presentation at a National Business Initiative (NBI) discussion unpacking SAWEM, Chair of the Power Futures Lab Advisory Board and UCT Professor Anton Eberhard said most municipalities will have to continue with distribution arrangements with power utility Eskom, using existing contracts that act as a hedge against volatility and supplier instability.
Participants said SAWEM is a major, profound, and necessary step toward competition, transparency, and efficiency in the South African power market. They acknowledged that it is a complex system that will develop over time but adds another opportunity for price discovery and ultimately sends signals for foreign direct investment in the market.
Eberhard said lenders have responded positively to the opening up of the market for long-term contracts and Public-Private Agreements (PPAs).
“All the big commercial banks have seen spreads coming down and capital becoming more competitive, but there is still very little exposure to or understanding of merchant clients — clients bidding into the market — and how their risks should be priced for imbalances and storage revenues. I see some of the major banks looking forward to engaging around these issues,” he said.
He added that the emphasis must be on the insolvency and financial challenges faced by municipalities, as their participation will only be possible once arrears to Eskom are reduced and revenue collection improves.
“There will have to be investments in modernising systems to meet IT billing requirements for accuracy and compliance. We have to build their understanding of how to leverage contracts as a transition hedge while they build internal capacity. They also need to align tariffs with NERSA’s regulatory framework of MYPDs — not only in this MYPD, but extending into the next one as well,” he said.
Eberhard said there had been encouraging discussions about Eskom opening practice bids for market participants — not real participation, but an opportunity to gain experience and build capabilities.
Head of New Markets at generation firm Mulilo, Joshua Dippenaar, speaking on the implications of curtailment for generators, said there were positive developments in the curtailment framework for the wind energy sector because it allows generators to connect more wind capacity in certain areas of the network.
“If there is curtailment, those wind generators get paid. They don’t generate, but they receive deemed energy payments for the energy they would have generated had they not been subject to congestion curtailment. However, that only applies to wind in those nodes, and there is a budget cap,” he said.
He added that in the future, when there are more generators and system-level curtailment occurs because of high solar output during the day — and because coal generators cannot ramp down to make space for renewables due to must-run generation limits — curtailment could become more widespread.
“When this happens, some generators will be curtailed, but because they still have long-term Power Purchase Agreements (PPAs), they will continue to receive PPA payments,” Dippenaar said.
He noted that there remains key uncertainty in the market: how curtailment will be treated and how wheeling credits will be passed through — specifically whether they will still apply during curtailment, and how curtailment will impact them.
“We’ve forecast what we think curtailment levels will be and factored that into project financing, but it remains a key uncertainty in the market code,” he said.
For market generators, when they participate and are curtailed, they still receive a lost opportunity payment. Generators that are cleared to sell power for a specific hour but cannot generate due to congestion issues receive compensation based on the market code.
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