ResearchPaperon

TheSouthAfrican

ElectricityMarket

CAPACITIESFORANENERGYTRANSITION

August2022

Contents

Abbreviationsi

1.Introduction1

1.1Background1

1.2Content2

2.TheSouthAfricanelectricitysupplyindustry3

3.Marketconcepts5

3.1DayAheadandintradaymarkets7

3.2Balanceresponsibilityandancillaryservices9

3.3Co-optimisationofenergyandreserves9

4.CentralPurchasingAgency11

5.Governanceandregulatorystructures13

6.Internationaltrade14

7.Conclusion16

8.Furtherreading17

Abbreviations

BRP

Balanceresponsibleparty

CPA

CentralPurchasingAgency

DMRE

DepartmentofMineralResourcesandEnergy

ESI

ElectricitySupplyIndustry

IPP

Independentpowerproducer

NERSA

NationalEnergyRegulatorofSouthAfrica

PPA

PowerPurchaseAgreements

SAPP

SouthernAfricanPowerPool

SMP

Systemmarginalprice

TSMO

TransmissionSystemandMarketOperator

TheSouthAfricanElectricityMarketi

1.Introduction

1.1Background

TheSouthAfrican-GermanEnergyProgramme(SAGEN),fundedbytheGermangovernmentandimplementedbytheDeutscheGesellschaftfu?rInternationaleZusammenarbeit(GIZ),wasapproachedbyEskomTransmissiontoprovidefurthertechnicalassistanceandcapacitybuildingfortheimplementationofreformsinthepowersector.Thisresearchpaperhasbeendevelopedundertheproject“CapacitiesforanEnergyTransition”asaninputtothepowersectorreformprocess.Itservesasahigh-leveldescriptionofthemarketmodelanddescribesthevariousmarketsegmentsandhowthemarketisintendedtowork.ThetwootherresearchpaperscreatedunderthissupportprojectgivefurtherdetailsontheroleoftheCentralPurchasingAgency(CPA)withintheSouthAfricanmarketandtheuseofContractsforDifferencewithintheindustry.ItisbeneficialforreadersofthisdocumenttoalsoreadthesepapersastheyareinterlinkedandprovideinsightintokeyaspectsofhowthefutureelectricitymarketinSouthAfricacouldwork.ThisreportwaspreparedbyHans-ArildBredesenfromBredesenConsultingactingasasub-contractortoNordPool

Consulting.

Contact

QuestionsandcommentsonthisReportcanbedirectedto:

Hans-ArildBredesen

TeamLeader

E:hans-arild.bredesen@

TheSouthAfricanElectricityMarket1

1.2Content

Thisresearchpaperpresentstheunderlyingconceptsofthemarketmodel,more

specificallyas:

a)TheSouthAfricanelectricitysupplyindustry

b)Marketconceptandthekeymarketfeatures

c)Regulatorystructures

d)Internationalmarkets

ThedescriptionisbasedontheexistingpresentationsofthecurrentmodelaswellastheongoingdevelopmentofthefutureSouthAfricanMarketCode.Thiscode(underdevelopment)shallbecometheregulationdocumentfortheSouthAfricanmarketmodel.

Disclaimer:ThedevelopmentoftheSouthAfricanMarketCodeisaworkinprogresswherethedescribedmarketmodel,includingthedetailedrules,arebeingdevelopedinparalleltothispaper(andwillcontinuetoevolveovertime).ThefinalmarketmodelwillalsobeinfluencedbythefinalchangestotheEnergyRegulationAmendmentBill(ERA)andpotentiallyothergovernmentaldecisions.

TheSouthAfricanElectricityMarket2

2.TheSouthAfricanelectricity

supplyindustry

TheSouthAfricangovernmenthasoutlineditsintentiontomovetoacompetitiveelectricitymarket,eventuallyallowingallconsumerschoiceofelectricitysupplier.Thetransitiontoacompetitivemarketmodelwillbebasedonastepwiseimplementationofvariousmarketsegments,aswellasaphasedintroductionofparticipantstotheSouthAfricanpowermarket.Tounderstandtheprocessesrequiredwithinanelectricitymarket,itisvaluabletooutlinetherelevantstakeholdersandhowtheyparticipateintheindustry.Figure1showsaschematicofanelectricitysupplyindustry(ESI)withacompetitivemarket.

