Trading in the Southern African Power Pool and possible coupling with the East African Power Pool

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Trading in the Southern African Power Pool and possible coupling with the East African Power Pool Mr Willem Theron International Trader Manager Eskom, South Africa EAPIC 2007 Conference Addis Ababa, Ethiopia September 18-20, 2007

Trading in the SAPP and possible coupling with the EAPP SAPP Eskom EAPP Outline: Eskom at a Glance Creating the Trading platform Overview and objective of SAPP Operations of SAPP - Interconnections - Bilateral Trading - STEM and DAM SAPP Gen & Tx Projects Challenges for the SAPP region Overview of East African region Comparison of the 2 regions Why integrate power regions? Coupling of SAPP with EAPP Future possibilities (Eastcor / Nile Basin Initiative)

Eskom at a Glance Eskom: Is State-owned and is central to the South Africa Government s growth and development strategy Generates 95% of SA s electricity and >50% of the electricity consumed on the African continent Has an installed capacity (total nominal capacity) of 42,618MW and is currently busy with a R150billion 5 year investment program Connected 3.2million households in last 14 years Was awarded Global Power Company of the Year 2001 Internationally is 6 th largest utility in terms of sales and 11 th largest utility in terms of generation capacity(*) Is an active and proud member of the Southern African Power Pool (SAPP) (*) DatamonitorResearch Co. UK: 2005 Survey

Creating the Trading Platform 1950 s - Interconnection and regional trade in Southern Africa started with lines connecting the DRC and Zambia 1960 s - Interconnection of Zambia and Zimbabwe systems started following the construction of Kariba Dam 1975 - South Africa was connected to Mozambique via a DC line from Cahora Bassa to Apollo Two networks were therefore developed as a result: The Southern network, mainly thermal (Namibia, South Africa & Mozambique) The Northern network, mainly hydro (DRC, Zambia, Cahora Bassa & Zimbabwe) The two networks were linked by weak lines 220kV and 132kV via Botswana until 1995 when the 400kV was constructed The interconnection of the northern and southern networks created a platform for regional trade and cooperation

The formation of SAPP Factors leading to the formation of the Southern African Power Pool (SAPP) Interconnection of the northern and southern networks Drought in the region in the 1990 s curtailed hydro-generation in Zambia and Zimbabwe Increases of power tariffs due to shortages in generation capacity particularly in Zimbabwe Constraints in power supplies and need for more reliable sources End of the apartheid and successful democratic elections in South Africa in 1994 Understanding of synergy of the regional generation mix At the SADC summit in SA in 1995, an Inter-Governmental Memorandum of Understanding was signed that lead to the formation of SAPP Four agreements govern SAPP: Inter-Governmental Memorandum of Understanding - Enabled the establishment of SAPP Inter-Utility Memorandum of Understanding - Establishes SAPPs Management and Operating principles Agreement Between Operating Members Establishes the specific Rules of Operation and Pricing Operating Guidelines Provide Standards and Operating Guidelines

Objectives of SAPP SAPP was created with the primary aim to provide reliable and economical electricity supply to the consumers of each of the SAPP members, consistent with the reasonable utilisation of natural resources and the effect on the environment Vision of SAPP: Facilitate the development of a competitive electricity market in the Southern African region. Give the end user a choice of electricity supply. Ensure that the southern African region is the region of choice for investment by energy intensive users. Ensure sustainable energy developments through sound economic, environmental and social practices

SAPP Area Connections SAPP has twelve member countries represented by their respective electric power utilities No. 1 2 3 4 5 6 7 8 9 10 11 12 Country Angola Botswana DRC Lesotho Malawi Mozambique Namibia South Africa Swaziland Tanzania Zambia Zimbabwe Utility Name ENE BPC SNEL LEC ESCOM EDM NamPower Eskom SEB TANESCO ZESCO ZESA

SAPP Interconnection and Trade Limits SAPP Area Configuration --- not yet interconnected

Operations of SAPP The Governance Structure of SAPP

Operations of SAPP Types of Trading Agreements: - Bilateral Contracts - Short Term Energy Market Trading / Day Ahead Market - Wheeling Bilateral Contracts Bilateral agreements are given priority for transmission on SAPP Interconnections Bilateral contracts are given priority in order of its maturity Each host control area responsible for submitting daily schedules for each of the bilateral agreements administered under its area of control Bilateral scheduling is done on a day ahead trading basis Wheeling needs to be secured for bilateral contracting

