1. Independent System and Market Operator (ISO)

2. Outline of Presentation
The Conundrum
What is an ISMO?
ISMO Functions
ISMO Logic
Phases to ISMO
Impact on Stakeholders
Possible end state for South Africa
Experiences elsewhere 2 2

3. The Conundrum
SA urgently needs new generation capacity and, in turn, Eskom needs
Scarce Government capital to fund new projects
Tariff increases that have social and industrial impact
Additional Debt that have, as prerequisite, a viable ESI to repay them
Minimizing Government exposure requires
Mobilizing private sector funding
The private sector, in turn, needs a level playing field and clarity of rules
Minimizing inevitable tariff increases requires
Reducing overall sector risk with correct allocation of risks and reward
Better allocation of resources with correct electricity pricing signals
A viable ESI requires
The benefits that accrue with competition
Unleashing of enterpreneurial agility
Superior Technological Innovation and Know-how in RE and Traditional Fuels
Access to New Financial Resources beyond the Government 3 3

4. What is an ISMO? Acronym for “Independent System and Market Operator”
“Independent” = Autonomy of ISMO from its key stakeholders
“System” = National Electricity Transmission System
“Market” = Buying of electricity from electricity generators and Selling thereof to customers at a wholesale level
ISMO = Owner/Operator of National Electricity Transmission System who buys electricity from generators and sells it to customers at a wholesale level 4 4

5. ISMO Functions
ISMO, an autonomous state owned company, mandated to execute the following functions
Generation Resource Planning
Transmission Service and Implementation
Buyer
System Operations and Expansion Planning
A package empowering ISMO as an “honest broker” wholesale electricity buyer, a role Eskom, as generator, can never play.
A message for the market to know that responsibility to meet these obligations rests with ISMO

6. ISMO Logic Key among IRP objectives are
usher in a new era of IPPs,
diversify into Renewable Energy sources, and
establish the associated enabling policies
IPPs will not mobilize unless system promotes
equitable access to grid for all participants,
predictability of all costs and risk allocation principles,
policies that enhance enabling environment for IPPs,
regional cooperation
Bias can not be eliminated unless an autonomous entity is set up to deal with these issues and the playing field is levelled.

7. ISMO establishment Legislate ISMO (4 Months) Populating ISMO (2 Years)
An ISMO shell as a “Peg on the Ground”
Clarity and comprehensiveness of 4 ISMO functions
Autonomy over 4 ISMO functions
Fast track legislation / populate assets over time
Investors can relate to and buy into this
Populating ISMO (2 Years)
Transfer assets, rights, obligations, contracts, staff
Data, time and effort intensive due diligence process
Sub-phases of transition
Single Buyer and generation resource planning
System Operations and Expansion Planning
Responsibility with ISMO and under ISMO autonomy
Subcontracting to Eskom for transition until full transfer of above
Operationalizing ISMO
Full fledged performance of all 4 functions by ISMO staff
Evolution into further market based modalities (willing buyer-willing seller)
Discussions about independence of the transmission assets

8. Legislation = “Peg on the Ground” (Draft Bill open for Comments and then to Parliament)
An unequivocal, urgent, and transparent message that the Government is determined to source power from IPPs and it is taking decisive action to put in place the necessary enabling framework for IPPs to operate in, ensuring efficiency, accountability, and transparency.
Not intent, not cooperative approache, not even contractual arrangements open to interpretation, but enabling legislation that sets the scene for things to come and tells would be IPPs “if you want to be in, start spending to develop your projects, it will be a fair level play field.”

9. Unknowns are not of “Spin-off” but already Exist
Financial creditworthiness of ISMO will depend on
(a) Regulated bulk supply tariffs to cover cost of ISMO operations, and
(b) Ability of its customers to pay the regulated bulk supply tariffs.
This credit risk is no different than if Eskom was contracting with the IPPs, as cash-flow is from the same customer base.
(a) With ESKOM, as an integrated operation, the cause of any problem is less transparent.
(b) With ISMO, reason will be transparent (inadequate tariffs, or non-paying customer.)
Current Government support to maintain and expand infrastructure is due to a lack of financing through normal operations.
Establishing ISMO will not change inadequacy of funding nor make it worse, but it will make the funding shortage more transparent.
There will continue to be subsidies at distribution, with decisions on whether to cross subsidize within sector or with outside funds, and to what extent.