Eskomiscurrentlystructuredasaverticallyintegrated,state-ownedenterprisebutisintheprocessofunbundlingintoseparategeneration,transmissionanddistributionentities.Theunbundlingdoesnotnecessarilymeanfulllegalseparationbutwillatleastincorporatefunctionalunbundling.Approximately95%oftheelectricityproducedinSouthAfricaiscurrentlyproducedbyEskomGeneration,primarilythroughcoal-firedthermalpowerstations.Additionalcapacityproducedbyindependentpowerproducers(IPPs)ispurchasedbyEskomthroughcontractsintheformofPowerPurchaseAgreements(PPAs),whichspecifythepriceatwhichelectricitywillbeboughtforasetnumberofyearsthroughasinglebuyer.TherequirementsforadditionalpowerarebasedonaministerialdeterminationbytheDepartmentofMineralResourcesandEnergy(DMRE)inlinewiththeIntegratedResourcePlansof2010and2019.Incontrasttoacentrallyplannedenvironment,acompetitiveenvironmentwillalloweligibleIPPstoenterthemarketastheychoose,withpricesignalsdeterminingwhennewcapacityiscreated;ifinvestorsthinkthattheywillmakeaprofitsellingelectricitytheyinvestinnewgenerationfacilities.

TheSouthAfricanElectricityMarket3

price

Contract

price

Contract

Market

price

Market

price

PPAContractprice

PPAContract

price

Households

Use-of-systemcharges

Use-of-systemcharges

Systemoperator

Communities/

businesses

LegacyIPPs

Transmission

Distribution

Bilateralagreements–contractprice

Powerintensive

users

NewIPPs

Brokers,traders,retailers

Marketprice

Marketoperator

Marketprice(usedinsettlement)

Central

purchasingagency

ESKOMGx

FlowofFlowofFlowof

Generators

Consumers

money,determinedbythemarket

money,determinedbythecontracts

electricity

Figure1.ParticipantsintheSouthAfricanelectricitysupplyindustry

Wherethesemarketmechanismsaredeemedtobeinsufficienttoensuresecurityofsupply,contractscanbeenteredintowithaspecialpurposevehiclecalledtheCentralPurchasingAgency(CPA),whichperformsasupportingrolewithinthemarket(detailedinSection5).

TheSouthAfricanElectricityMarket4

TheSouthAfricanElectricityMarket5

Whilecompetitionwillbeallowedbetweengenerators,thetransmissionanddistributionnetworksmustbeoperatedandregulatedasmonopoliesindependentofthemarket.Thisisbecauseaccesstothesenetworksisrequiredbyallparticipantsandthereforenon-discriminatorythird-partyaccessmustbeensuredasaprerequisitetocompetition.Tocoverthecostsofowning,operatingandexpandingthenetwork,anunbundleduse-of-systemtariff(sometimesreferredtoasawheelingtariff)isappliedtoallelectricitytransferredonthenetwork.ThischargeispaidtotheSystemOperator,whoisresponsibleforthemeteringofallmarketparticipants,thereal-timebalancingofsupplyanddemandontheintegratedpowersystemandtheiswsuingofdispatchinstructions.Inacompetitivemarketenvironment,theSystemOperatorwillusetradesreportedfromtheMarketOperatortomanagethereal-timeprocessesrequiredforthephysicalbalanceofthepowersystem.Theconsumers(oftenrepresentedbytraders,brokersand/orresellers)willbuyelectricityfromachosensupplierthatwillutilisethevarioustradingopportunitiesthroughthemarketstobuytherequiredelectricitytomeettherequirementsfromtheconsumers.TheMarketOperatoristhebodyresponsibleformanagingthemarketscreatedtofacilitatethischoiceandforensuringthatfinancialsettlementsbetweenbuyersandsellersaresettledinatransparentmanner.

3.Marketconcepts

Inaperfectlybalancedsystem,theamountofelectricityproducedequatestotheamountofelectricityconsumedatanygiventime.Thebenefitofamarketisnotonlythatitallowsconsumerstochooseproductsthatbestsuitthembutthatindoingso,thissystembalanceoccursatapricethatisacceptabletoeveryone(definedasmarketclearing).

