By Larry Claasen
THE opening up of the South African energy market has created new opportunities but companies looking to enter this space should also be aware of the challenges that comes with deregulation, says Rystad Energy, an independent energy research company based in Oslo, Norway.
With Independent Power Producers (IPPs) increasingly playing a larger role in electricity generation, it does not necessarily mean that the new players are set to succeed, even as state-owned power provider Eskom struggles to supply sufficient electricity.
For one, a lack of investment in the sector could see IPPs struggle to get their power to their clients. The country needs about R390-billion to upgrade and expand its transmission network to allow new energy projects to come online.
“The country’s aging grid infrastructure and insufficient capacity in some regions – especially the cape provinces can impede the efficient operation and flow of investments into the market,” says Rystad Energy vice president – business development South Africa, Nkululeko “NK” Ngcobo.
“Maintaining grid stability and reliability is paramount in a deregulated market where potentially multiple developers can integrate a lot of wind and solar capacity into the grid posing technical and operational challenges,” he adds.
Power players
Ngcobo also warns that though Eskom will no longer be the monopoly electricity generator and transmitter, deregulation does not mean there would be no concentration of market power in the sector.
“Deregulation might lead to the concentration of a few major players in the market leading to monopolistic practices such as price fixing or barriers for new competitors. If not co-ordinated and managed carefully, this could potentially compromise competition and limit choices available to the consumer.”
Eskom is also set to have significant market power for the foreseeable future, despite the move to deregulate the market.
New rules
Ngcobo also warns there is huge danger in underestimating the complexity that comes with operating in a deregulated energy market that will necessitate new players getting into complex agreements with multiple partners.
“Introducing a new energy system entails a multitude of changes across various aspects such as forecasting, notifications, system balancing, and grid capacity allocation, among others. Many of these elements do not currently exist, and hence the transition to a deregulated market could possibly take time.”
He says participants in the market need to understand the high likelihood that parties involved in these agreements will need to renegotiate terms as the government’s reform efforts become more defined and implemented.
The pricing problem
Another thing participants in the sector also need to understand is the complexity around pricing, which will have to take into account tariffs imposed by the energy regulator, and transmission arrangements with Eskom and municipalities.
“Previously, monopolistic firms in the power sector enjoyed financial stability – unlike with Eskom as the utility ended up being debt ridden. Such firms resorted to increasing consumer tariff rates to compensate for fluctuations, which would not be possible in a deregulated market as it would pose a risk on their competitive edge.”
Despite the challenges, Ngcobo says it’s a positive move for the country, as it removes entry barriers, enabling smaller firms to enter the industry, enhancing corporate efficiency, enabling companies to compete to attract more customers.
