Electricity trading on the Internet coming to southern Africa

With deregulated and cross-border electricity markets opening up worldwide and the establishment of the multimarket model (MMM) in South Africa, the mechanisms enabling the trade of electricity have become a topic of great interest.

Predictably, the Internet has become the worldwide de facto standard platform for energy trading, according to a report published by Dr G. van Harmelen and RM Surtees of Enerweb.

The reasons are compelling for both buyers and sellers. Buyers are assured that the competitive bidding process uncovers the true market value of the contracts. The seller is also assured of getting the best price for the contract, as maximum exposure is achieved.

Internet-based trading positively contributes to liquidity, wide exposure for many potential contract partners, lower transactional costs, anonymous trading, real-time speed of execution and trading after hours. The barriers to entry are low due to the relative familiarity with the Internet, the use of expensive technology seldom being required, and the feasibility of back-office integration with existing systems, they write.

In Eskom, the internal power pool has been in existence for some years and while it has not been fully opened to external participants due to the prevailing regulatory environment, there has, however, been much activity in the trading arena, some larger customers and self-generating entities having been given exposure to Real-Time Pricing; Demand Side Participation via a product called DMP (Demand Market Participation); a Reserve Market; and a Forward Energy Market (based on week-ahead trades contracted via an Internet enabled financial exchange).

Regionally, there has also been trade activity on the Southern African Power Pool (SAPP) for many years, with Internet-based systems gradually being introduced as well. These systems have not only resulted in substantial additional sales for the utilities concerned, but have also served to improve information flows and supply chain efficiencies.

Future participation in local multi-markets is likely to be Internet-based, they conclude.

Most developed electricity markets cater for the trade of electricity in three basic market areas, namely: the physical market, ancillary market and financial markets.

About the SAPP they write that while it was possible to initiate this market using faxes, e-mails and telephonic communication, as the volumes increased, an electronic Internet-based system became essential.

These systems require that information such as hourly energy forecasts, confirmations and schedules (often accompanied by the previous day’s load measurements) are exchanged (called the daily bilateral operations).

The value of the energy traded in these bilateral agreements (using Enerweb-hosted platforms) is currently in excess of R1 billion per annum. Due to the relative infancy of the trading environment, operational and rule changes have been frequent. The platforms are thus required to be flexible enough to be configured by the users themselves, while also being capable of automating and monitoring operations.

Detailed reports covering bid parameters, contract data, load data, pricing and settlement data, etc. have been made available online.

While the communication infrastructure may not be of the same standard as the European and American markets, all available communication networks (the Internet, SMS, e-mail and even fax machines) are utilised to ensure reliability and high-speed delivery of information.

Connectivity to date has been more than adequate within the region to support electronic trading platforms.

Once the MMM is established in South Africa, the SAPP licensed participants may be granted access to the local market under the same rules and obligations as the local participants, subject to transmission constraints etc.

In the opinion of the authors, the higher liquidity levels likely to be experienced in the MMM will result in the SAPP short-term energy market gradually being combined with the local market initiatives.

The establishment of power pools, deregulation and cross-border electricity trading make the establishment of various exchange-traded electricity trading instruments inevitable. The area of derivatives, historically the domain of commodity traders and speculators, can be complicated.

Eskom’s Research group therefore deemed it important to establish a real-world simulation environment in order to gain an understanding of the dynamics and risks associated with this environment, particularly in light of the harsh lessons learned elsewhere in the world.

They conclude that “there can be no doubt that the Internet (e.g. electronic exchanges) will continue to play a key role in the future of energy trading in developed, as well as developing countries.

“In this regard, Eskom has already, in anticipation of the new MMM, successfully deployed various platforms, systems, simulations and products.

“Of fundamental importance, however, remains an evaluation of the current state of cross-border energy trade, the potential local and regional liquidity, as well as the state of industry liberalisation in Africa.

“It is expected that in southern Africa, while the SAPP and MMM would run in parallel, they will ultimately merge as a result of the benefits of increased liquidity, lower transaction costs and the use of more efficient technologies.”