* ~~~1S1q7 Viewpoint Note No. 145 June 1998 Promoting Regional Power Trade- The Southern African Power Pool Donial T The Southern African Power Pool (SAPP), the first formal international pool to be set up outside Jean-Pierre North America and Western Europe, was inaugurated in 1995. While the utilities of southern Africa Charpentier, have been importing and exporting electricity for four decades, these trades occurred through and Diane bilateral contracts that were complex and often difficult to administer. The objective of shifting Minogute to the pool is to create a more efficient regional market. Although physically the pool is still embryonic and trade volumes average roughly 3 percent of production, confidence in the market and mutual trust between the members are being strengthened and sector coordination is dramatically improved. This Note reviews the factors that have eased the way for the pool agree- ments and the challenges that remain in getting the multilateral trading operation under way. FIGURE 1 SOUTHERN AFRICAN POWER POOL Power exchange first arose because of the dis- tribution of power sources in the region: a large reserve of low-cost hydroelectricity in the north- ern part (especially the Inga Reservoir in the Democratic Republic of Congo and the Cahora- - DEMOCRATIC - . . .s. - i Bassa Reservoir in Mozambique), large reserves REPUBLUiC , - of cheap coal in South Africa, and the Kariba OF CONGO - Dam (on the border between Zambia and Zim- L'_.g; az-f Z.7''.;>'-"i,'' babwe), which, being in the middle of the re- gional system, can play the "buffer" role. As the *J . t . < MALAWI network has been reinforced and extended, MALAWI many arrangements have arisen for the sale and ,, t- - ) - ;MOZAMBIQUE wheeling of electrical power between countries in the region. The new pool agreement covers about 9 million NAMIBIA I ZIMBABWE square kilometers and 200 million people. The Cahora Bassa number of customers of the interconnected na- tional systems has been estimated at more than 4.1 million, though this figure understates the to- tal number of retail customers because some of AF PWRWA L ~- the customers are distribution companies. \ 2 ~~~~~SWAZILAND The SAPP members agreed to develop their LESOTHO -Existing or planned pooling operations as a "loose pool" along the power lines lines of NORDEL/NordPool (Scandinavia), The World Bank Group Finance, Private Sector, and Infrastructure Network Promoting Regional Power Trade-The Southern African Power Pool SAPP members and UCPTE (Western Europe), and such U.S. pools inaugurated after the Inter-Governmental their utilities as the Midcontinent Area Power Pool before the Memorandum of Understanding was signed by Angola 1996 restructuring of the U.S. electricity market. a majority of the SADC members. The memo- Empresa Loose pools emphasize the constant exchange randum of understanding and its subsidiary National de of information in order to maximize both the agreements-the Inter-Utility Memorandum of Electricidade (ENE) economic and reliability benefits from trading Understanding, the Agreement Between Oper- and system autonomy. These pools do not use ating Members, and the Operating Guidelines Botswana Botuwana Power central dispatch of power plants, often relying -have now been signed by all the SADC mem- Corporation (BPC) instead on long-term bilateral contracts for elec- bers and their national power utilities. tricity supply between generators and custom- Democratic ers. These contracts are supplenejented witlh The SAPP agreeirmeniLs state that the pturpose of Republic of Congo short-term contracts and other deals under the the pool is to allow its members to coordinate Societe Nationale overall agreement. Loose pools may provide cen- the planning and operation of their systems cldElectricitt (SNELI tral services, however, including producing con- while maintaining reliability, autonomy, and self Lesotho tinuous, real-time data to match generation and sufficiency, and to share in the benefits of oper- Lesotho Electricity demand, developing indicative expansion plans, ating the pool. The agreements incorporate the Commission (LEC) and implementing emergency procedures. Loose SADC treaty, the SADC Dispute Resolution Tri- Malawi pools also establish detailed common design and bunal, the SADC energy ministers, and the Tech- Malawi Electricity operational standards to ensure system security nical and Administrative Unit. The Inter- Supply Commission and reliability and to facilitate trades. Governmental Mnemorandum of Understanding (ESCOM) establishes that the SAPP agreements must be In the SAPP full membership is limited to the interpreted in a manner consistent with the SADC Moztaim.biqued national utilities. Most are still vertically inte- treaty and that the final and binding dispute reso- Electricidade de Mozambique (EDM) grated, with a primary mandate of ensuring the lution forum is the SADC Dispute Resolution autonomy and self-sufficiency of the domestic Tribunal. The energy ministers are responsible Namibia system. The benefits of the pool include reduc- for resolving major policy issues in the SAPP Namibia Power tions or postponements in new requirements and for admitting new members to the pool. (NAMPOWER) for generating capacity and reserves, reductions The Technical and Administrative Unit provides South Africa in fuel costs, and more efficient use of hydro- secretariat and other services