Operations of SAPP Short Term Energy Market (STEM) STEM was formed in 2001 to enable SAPP utilities to trade their excess capacity outside their bilateral agreements STEM is a firm energy market where energy is traded on a daily basis for delivery the following day Three energy contracts on STEM Monthly / Weekly / Daily Contracts Documents that govern the STEM are: Legal Agreement Book of Rules consisting of Trading / Financial Rules Participation in the STEM is open to all Operating Members and IPPs Success of STEM has been a motivating factor in creation of a regional SPOT MARKET Day Ahead Energy Market (DAM) Based on the price setting mechanism used in the Nordic Market NoordPool Bids are connected to geographic areas Interconnection capacities between areas are defined An implicit auction of the transmission capacity is conducted as part of the energy auction (Congestion Management - by Market Splitting) The auction price is set to the price where supply equals demand An Unconstrained Market Clearing Price (MCP) is calculated Area prices are calculated based on the available transmission capacity between areas Schedules are awarded based on area prices Benefits of DAM Creation of a transparent market price Increased price volatility Price signal for cross border constraints High price area 1 Low price area 2 = market price due to constraint Price basis for structured bi-lateral contracts Price date provides underlying argumentation for generation investments Facilitates new entrants, industrial, private PP, communities Facilitates a platform for Balancing Market, Ancilliary Services Market and creates a bench mark for Transmission losses compensation

SAPP Generation & Projects Installed Capacity 53,224 MW Available Capacity 45,069 MW 2006 Peak Demand 41,831 MW Coal 58% SAPP Generation Projects Commissioned Planned Rehabilitation & Short-term Projects Medium to Long-term Projects Commissioned projects: Gas 7% Hydro 35% Commission Date 2004-2006 2007-2010 2011 onward Generation Capacity 1,140 MW 13,517 MW 32,000 MW Source: SAPP Annual Report 2007

SAPP Transmission Projects SAPP Transmission projects can be divided as follows: Transmission interconnectors with the aim to interconnect non-operating members of the SAPP: - Malawi-Mozambique interconnector, - Zambia-Tanzania-Kenya Interconnector - Westcor project Transmission interconnectors aimed at relieving congestion on the SAPP grid New transmission interconnectors aimed to evacuate power from generating stations to the load centres Enhanced transmission infrastructure will alleviate bottlenecks, increase electricity traded volumes, encourage diversity of dispatch and limit the creation of different pricing areas / zones

Challenges for the region Regional network stability Network integration & maintenance standards Limited Capacity Congestion Ageing plant Direct investment attraction Telecommunication network Environmental issues Setting up of additional control centres and the ultimate need for a super-grid authority Ensuring secure and co-operative operation through a uniform and co-ordinated system Region is running out of excess generating capacity focus on rehabilitation projects Limit congestion by new transmission infrastructure development Aging plant being run to a maximum and maintenance periods being trimmed Major investments are required Need rapid development to ensure reliability and connectivity EIAs for capacity and transmission projects and implementation of environmental guidelines

East African Countries SAPP SA EAPP According to our desk top study: The East African Community (EAC), consisting of Kenya, Uganda and Tanzania, is developing a regional energy interconnectivity plan Other East African Region Countries include Ethiopia, Sudan, Eritrea, Rwanda, Burundi, Djibouti & Somalia The EAPP is not fully functional but some interconnection and cross-border energy trade Some EA countries are cooperating in the Nile Basin Initiative (consulting with Nord Pool)

Energy in EA Countries There is significant hydropower capability in Eastern Africa, however, it is subject to periodic drought and dwindling water resources Uganda and Ethiopia have biggest hydropower potential and would play a major part in any power sharing project The Africa Great Lakes region includes countries surrounding Lake Kivu, Lake Tanganyika and Lake Victoria EA Countries mainly rely on hydropower and climatic changes can negatively effect utilities that are reliant on hydro plants to provide base load requirements Fuelwood and biomass is still greatly used in the region TECHNICALLY EXPLOITABLE HYDROPOWER CAPABILITY (TWh/Year) TWh/Year > 300 100 to 300 10 to 100 <10

East African Demand Demand for electricity in the Eastern Africa region is increasing with no apparent source of supply to meet this demand The figure illustrates the growing EAC economies and the consequent increase in peak energy demand The energy needs of both Southern and Eastern Africa are growing and more generation and transmission capacity is needed if economic growth targets of the region are to be attained [Reference: Assessment of Power Development Options in the Nile Equatorial Lakes Region Stage II, March 2005, Nile Equatorial Lakes Subsidiary Action Program, Nile Basin Initiative]

Comparison of 2 regions Access to electricity in SAPP and EAC countries 80% 70% 60% 50% 40% SAPP 30% 20% 10% 0% South Africa Botswana Mozambique Malawi Swaziland Zimbabwe Zambia Kenya Tanzania EAC Uganda Source: Sad-Elec (RSA), Electricity Prices in Southern and Eastern Africa, April 2007