Giventhecoordinationrequiredtoachievethisbalance,differentmarketmechanismsareusedtofacilitateit.Theseincludemarketplatformsinwhich:

a)predictedsupplyanddemandaretradedbyparticipantsaheadoftime,toallowforsystemplanningandcoordination=short-termphysicalmarketssuchastheDayAheadmarketsandinthefuture,intradaymarkets

b)anyimbalancescreatedduetothedifferencebetweenrealandpredictedsupplyanddemandarereconciledtoensuresystemsecurity=balanceresponsibility,reservemarketsandancillaryservices.

c)contractscanbeenteredintotoprovidecapacityforlongertermsupplysecurity=

capacityremunerationschemes

d)themarketmodelallowsforlonger-termbilateraltrades(bothphysicalandfinancial)tobetradeddirectlybetweenabuyerandselleroutsidetheshort-termphysicalmarketstoallowforhedgingagainstpricerisk.

Theshort-termphysicalenergymarket,whereelectricityispaidforasconsumed,consistsofacommitmenttothedeliveryandconsumptionofpower.Afuturefinancialenergymarketallowsfortradingtooccuroncontracts,withanunderlyingreferencetotheshort-termmarket.Thismarketcanbeusedforderivativetrading,tosupportriskmanagementstrategiesbyparticipants.(FormoredetailsonthesecontractspleaseseetheEskomTransmissionresearchpaperentitled“ContractsforDifference”).

EskomhasalreadyestablishedtheEskomDynamicEnergyMarket(EDEM),whichcanformthebasisoftherequiredplatformsforacompetitiveelectricitymarket.Theseplatforms,operatedbytheTransmissionMarketOperatorareillustratedinFigure2.

Energyreservemarket

(Dayaheadreserve)

Availablebutheld

backforreserve

margin

Balancingmarket

Realtimedeliveryofpower

Ancillaryservices

Networksupport

services

Otherservices

Anythingthatcan

managesupply/demand

inrealtime

Capacitymarket

Firmpowercanbecalledonwhenneeded

Energymarket(Dayahead)

Carriedacross

wirestoday

Figure2.OverviewofEskom’sDynamicEnergyMarket(EDEM)model

Eligiblebuyersandsellersarealsoabletoconcludephysicalandfinancialbilateralcontractsoutsidethismarket.Thephysicalcontracts,incorporatingthecommitmentfordeliveryandconsumptionofpower,willresultindeclarationstotheMarketOperatorbytheendofeachday’stradingontheDayAheadmarket(gateclosure).IntradayvariationswillbepermittedasapprovedbytheSystemOperator(afteraccountingfornetworkconstraints).

TheSouthAfricanElectricityMarket6

3.1DayAheadandintradaymarkets

ADayAheadmarketisnormallywheremostenergyistraded.Asthenamesuggests,theDayAheadmarketisrunonedayaheadofrealtimeandattemptstoestablishaprovisionalhour-by-hourbalancebetweenelectricitysupplyandconsumption.GeneratorssubmitabidtotheMarketOperatorforeachoftheirpowerproducingunits,declaringtheircapacity,availabilityandpriceforeachhourofthefollowingday.Theseunit-basedbidsarereferredtoascomplexorders,astheyincludetechnicalparameters(start-uporshut-downtimes,howfastaunitcanchangeitsoutput,minimumgeneration)andthepricesassociatedwithproductionasacapacity-dependentcurve.Retailers,brokersandtradersrepresentingtheconsumers(households,businessesandpower-intensiveindustries)submittheirpredictedconsumptionlevelsperhourasdemandorderstotheMarketOperator.Oncegeneratorshaveofferedtheircapacity,expressedwithdifferentvolumesatdifferentprices,andconsumershaveindicatedtheirwillingnesstopayforenergyatasetofgivenprices,theMarketOperatormatchesgeneratorsandconsumersonanhour-by-hourbasis.Matchinggeneratorsandconsumersinthiswayresultsinaprovisionalbalancepoint,asindicatedinFigure3,atwhichelectricityissoldatasystemmarginalprice(SMP)forallparties.Thepowergenerationunitsareactivatedinanascendingorderoftheirrespectiveofferprice,andasaresult,themosteconomicallyefficientproductionunitswillbechosenfirst(energyoptimisation).

