Note No. 145 June 1998

The World Bank Group ▪ Finance, Private Sector, and Infrastructure Network

Promoting Regional Power Trade—The Southern African Power Pool

Donal T.O’Leary,Jean-PierreCharpentier,and DianeMinogue

Power exchange first arose because of the dis-tribution of power sources in the region: a largereserve of low-cost hydroelectricity in the north-ern part (especially the Inga Reservoir in theDemocratic Republic of Congo and the Cahora-Bassa Reservoir in Mozambique), large reservesof cheap coal in South Africa, and the KaribaDam (on the border between Zambia and Zim-babwe), which, being in the middle of the re-gional system, can play the “buffer” role. As thenetwork has been reinforced and extended,many arrangements have arisen for the sale andwheeling of electrical power between countriesin the region.

The new pool agreement covers about 9 millionsquare kilometers and 200 million people. Thenumber of customers of the interconnected na-tional systems has been estimated at more than4.1 million, though this figure understates the to-tal number of retail customers because some ofthe customers are distribution companies.

The SAPP members agreed to develop theirpooling operations as a “loose pool” along thelines of NORDEL/NordPool (Scandinavia),

The Southern African Power Pool (SAPP), the first formal international pool to be set up outside

North America and Western Europe, was inaugurated in 1995. While the utilities of southern Africa

have been importing and exporting electricity for four decades, these trades occurred through

bilateral contracts that were complex and often difficult to administer. The objective of shifting

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.

Existing or planned power lines

FIGURE 1 SOUTHERN AFRICAN POWER POOL

Cahora Bassa

Inga

KaribaDam

MOZAMBIQUE

NAMIBIA

TANZANIA

DEMOCRATICREPUBLICOF CONGO

ANGOLA

BOTSWANA

ZAMBIA

SWAZILAND

LESOTHO

MALAWI

SOUTHAFRICA

ZIMBABWE

PrivatesectorP U B L I C P O L I C Y F O R T H E

Promoting Regional Power Trade—The Southern African Power Pool

UCPTE (Western Europe), and such U.S. poolsas the Midcontinent Area Power Pool before the1996 restructuring of the U.S. electricity market.Loose pools emphasize the constant exchangeof information in order to maximize both theeconomic and reliability benefits from tradingand system autonomy. These pools do not usecentral dispatch of power plants, often relyinginstead on long-term bilateral contracts for elec-tricity supply between generators and custom-ers. These contracts are supplemented withshort-term contracts and other deals under theoverall agreement. Loose pools may provide cen-tral services, however, including producing con-tinuous, real-time data to match generation anddemand, developing indicative expansion plans,and implementing emergency procedures. Loosepools also establish detailed common design andoperational standards to ensure system securityand reliability and to facilitate trades.

In the SAPP full membership is limited to thenational utilities. Most are still vertically inte-grated, with a primary mandate of ensuring theautonomy and self-sufficiency of the domesticsystem. The benefits of the pool include reduc-tions or postponements in new requirementsfor generating capacity and reserves, reductionsin fuel costs, and more efficient use of hydro-electricity. To estimate the potential gains, aSouthern African Development Community(SADC) electric power study conducted in 1990–92 compared the costs of integrated regionaldevelopment with those of independent de-velopment, in which each country follows astrategy of self-sufficiency. The study showedsavings of US$785 million (1992 prices), or 20percent, over 1995–2010. Because the Demo-cratic Republic of Congo and South Africa werenot members of the SADC at the time of thestudy, the comparison did not include their sys-tem expansion plans, though it did account forenergy trade opportunities. Including these twocountries boosts the benefits significantly.

The agreements

The Southern African Power Pool is based onagreements rather than on law. The pool was

inaugurated after the Inter-GovernmentalMemorandum of Understanding was signed bya majority of the SADC members. The memo-randum of understanding and its subsidiaryagreements—the Inter-Utility Memorandum ofUnderstanding, the Agreement Between Oper-ating Members, and the Operating Guidelines—have now been signed by all the SADC mem-bers and their national power utilities.