10. There is a Better Way with ISMO
IPPs will lift a substantial burden off Government’s coffers
Demand for present 40,000MW capacity might double in 20 years
Some of the installed capacity needs to be replaced
If IPPs bring at least 30% of future capacity, that’s 24,000MW Government need not finance
The proposed regime will reduce risk premiums
ISMO will not need subsidies if tariffs are set to self finance its operations
Competitive ISMO-generator PPAs will allocate risk more predictably
Sector costs will be reflected in new transparent pricing between ISMO-generators and between ISMO-customers
IPPs will price PPAs with ISMO at lower risk premium than with Eskom, due to absence of inherent conflict of interest in contracting process
Cost recovery based pricing combined with better risk mitigation should reduce level of guarantees needed
As a result, Government will not be faced with unquantified risks, as shareholder of a state-owned enterprise responsible for its own building program (e.g. cost overruns, project delays, currency risk)

11. Impact on Government
An asset split along mutually exclusive functions for same shareholder
Assets packaged for more efficient operation under same shareholder
Separation of businesses that ordinarily should be at arm’s length
Specialization in services
Transparency in pricing
Diversity of Business Models
Accountability of Quality
More competitive and self-reliant Eskom in generation
More competitive and self-reliant functions under an autonomous ISMO

12. Impact on IPPs IPPs have not been forthcoming in significant volumes
Perception of conflict of interests in vertically integrated Eskom
Perception that Government is not serious about industry reform
Perceptions about long-term viability of present ESI structure
Lack of enabling legal/regulatory framework to facilitate IPPs
ISMO is key in facilitating introduction of IPPs
Inclusiveness, Transparency, Accountability for level play field in Planning/Dispatch
Transparency in governance and decision making
No conflicts of interest as both player and referee
Benefits of competition in the generation sector
Objective purchase/sale of electricity in the best interests of the country
Correct risk allocation and pricing

13. Impact on Other Eskom Stakeholders
Clients :
Increased reliability of service
Suppliers :
Increased demand for goods and services in an expanding sector
Staff :
Same functions reorganized under two new houses
Possible short term job creation in in-house support functions
Certain long term job creation in an expanding sector

14. Possible end state options for South Africa
The team is considering a variety of options. Those explained in this presentation serve the illustrate the main issues.

15. As Is ESKOM HOLDINGS PROD TRANS RETAIL WIRES Gn1… GnX… Imports SO
KSACS DX
Gn2…
GnX…
Imports
Imports SO
National Control
Wholesaler
IPP’s
In this model the System Operator is a division of Eskom Holdings (not corporatised). The System operator consists of National Control, Wholesaler,Grid planning and Single Buyer. Transmission is a also a division of Eskom Holdings. Large customers (KSACS) are managed by transmission but connected at both Eskom transmission and distribution.
As highlighted earlier in the presentation, this structure has a number of problems that are preventing PPAs from being signed with IPPs
Single Buyer
REFIT
Dispatch
Trading (Aggregation)
MW Flow

16. System Operator as subsidiary of Eskom
ESKOM HOLDINGS
PROD
TRANS
RETAIL
WIRES
Gn1…
Gn1…. DX
GnX…
Gn2…
Imports
Imports
SO (Subsidiary of Eskom Holdings)
National Control
KSACS
Wholesaler
IPP’s
The System Operator consists of National Control, Wholesaler, Single Buyer and Planning. The functions of the System Operator include purchasing of power from generators, electricity wholesale – aggregation, load forecast and modeling of the planning scenarios, dispatch of power from generators. Transmission remains part of Eskom Holdings. The System operator is a (wholly owned) subsidiary of Eskom.
It is critical that the KSACS (responsible for contracting with large customers) are incorporated as part of the ISO to prevent Eskom from negotiating tariffs with large customers that are lower than the aggregated wholesale tariff.
This option can be modified by including Transmission network as part of the System Operator.
Single Buyer
REFIT
Planning
Dispatch
Trading (Aggregation)
MW Flow

17. System Operator as an Independent Entity
ESKOM HOLDINGS
PROD
TRANS
RETAIL
70%
WIRES
Gn1…
Gn1…. DX
Gn2…
GnX…
National Control
Imports
Imports
SO (State Owned Entity)
Planning
30%
Wholesaler
IPP’s
System operator consists of National Control, Wholesaler, Single Buyer and Planning. The functions of the System Operator include purchasing of power from generators, electricity wholesale – aggregation, load forecast and modeling of the planning scenarios, dispatch of power from generators. Transmission remains part of Eskom Holdings. The System operator is a public company wholly owned / controlled by Government (independent of Eskom). Large customers (KSACS) will purchase power from the system operator.
Having the company as a separate SOE rather than a subsidiary of Eskom will increase its independence substantially.
This option can also be modified to include transmission as part of the System Operator
Buyer
REFIT
KSACS
Dispatch
Trading (Aggregation)
MW Flow