to the SAPP ex- Electricity Supply electricity. To estimate the potential gains, a ecutive committee, acts as liaison to the SADC., Commission (ESKOM) Southern African Development Community and seeks funding according to the recommen- (SADC) electric po-wer study conducted in 1990- dations of the executive committee. Swaziland Electricity 92 compared the costs of integrated regional (SEB) development with those of independent de- The SAPP is organized under the executive velopment, in which each country follows a committee, which acts as the board of direc- Tanzania strategy of self-sufficiency. The study showed tors of the pool, and a management commit- Tanzania Electricity savings of USS785 million (1992 prices), or 20 tee, which oversees the administration of the Supply Company percent, over 1995-2010. Because the Demo- pool. Three subcommittees serve under the ITANESCD) cratic Republic of Congo and South Africa were direction of the management committee: the Zambia not members of the SADC at the time of the planning subcommittee (which focuses on re- Zambian Electricity study, the comparison did not include their sys- viewing wheeling rates annually and develop- Supply Corporation tem expansion plans, though it did account for ing an indicative SAPP expansion plan every (ZESCO) energy trade opportunities. Including these two two years), the operating subcommittee and Zimbabwe countries boosts the benefits significantly. its associated coordination center, and the en- Zimbabwe Electricity vironmental subcommittee. The coordination SupplyAuthority The agreements center, which is still being set up, will be re- (ZESA) sponsible for such tasks as undertaking most The Southern African Power Pool is based on pool monitoring activities, carrying out oper- agreements rather than on law. The pool was ating and planning studies, determining trans- fer limits on tie-lines, administering a regional ner (South Africa) act as a driver, encouraging database, disseminating maintenance sched- more passive parties. ules, providing technical advice, and seeking funding for its needs. The experience of the SAPP shows that in mov- ing from pool agreements to implementation, it Each member must meet its Accredited Capac- is possible for some participants to move in ity Obligation, a requirement that each utility smaller, incremental steps toward the overall goals have sufficient capacity to cover the forecast set bv the agreements. While all participants must monthly peak. Each member is also obligated take consistent steps, they do not need to move to supply emergency energy for up to six hours, at the same pace. And while all participants have to provide automatic generation control and agreed to an international pool, it is reasonable other facilities in its control area. to allow to expect that self-sufficiency and autonomy will wheeling through its system where technically remain the priority for some members, at least and economically feasible, to submit mainte- through the first phase of operations. The pool nance schedules, to disclose information and agreements include provisions that recognize costs related to thermal generating facilities, these concerns while also encouraging greater and to contribute toward the center's costs. integration, for example, by permitting members to meet their Accredited Capacity Obligation A key element in the operation of the pool is through a contract with another member. Not all the SAPP pricing arrangement, set out in thir- countries prefer such a gradualist approach, how- teen detailed schedules in the operating agree- ever: Botswana, Mozambique, and Namibia have ment. These schedules cover four broad types opted to rely more on importing power than on of transaction: firm power contracts of varying building new capacity. Regardless of the preferred duration; nonfirm power contracts of varving path, it is essential to set pool governance rules duration: mutual support contracts such as op- so that all members, large and small, perceive erating reserve, emergency energy. and con- that they have a voice. trol area services; and scheduled outage energy, energy banking, and wheeling. As national regulatory agencies develop and be- gin to assert their authority there is a risk that Implementation they might not be sufficiently attuned to the needs of the regional market. Experience in other Three major factors played a key part in the countries shows that although a pool can oper- development of the regional pool agreements: ate where regulatory regimes differ, as they do the availability of complementary power sources, among SAPP countries, possibilities for gaming an active regional organization for economic co- or unfair advantage created by differences in operation, and the political will to support in regulatory systems can undermine members' creased regional energy trade. The Southern willingness to participate. So national-level regu- African Development Community and its pre- latory statutes should be carefully drafted so that decessor, the Southern African Development Co- the agency jurisdictions are properly defined, ordination Conference, served as a focal point directed and restrained in order to avoid regu- for the promotion of regional integration, facili- latorv obstacles to trade. There should also be tating investment in projects (such as intercon- periodic reviews of regulatory compatibility as nection projects) that