The SAPP agreements state that the purpose ofthe pool is to allow its members to coordinatethe planning and operation of their systemswhile maintaining reliability, autonomy, and selfsufficiency, and to share in the benefits of oper-ating the pool. The agreements incorporate theSADC treaty, the SADC Dispute Resolution Tri-bunal, the SADC energy ministers, and the Tech-nical and Administrative Unit. The Inter-Governmental Memorandum of Understandingestablishes that the SAPP agreements must beinterpreted in a manner consistent with the SADCtreaty and that the final and binding dispute reso-lution forum is the SADC Dispute ResolutionTribunal. The energy ministers are responsiblefor resolving major policy issues in the SAPPand for admitting new members to the pool.The Technical and Administrative Unit providessecretariat and other services to the SAPP ex-ecutive committee, acts as liaison to the SADC,and seeks funding according to the recommen-dations of the executive committee.

The SAPP is organized under the executivecommittee, which acts as the board of direc-tors of the pool, and a management commit-tee, which oversees the administration of thepool. Three subcommittees serve under thedirection of the management committee: theplanning subcommittee (which focuses on re-viewing wheeling rates annually and develop-ing an indicative SAPP expansion plan everytwo years), the operating subcommittee andits associated coordination center, and the en-vironmental subcommittee. The coordinationcenter, which is still being set up, will be re-sponsible for such tasks as undertaking mostpool monitoring activities, carrying out oper-ating and planning studies, determining trans-

SAPP members andtheir utilities

AngolaEmpresaNational deElectricidade (ENE)

BotswanaBotswana PowerCorporation (BPC)

Democratic Republic of CongoSociété Nationaled’Electricité (SNEL)

LesothoLesotho ElectricityCommission (LEC)

MalawiMalawi ElectricitySupply Commission(ESCOM)

MozambiqueElectricidade deMozambique (EDM)

NamibiaNamibia Power(NAMPOWER)

South AfricaElectricity SupplyCommission (ESKOM)

SwazilandSwaziland Electricity(SEB)

TanzaniaTanzania ElectricitySupply Company(TANESCO)

ZambiaZambian ElectricitySupply Corporation(ZESCO)

ZimbabweZimbabwe ElectricitySupply Authority(ZESA)

ner (South Africa) act as a driver, encouragingmore passive parties.

The experience of the SAPP shows that in mov-ing from pool agreements to implementation, itis possible for some participants to move insmaller, incremental steps toward the overall goalsset by the agreements. While all participants musttake consistent steps, they do not need to moveat the same pace. And while all participants haveagreed to an international pool, it is reasonableto expect that self-sufficiency and autonomy willremain the priority for some members, at leastthrough the first phase of operations. The poolagreements include provisions that recognizethese concerns while also encouraging greaterintegration, for example, by permitting membersto meet their Accredited Capacity Obligationthrough a contract with another member. Not allcountries prefer such a gradualist approach, how-ever: Botswana, Mozambique, and Namibia haveopted to rely more on importing power than onbuilding new capacity. Regardless of the preferredpath, it is essential to set pool governance rulesso that all members, large and small, perceivethat they have a voice.

As national regulatory agencies develop and be-gin to assert their authority there is a risk thatthey might not be sufficiently attuned to theneeds of the regional market. Experience in othercountries shows that although a pool can oper-ate where regulatory regimes differ, as they doamong SAPP countries, possibilities for gamingor unfair advantage created by differences inregulatory systems can undermine members’willingness to participate. So national-level regu-latory statutes should be carefully drafted so thatthe agency jurisdictions are properly defined,directed and restrained in order to avoid regu-latory obstacles to trade. There should also beperiodic reviews of regulatory compatibility asthe SAPP develops. In addition, the need for aconsistent approach to transmission access isbecoming apparent as more independent powerproducers (IPPs) and independent transmissionprojects (ITPs) express interest in investing inthe region. So far only Zambia has required itsregulator to take into account SAPP interests.

fer limits on tie-lines, administering a regionaldatabase, disseminating maintenance sched-ules, providing technical advice, and seekingfunding for its needs.

Each member must meet its Accredited Capac-ity Obligation, a requirement that each utilityhave sufficient capacity to cover the forecastmonthly peak. Each member is also obligatedto supply emergency energy for up to six hours,to provide automatic generation control andother facilities in its control area, to allowwheeling through its system where technicallyand economically feasible, to submit mainte-nance schedules, to disclose information andcosts related to thermal generating facilities,and to contribute toward the center’s costs.

A key element in the operation of the pool isthe SAPP pricing arrangement, set out in thir-teen detailed schedules in the operating agree-ment. These schedules cover four broad typesof transaction: firm power contracts of varyingduration; nonfirm power contracts of varyingduration; mutual support contracts such as op-erating reserve, emergency energy, and con-trol area services; and scheduled outage energy,energy banking, and wheeling.