18. TURKISH EXPERIENCE ON RESTRUCTURING
The Vertically Integrated Utility Model
(Until 1994)
The Central Buyer Model ( )
Unbundling
(2001 – )
New Generation -
TEAS or IPP (BOT, BOO) Built
New Generation -
EUAS or IPP Built
New Generation -
TEK and BOT Built
Suppliers (Generators,
Marketers)
EUAS
Electricity
Generation
Company
State Owned
Integrated Utility
(Turkish
Electricity
Company-
TEK)
Existing Generation (Regulated)
Generation
Only the Integrated Utility TEAS can buy
Energy from
generators.
System Operator
and
Market Operator
TEIAS
Turkish
Electricity
Transmission
Company
Transmission
and Operations
Transmission and
Operations
Only the integrated Utility TEAS can sell energy to TEDAS, Kayseri and Aktas.
Distribution
Transmission Owner
Integrated Utility TEK
and 2 concessionary companies can sell energy to consumers.
TEDAS
Turkish
Electricity
Distribution
Company
Distribution Utility
TEDAS
(State owned
Distribution & Retail
Company)
Consumers
I will conclude this part with stating a brief historical outlook of Turkish electricity sector.
Up until 1994, there was a single public utility that was vertically integrated.
As part of a restructuring effort, the distribution arm of the state-owned utility was separated in 1994.
Private participation in the sector during these periods was in the form of two concessionary zones for generation, transmission and distribution, two Transfer of Operating Rights contracts for distribution, and several generation facilities with Build Operate Own and Build Operate Transfer contracts.
With the Electricity Market Law, a new wave of restructuring began in As the Law envisages the unbundling of market activities, the public integrated electricity undertaking was also unbundled and three separate public companies responsible for the functional components of generation, transmission and trading were created.
What was new for distribution is that the Law brought the obligation for accounts separation for distribution and retail sales.
As for private participation, now, any investor wishing to operate in the generation, wholesale and retail segments may apply for licenses and enter the market. Eventually, the state-owned portions of generation and distribution functions will be privatized in order to further decrease the share of public participation in the sector.
Consumers
Consumers

19. Thank you

20. What are the international trends?
Appendix
What are the international trends?

21. Thailand model
Current: EGAT (similar to Eskom) remains vertically integrated with no ISO, yet IPPs contribute 55% of generation capacity; EGAT not directly involved in distribution
Learnings:
Different requirements for very small IPPs (e.g. no tendering but selection criteria,
and sell directly to distributors in accordance with the approved tariff
Government promulgates tariffs for the different IPPs, but provides financial support
to EGAT to make up shortfalls
Tariffs slightly high with step tariff for domestic customers and Time of Use for large customers
Tariffs are the same through out the country with cross subsidies across distributors
PPAs were structured to cater for all the concerns raised by the IPPs (i.e. high level of risk taken on by government / EGAT) hence there was less concern re the regulatory framework

22. Thailand electricity structure
VSPPs
(1%)
EGAT
(44%)
IPPs 42
Import 3%
SPPs
10%
National Transmission
EGAT (100%) System Operator
PEA
(66%)
MEA
(32%)
Customers
(2%)
Customer
Regulator
Implement Energy Industry Act
Gov
NEPC
Government Policy and Tariff approval
VSPP refers to very small private generators constituting 1% of the generation capacity
EGAT refers to the national utility of Thailand and is responsible for 44% of the total capacity
IPPs refers to large IPPs constituting 42% of the total capacity
SPPs refers to medium size IPPs responsible for only 10 percent of the total capacity

23. Thailand enhanced Single Buyer Model (ESB)‏
Key structure specifications
Key structure specifications

24. Norwegian System Operator
Norway is one of the advanced country in terms of their electricity structure
Generation is largely owned by the state (municipalities and national government) under different companies
The system operator is part of the transmission company owned by the State with no link generation
Norway has an Electricity Market responsible for aggregation of the electricity tariffs
All generators sell their power to the electricity market while the system operator is responsible for electricity dispatch