Comparison of Generation Mix RSA Generation mix of utilities in SAPP and EAC in comparison to South Africa SAPP EAC 232,443 GWh 20,244 GWh 7,864 GWh (Eskom) Coal/Thermal Nuclear Hydro Other (BPC, EDM, ESCOM, SEB, ZEDC, ZESCO) (KPLC, Tanesco, UMEME) Source: Sad-Elec (RSA), Electricity Prices in Southern and Eastern Africa, April 2007

Comparison of Electricity Prices Average selling price of typical customers of utilities in SAPP and EAC in comparison to Eskom 25 20 USc/kWh 15 10 SAPP EAC 5 0 Eskom BPC EDM ZESCO KPLC Tanesco UMEME Domestic Business General Industrial (400kWh) (2500kWh) (2500kVA-50%) Source: Sad-Elec (RSA), Electricity Prices in Southern and Eastern Africa, April 2007

Why Integrate Power Regions? Benefits: Economies of scale Increased system reliability and security of supply Generation mix and optimisation of resources Improved delivery service to customers Increase in volume of electricity trade Seasonal and load diversity Minimise energy cost differentials Increased investor confidence Accelerated economic development Challenges: Transmission interconnections covering large geographical area Adherence to operational discipline is vital Transmission congestion management is critical Efficient metering and telecommunication systems needed Trust and transparency needed

Coupling of SAPP and EAPP Interconnection of the SAPP with the EAPP is in alignment with various stakeholder priorities: SAPP Long Term Expansion Plan Investigation SADC Regional Indicative Strategic Development Plan (RISDP) NEPAD Short Term Action Plan (STAP) EAC East Africa Power Master Plan (EAPMP) Nile Basin Initiative Nile Equatorial Lakes Subsidiary Action Programme (NELSAP) Coupling of SAPP and EAPP will exploit the synergy of thermal capacity in southern Africa and hydro capacity in eastern Africa

To Facilitate Coupling Accelerate the construction of the Zambia Tanzania 400kV line (about 700km) Strengthening of the lines in Zimbabwe Establish the north south interconnection in Mozambique Interconnect Mozambique with Tanzania and Malawi Integrate the power systems of Rwanda, Burundi and eastern DRC to EAC grid Identification of loads to support infrastructure development MOUs (Utility / Governmental) GABON INGA CONGO REP. DEM. CONGO TANZANIA ANGOLA ZAMBIA UGANDA MALAWI ZIMBABWE BOTSWANA NAMIBIA SWAZILAND SOUTH AFRICA LESOTHO R. B. MOZAMBIQUE KENYA

Future possibility Eastcor Eastern Power Corridor involves the establishment of Eastcor To exploit the various hydro, gas, and coal/thermal potential in countries participating in SAPP and EAPP A phased approach for interconnection is envisaged: Phase I (SA Mozambique Malawi Tanzania) Phase II (Tanzania Rwanda Burundi) Phase III (Tanzania Kenya Uganda) Phase IV (Uganda Eastern DRC Inga) Benefit to region high transmission costs detract from generation business cases and ideally should be separately addressed hence the need for Eastcor

Future possibility NBI Nile Basin Initiative (NBI) achieving sustainable socioeconomic development through the equitable utilisation of the common Nile Basin water resource The North and East African countries involved include the DRC, Egypt, Ethiopia, Kenya, Uganda, Sudan, Uganda & Burundi Consulting with Nord Pool on development Various projects under the shared vision programme involving: Exploring power trade opportunities Increasing interconnections and power transmission capacity Development of selected hydro projects Assessment of dispatch, control and communication capabilities Benefit to region - will establish a network providing a corridor for power trade with the Mediterranean Basin

Future Interconnected Pools in Africa West African Power Pool North African Power Pool East African Power Pool Central African Power Pool Southern African Power Pool

Way Forward South Africa through Eskom will continue to be a proud and active participant in SAPP, and will strive together with SAPP and the EAPP to facilitate the development of an efficient, reliable and stable interconnected electrical system in the two regions

Thank-you

References SAPP Annual Report 2007 Electricity Prices in Southern and Eastern Africa, April 2007, Sad-Elec (RSA) Planning the Eastern Power Corridor of Southern Africa, June 2007, EDM / SAPP / Eskom African Power Pools, August 2005, Eskom (KSACS Marketing Strategy) DatamonitorResearch Co. UK: 2005 Survey Assessment of Power Development Options in the Nile Equatorial Lakes Region Stage II, March 2005, Nile Equatorial Lakes Subsidiary Action Program, NBI African Regional Power Pools: Status, Plans of Action, Further Development and Recommendations, Panel session: P Naidoo, T Hammons, B Blyden, IEEE 2005 General Meeting, USA