Implementation

Three major factors played a key part in thedevelopment of the regional pool agreements:the availability of complementary power sources,an active regional organization for economic co-operation, and the political will to support in-creased regional energy trade. The SouthernAfrican Development Community and its pre-decessor, the Southern African Development Co-ordination Conference, served as a focal pointfor the promotion of regional integration, facili-tating investment in projects (such as intercon-nection projects) that allowed increased regionalpower trade. The momentum for regional inte-gration, including increased power trade, wasfurther strengthened by the emergence of moredemocratic governments in several countries andthe cessation of hostilities in others. Also help-ful has been having at least one country or part-

Promoting Regional Power Trade—The Southern African Power Pool

Viewpoint is an openforum intended toencourage dissemina-tion of and debate onideas, innovations, andbest practices for ex-panding the privatesector. The views pub-lished are those of theauthors and should notbe attributed to theWorld Bank or any ofits affiliated organiza-tions. Nor do any of theconclusions representofficial policy of theWorld Bank or of itsExecutive Directors or the countries theyrepresent.

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A review of the SAPP’s first year of operationshows that several important practical issuesneed to be addressed to support the develop-ment of the pool. First, the power utilities ineach country need to be put on a more viablefinancial footing to ensure that they are credit-worthy and able to respond to commercial in-centives for trading power, including the abilityto generate foreign exchange. Toward this end,commercialization programs are under way orunder consideration at half the utilities (EDM,ENE, ESCOM, ESKOM, ZESA, and ZESCO). Mostadvanced in power system reform are SouthAfrica and Zambia.

Second, the SAPP members need to reach agree-ment on the design and staffing of the coordi-nation center, a politically challenging task, sothat the center can become operational. The keysteps are deciding on a neutral location; select-ing a neutral manager with sufficient autonomy;establishing a legal status; defining clear gover-nance rules; setting guidelines for the interfacebetween the center, SAPP members, and theSADC; identifying equipment needs, especiallycomputer hardware and software; training op-erators; twinning with a mature pool to developskills; and developing a realistic budget. By theend of the first year SAPP members had madeprogress on only a few of these issues. Theyhad agreed to establish the center in Harare,Zimbabwe, separate from ZESA, and had ad-vertised for a manager. The operating subcom-mittee had drafted a constitution that was beingfinalized. And training programs for operatorshad been offered, with more under preparation.

Third, the pool would benefit from broadeningits membership to include existing institutionsthat control or influence significant generationor transmission, such as Hidroelectrica de CahoraBassa, the Copperbelt Energy Consortium, thenew private owner of the Power Division of theZambia Consolidated Copper Mining Company,and the Zambezi River Authority. But this willmean developing procedures (voting rules) togive voice to and account for the interests ofthese players as well as other new entrants, suchas IPPs and ITPs.

Fourth, to allow efficient operation of the pooland encourage an IPP presence, all the SAPPutilities should unbundle their domestic trans-mission pricing and ensure members adoptidentical rules to set transmission costs. In ad-dition, a study is needed to assess the effectson pool development of transmission pricingunder the SAPP and current national pricingpolicies.

Fifth, SAPP members need to estimate and meetfinancing requirements for operations and newgeneration and transmission projects. In identi-fying potential new projects, they should usecompatible generation and transmission plan-ning software that explicitly allows for risk analy-sis and for dealing with hydrological uncertainty.

Sixth, SAPP members need to harmonizeESKOM’s internal competitive generators poolwith the SAPP cooperative pool. The internalpool, set up in 1996, is based on the Englandand Wales model and currently does not pro-vide for access to third party operators. SAPPmembers also need to address the risk that thedifferent triggers for capacity addition (pricesignals for the internal pool and a planned ap-proach for the other SAPP members) could leadto suboptimal investment.

Finally, because the SAPP establishes a largelyself-governing regime at the operating level,and as experience in Argentina, Europe, andNorth America shows, members will need toquickly set up an effective dispute resolutionprocess. Clear resolution procedures combinedwith realistic enforcement could also help inattracting new generation and minimizing na-tional self-sufficiency concerns.

This Note draws heavily from Supporting the Implementation of theSouthern African Power Pool, forthcoming as a World Bank Techni-cal Paper (Washington, D.C.).

Donal T. O’Leary, (currently working withSiemens AG under the World Bank StaffExchange Program), Jean-Pierre Charpentier,and Diane Minogue, Energy Markets andReform Thematic Group