Supply

Price(EUR/MWh)

System

Marginal

Price

Demand

Turnover

Figure3.SystemMarginalPriceandpowervolumes

forbothsupplyanddemandcurves

TheSouthAfricanElectricityMarket7

TheSouthAfricanElectricityMarket8

Thisinitialmarketbalancepointisanunconstrainedresult,independentofanyphysicalnetworkconstraints.However,theinclusionofnetworkconstraintsisnecessarytoensurethephysicalviabilityofthedispatchorders.Therefore,thevolumesofpowertobeproducedbyeachgeneratorarerecalculatedtoincorporatenetworkconstraints(calledaconstrainedresult).Ifaparty’sunconstrainedscheduleisreducedduetothisre-calculation,itwillbeallowedtokeepits“l(fā)ostopportunitypayment”fortheconstrainedvolume.

Exampletodemonstratelostopportunitypayment

a)AgeneratoroffersageneratingunitatapriceofR500foragivenhour.

b)Theunconstrainedmarketresultisthatthisgeneratorshouldproduce50MWhataSMPofR700.

c)However,duetonetworkconstraints,itsproductionscheduleisreducedto45MWh.

Thegenerator’sfinancialsettlementforthatspecifichourwouldthenbe:

Totalpayment=productionpayment+lostopportunitypayment

=(electricityproducedSMP)+(lostopportunitygenerator

offerprice)

Totalpayment=(45MWhR700)+[(50MWh–45MWh)(R700–R500)]

=R31500+R1000

=R32500

TheconstrainedresultisthenusedbytheSystemOperatortoformulatedispatchinstructionsforthenextday.InadditiontoaDayAheadmarket,inthefuture,intradaymarketscanbeusedthroughoutthedaytobalanceproductionandconsumption.ThesemarketsfunctioninthesamewayasDayAheadmarketsbutwithinashortertimeframe(forexample,auctionstakeplaceeveryfourhours).However,theshortertimeframesdocreatemoreonerousrequirementsand,whilethereisanambitiontocreatethistypeofmarketinthefuture,itwillnotbecreatedwithintheinitialmodel.

services

3.2Balanceresponsibilityandancillary

Ifallpartiesadheretotheirpredictedproductionandconsumption,thesystemremainsinbalance.However,thereareinevitablydeviationsfrompredictedproductionandcon-sumptionandtheseimbalancesareaddressedthroughbalanceresponsibility,DayAheadreservemarketsandancillaryservices.

Balanceresponsibilityisdefinedasaparticipant’sobligationtopaythecostsassociatedwithanyimbalancecausedduetothedifferencebetweenrealandpredictedsupplyordemand;ifageneratorproduceslesspowerthanpredictedorconsumersconsumemorepowerthanpredicted,theparticipantisrequiredtopaythecostsassociatedwithprocuringadditionalpowerandcoordinatingthebalancingofthesysteminrealtime.

ThepowerrequiredtobalancethesysteminrealtimecanbeprocuredthroughancillaryservicesandDayAheadreservemarkets,wheregeneratorsdeclarethattheyareavailableatspecifiedtimestoproduceacertainamountofpower,ifthereisashortfall.Thesegeneratorsarecompensatedbothformakingthemselvesavailableonstandbyandforanyelectricityproducedduringthistimeframe.Duetothehigherdispatchabilityandsystemcoordinationrequirementforthistypeofgeneration,thepriceofelectricityonthismarketisalsohigher;acostthatisbornebythebalanceresponsibleparty(BRP).Consumerscanalsodeclarethattheyareavailableatspecifiedtimestoreduceconsumptionbyaspecifiedamount(demandresponse),forwhichtheywillbecompensatedfor.TherequirementfortheamountsandtypesofreservesisacalculationthatisdonebytheSystemOperatortoensuresystemsecurity(reserveoptimisation).TheMarketOperatorisresponsibleforprocuringtheseancillaryservicesonbehalfoftheSystemOperator.Thesebalancingmechanismscreateacostincentiveforallpartiestopredictanddeclaretheirpowerproductionorrequirementsaccuratelyandadheretotheirpredictions.