allowed increased regional the SAPP develops. In addition, the need for a power trade. The momenitum for regional inte- consistenit approachi to t-ansiimission access is gration, including increased power trade, was becoming apparent as more independent power further strengthened by the emergence of more producers (IPPs) and independent transmission democratic governments in several countries and projects (ITPs) express interest in investing in the cessation of hostilities in others. Also help- the region. So far only Zambia has required its ful has been having at least one country or part- regulator to take into account SAPP interests. Promoting Regional Power Trade-The Southern African Power Pool A review of the SAPP's first year of operation Fourth, to allow efficient operation of the pool showvXs that several important practical issues and encourage an IPP presence, all the SAPP need to be addressed to support the develop- utilities should unbundle their domestic trans- ment of the pool. First, the power utilities in mission pricing and ensure members adopt each country need to be put on a more viable identical rules to set transmission costs. In ad- financial footing to ensure that they are credit- dition, a study is needed to assess the effects worthy and able to respond to commercial in- on pool development of transmission pricing centives for trading power, including the ability under the SAPP and current national pricing to generate foreign exchange. Toward this end, policies. commercialization programs are under way or under consideration at half the utilities (EDM, Fifth, SAPP members need to estimate and meet ENE, ESCOM, ESKOM, ZESA, and ZESCO). Most financing requirements for operations and new advanced in power system reform are South generation and transmission projects. In identi- Africa and Zambia. fying potential new projects, they should use compatible generation and transmission plan- Second, the SAPP members need to reach agree- ning software that explicitly allows for risk analy- ment on the design and staffing of the coordi- sis and for dealing with hydrological uncertainty. nation center, a politically challenging task, so that the center can become operational. The key Sixth, SAPP members need to harmonize steps are deciding on a neutral location; select- ESKOM's internal competitive generators pool Viewvpoint is an open forum intended to ing a neutral manager with sufficient autonomy; with the SAPP cooperative pool. The internal encourage dissemina- establishing a legal status; defining clear gover- pool, set up in 1996, is based on the England tion of and debate on nance rules; setting guidelines for the interface and Wales model and currently does not pro- best prictvcesfor exa between the center, SAPP members, and the vide for access to third party operators. SAPP panding the pnivate SADC; identifying equipment needs, especially members also need to address the risk that the sector. The views pub- computer hardware and software; training op- different triggers for capacity addition (price lished aire those of the authors and should not erators; twinning with a mature pool to develop signals for the internal pool and a planned ap- be attributed to the skills; and developing a realistic budget. By the proach for the other SAPP members) could lead World Bank or any of end of the first year SAPP members had made to suboptimal investment. its affiliated organiza- tions. Nor do any of the progress on only a few of these issues. They conclusions represent had agreed to establish the center in Harare, Finally, because the SAPP establishes a largely official policy of the Zimbabwe, separate from ZESA, and had ad- self-governing regime at the operating level, World asak or of ts vertised for a manager. The operating subcom- and as experience in Argentina, Europe, and or the countries they mittee had drafted a constitution that was being North America shows, members will need to represent. finalized. And training programs for operators quickly set up an effective dispute resolution To order additional had been offered, with more under preparation. process. Clear resolution procedures combined copies p ease call with realistic enforcement could also help in 202-458-1111 or contact Third, the pool would benefit from broadening attracting new generation and minimizing na- Room ih-188, its membership to include existing institutions tional self-sufficiency concerns. The World Bank, that control or influence significant generation Washington, NW, or transmission, such as Hidroelectrica de Cahora This Note draws heavily from Suipporting the Implementation of the or Internet address Bassa, the Copperbelt Energy Consortium, the SonternAifncanPowerPool, forthcomingasanvorldB ssmith7tBworldbank.org. new private owner of the Power Division of the cat Paper (Washington, D.C.). The series is also Zambia Consolidated Copper Mining Company, available on-linieDoaTOLay(cretywkigih lwww.v orldbank.org/ and the Zambezi River Authority. But this will Donal T 0 Leary, (currently working with html/fpd/notes/ mean developing procedures (voting rules) to Siemens AG under the World Bank Staff notelist.html). give voice to and account for the interests of Exchange Program), Jean-Pierre Charpentier, (® Printed on recycled these players as well as other new entrants, such and Diane MIinogue, Energy Markets and paper. as IPPs and ITPs. Reform Thematic Group