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Day Ahead Market – Regional energy trading gains momentum

April 2013
SOUTHERN AFRICA continues to make significant progress towards achieving a sustainable and competitive electricity market that allows member countries to easily sell and buy electricity from each other. The competitive electricity market, commonly known as the Day Ahead Market (DAM), was commissioned in December 2009 and is administered by the Southern African Power Pool (SAPP).

SAPP is a regional body that coordinates the planning, generation, transmission and marketing of electricity on behalf of Member State utilities in southern Africa.

All the power utilities in mainland SADC, with the exception of Angola, Malawi and the United Republic of Tanzania, are interconnected through SAPP, allowing them to sell electricity to one another through a competitive market.

SAPP chief market analyst Musara Beta said, in an interview with this publication, that the DAM has allowed member utilities to have a wider choice in energy trading, particularly in terms of determining the price of electricity.

The DAM – which is the first competitive electricity market in Africa – is conducted prior to the commencement of each day. Forward contracts are established for each hour of the coming day.

The DAM sets prices as of 11am the previous day, thus the term “day ahead”, based on generation and energy transaction bids that are offered in advance to the SAPP.

DAM prices are determined on an hourly basis for each of the power pool’s operating members.

This, therefore, means that the seller will only sell their electricity at a price they have set or even higher since there are some buyers who would have expressed bids for the same quantity at a higher rate.

On the other hand, the buyer can also only buy the electricity at their desired price or even less as some sellers will be selling the same quantity of electricity at a lower rate.

“Those (utilities) that are participating in the competitive market have realized huge financial rewards,” Beta said, adding that in the DAM there is no manipulation of prices as both the seller and buyer offer what they can only afford.

As of February 2013, the number of active participants on the DAM increased to six utilities from four in January 2013. More utilities have expressed interest to come on board, according to SAPP.

“The challenge is that energy trading in most SADC countries is regulated,” Beta said, adding this is affecting active participation by all member utilities.

Another challenge is that the DAM has come at a time when most countries are facing a shortfall in energy supplies, hence the energy trading market is viewed as insecure.

“Despite all these challenges, we are still happy with the way the competitive market is progressing,” he said.

He said since the launch of the competitive market in 2009, SAPP has managed to conclude bids amounting to 216 Gigawatts (GW).

However, of these total bids, only about 60.8 GW was moved from seller to buyer due to various constraints, chief among them the lack of transmission paths as well as congested transmission corridors.

“All the concluded volumes could not go through, which just goes to show how serious transmission constraints are affecting trade on the DAM,” Beta said.

“The potential to trade in the DAM is there but the current transmission capacity is not allowing member countries to fully exploit the competitive market. The problem is not with the market but with the system.”

In this regard, he said SAPP was working on implementing energy generation projects to boost energy production in the region.

Plans are also underway to build more transmission interconnections across the borders of member state, particularly to connect the unlinked three member countries – Angola, Malawi and Tanzania – to the regional power grid.

Fuller integration on the SAPP grid would ensure that any new generation capacity installed in any of the three countries is also realized by the nine other SAPP members, namely Botswana, the Democratic Republic of Congo, Lesotho, Mozambique, Namibia, Swaziland, South Africa, Zambia and Zimbabwe.

Such a situation would, therefore, boost the regional competitive electricity market, allowing member countries to easily sell and buy surplus electricity from each other.

“We are working hard to link all the member utilities to the regional grid to promote the sharing of surplus energy on the DAM,” he said.

The DAM also has other numerous benefits, including the capacity to open up the energy sector to new players and investments.

Lack of investment in the energy sector has been identified as one of the main factors that have contributed towards the current power deficit in southern Africa.

“We might be experiencing some challenges with regard to the competitive market, but we will not give up. We will soon get there,” Beta said.