3.3Co-optimisationofenergyandreserves

Tofacilitatethetradingforeachmarket,theMarketOperatorusesindividualunit-basedcomplexordersfromBRPs(onboththeconsumptionandgenerationside)indifferentmarkets,tooptimiseforbothcostandsystemsecurity.Thisissplitintotwomainprocesses:Energyoptimisationandreserveoptimisation.Theenergyoptimisation,representedbytheenergybalancebetweensupplyanddemandissolvedusingtheDayAheadandfutureintradaymarkets,whilethereserveoptimisation,accordingtotheSystemOperator’srequirements,issolvedinthereservemarket.

TheSouthAfricanElectricityMarket9

TheSouthAfricanElectricityMarket10

Boththeenergyandreservesoptimisationsaresolvedinonealgorithm.ThisalgorithmwillberunbytheMarketOperator,usingthesameunit-basedcomplexordersonbothmarkets.Thealgorithmwillcalculatetheoptimalresultsforboththeenergybalancebetweensupplyanddemand,andtheSystemOperator’srequirementforreservesaspartofoneprocess.Therebythenameco-optimisation,asitoptimisesboththeenergybalanceandthereserverequirementaspartofoneprocessoralgorithm.Thisco-optimisationisoneofthekeyfeaturesthatdistinguishestheproposedSouthAfricanmarketmodelfrom,forexample,itsEuropeancounterpart.

Exampletodemonstrateco-optimisation

GU1

GU2

GU3

Thisisasimplifiedexamplebasedononeinflexibledemand-siderequirementof600MWandonereserverequirement(inreality,therewillbethree)fromthe

SystemOperatorof150MW.Therearenonetworkconstraintsinthisexample.Threegeneratingunits(GU)withthefollowing(simplified)parametersareofferedtothemarket:

(1)300MW,pricedatR400/MW,non-flexible

(2)100MW,pricedatR500/MW,flexible

(1)100MW,pricedatR600/MW,flexible

(1)200MW,pricedatR550/MW,non-flexible

(2)100MW,pricedatR700/MW,flexible

Ifyoudoapureenergymarketcalculation,theresultwouldbe:

GU1:GU2:

GU3:

Allitsoutputwouldbetaken(400MW),

Noneofitsoutputwouldbetaken,

200MWwouldbetaken(Order1),

andtheSMPwouldbeR550(thepriceofthelastunitusedinamerit-orderselection).

However,theco-optimisationwillalsoneedtoconsiderthereserverequirementfromtheSO.

GU1:

GU2:

GU1:GU2:

GU3:

Energy300MW*R700=R210.000Reserve100MW*R400=R40000Energy50MW*R700=R35000Reserve50MW*R400=R20000

Energy250MW*R700=R175000

Noreservepayment

Basedontheordersonthepreviouspage,theselectionprocesswouldthereforebe:

Reserves(thisrequiresflexiblegeneration):

100MWfromOrder(2)

50MWfromOrder(1)

Energy(bothflexibleandnon-flexiblegenerationcanbeused):

300MWfromOrder(1)

50MWofitsOrder(1)(remainingafterreserveselection)

200MWofitsOrder(1)and50MWofOrder(2)

ResultinginaSMPforenergyofR700/MW(thepriceofthelastunitusedinamerit-orderselection)andaSMPforreservesofR300/MW(basedonthelostopportunitycostfrombeingkeptoutsidetheenergymarketcalculatedasthedifferencebetweenthelowestcostoffered–R400fororder1forGU1andtheSMP–calculatedatR700/MW).

Paymentswouldthenendupas:

GU1

GU2

GU3

4.CentralPurchasingAgency

ACentralPurchasingAgency(CPA)isamarketsupportentitythatwillbecreatedtofulfiltheroleofcounterparttocontractsnecessarytofacilitatethetransitiontoacompetitivemarketaswellasaspecialpurposevehiclemanagingnon-marketagreementsorservicesalignedwiththecompetitivemarket.

ItwillbefinanciallyresponsiblefortheexistingPowerPurchaseAgreementswithIPPs(legacycontracts)andwillparticipateasabalanceresponsiblepartyinthemarketfortheelectricityproducedundertheseagreements.ItcanalsoenterintonewPPAswithIPPstoenhancesystemstability.

TheSouthAfricanElectricityMarket11

TheSouthAfricanElectricityMarket12

InadditiontocontractswithIPPs,theCPAwillserveasthefinancialcounterpartforelectricitygeneratedbyEskomGeneration(vestingcontracts).Thesecontractsaresignedwitheachpowerplantandtypicallyconsistoftwoparts;thefirstappliedoverthelifetimeoftheplantandthesecondexpiringovertime.Thefirstsectionspecifiesanagreeduponpaymenttocoverthefixedcapital,operationalandmaintenancecostsrequiredbytheplantandspecialancillaryservicessuchasblackstartingandislanding.Thesecondsectionspecifiesafixedenergyandreservecapacityprice(hedgeprice)tobeappliedatthestartofthecontractandtheprocessbywhichthisfixedpricewillgraduallytransitiontothemarketpriceovertime.Whenapplyingahedgeprice,powerisfirstboughtorsoldinacompetitivemarketthenhedgedbacktotheagreeduponfixedprice.EskomGenerationwillbetheBRPforallitsgeneration.(FormoredetailsontheCPApleaserefertoEskomTransmissionresearchpaperentitled“TheRoleoftheCentralPurchasingAgency”.)

Common?nancialsettlementservices

BalanceResponsibleParties(Generators,Retailers,Traders,Consumers)

BalanceResponsibleParties(Generators,Retailers,Traders,Consumers)

MarketOperator

(future)

Intraday

(Energy)

Centralpurchasingagency

Day-ahead

Reserves(Capacity)

Energyhedge

(Energy)

SystemOperator

Day-ahead

(Energy)

Availability

payment(capacity)

Balancing

activations

Ancillary

services

(Energy)

Figure4.Organisationalaspectsofthemarketmodel

Figure4illustratestheresultantorganisationalaspectsofthemarketmodel.TheexistingEskomDynamicEnergyMarketandPPAsformpartofaregulatory“sandbox”environment.Thismeansthatthemarketisalreadybeingusedasdesigned,withpricesdeterminedaccordingtothemarket.Similarly,thePPAswithEskomGenerationandEskomDistributionareappliedaspertheagreedcalculationsandprinciplesinthesecontracts.However,oncethesepaymentsaredeterminedaccordingtothemarket,theyarehedgedbacktoaregulatedrevenuedeterminationmadebytheNationalEnergyRegulatorofSouthAfrica(NERSA).The“sandbox”operationmeansthatthepartiesarenotsubjecttothefinancialeffectofthepaymentsandchargesbutareabletolearnhowtheseprocesseswillworkinthefuturemarket.

5.Governanceandregulatory

structures

Figure5illustratestheregulatoryandlegislativeenvironmentfortheSouthAfricanelectricitysupplyindustry.

NationalPolicy

Documents

Discussion

e.g.Whitepaperon

EnergyPolicy

NationalParliament

NationalExecutive

NERSA

Regulations

Licenses

Codes

Rules

Guidelines

Methodologies

e.g.SAMarketCode

NERSA

TransmissionSystem

andMarketOperator

(TSMO)

MarketCommittee

Figure5.RegulatoryandlegislativeenvironmentfortheSouthAfricanelectricity

supplyindustryandmarket(adaptedfromtheElectricityPricingPolicy)

Metering

Financialsettlement

Disputesettlement

Investigationof

noncompliance

MarketOperator

SystemOperator

Legislation

Bills

Acts

e.g.Electricity

RegulationAct

e.g.National

EnergyAct

Directions

Principles

SectorPolicy

DMRE

NERSA

DMRE

NERSA

Implementation

Green

White

paper

paper

Papers

DMRE

DMRE

AtthehighestlevelofgovernancearenationaldocumentsanddiscussionsbytheNationalParliamentortheExecutive.Theseaddressprioritymultisectoralissues,forexample,theNationalDevelopmentPlan2030andStateoftheNationaddresses.Whiteorgreenpapersandlegislationprovidehigh-levelguidancewithinthesectorandarethereforetheresponsibilityoftheDepartmentofMineralResourcesandEnergy(DMRE).T