Business, Politics

Analysis: SA’s energy future – be afraid

By Branko Brkic 18 February 2010

Last week, we listened carefully to what President Zuma had to say about energy policy in South Africa. Then we looked deeper into what it all really meant. Then we felt the urge to scream and throw ourselves under the nearest bus.

It’s worth considering point-by-point, what Zuma said in his state of the nation address:

“To ensure reliable power supply, we have established an inter-ministerial committee on energy, to develop a 20-year integrated resource plan [IRP].”

A long-term, 20-year national energy integrated resource plan is an essential part of the capacity planning and funding process, and it should have been developed in a consultative and inclusive way, with policy makers, energy experts and stakeholders, several years ago. What was actually produced is a shoddy and inadequate piece of work called the interim “three-year integrated resource plan (IRP)”.

It was belatedly presented as a fait accompli to the long-suffering industry by the department of energy in December 2009. From the day it was published, it was misaligned with the very basis and assumptions of Eskom’s prior applications to the National Energy Regulator of South Africa for massive price increases over the next three years.

It is inconceivable that Eskom can do proper planning in the national interest without a properly developed national energy IRP detailing the required energy mix for the country. And, of course, the department also needed to tell Eskom what was expected of it to meet projected demand over the long term. Without a 20-year IRP, how is it possible for Eskom and its shareholder to develop a meaningful funding plan? And without a funding plan, incorporating the necessary mix of debt, equity and tariffs, how can Eskom possibly make a rational application to Nersa for a multi-year price determination?

It is a national disgrace, reflecting very poorly on the department and Nersa that we still do not have a proper 20-year national energy IRP in place, more than two years after the generation crisis. And it is astonishing that only now, months after Eskom’s two price applications and the associated Nersa public hearings, has an inter-ministerial committee on energy has been established to develop the required plan. Any bets on when it will actually start working on the issues?

“Among other things, this [plan] will look at the participation of independent power producers [IPPs], and protecting the poor from rising electricity prices.”

More than 12 years ago, the need for participation by IPPs in the generation capacity mix of South Africa was detailed in the official government white paper on energy policy. Yet we were told by Zuma last week that the 20-year plan, still to be developed and published by the interministerial committee on energy, will only now “look at” the participation of IPPs, while the necessary enabling environment – the policy, legal and regulatory framework – has yet to be established and put in place. Is this not a somewhat weak and reluctant response that comes a little too late, to put it extremely mildly? It is, however, heartening to see that the participation of IPPs is at least acknowledged by government, and in protecting the poor from Eskom’s fast-rising electricity prices. But will the IPPs also play an important role in protecting other customer categories – commercial, industrial, mining, traction, agricultural and domestic – from Eskom’s exorbitant price trajectory? (And does anyone else see a terrible irony here? – Ed.) Even Eskom now grudgingly acknowledges that IPPs in fact are essential to meeting the country’s further power capacity needs, critical to preventing shortages and blackouts in the short to medium term.

“We will establish an independent system operator, separate from Eskom Holdings.”

One also has to marvel at the policy flip-flops along the way, without anything actually happening on the ground. The position of the 1998 government white paper on energy policy was:

  • the electricity supply industry would be significantly restructured.
  • Eskom generation would be unbundled into about five nominally independent and competing generation companies.
  • New generation capacity would be provided by foreign and domestic investment.
  • IPPs would introduce diversity and further competition in the generation sector.
  • A state-owned, independent transmission system operator would be established, together with an energy market and/or independent power procurement agency.

The electricity distribution sector would be rationalised from the few hundred municipal electricity distributors into a significantly reduced number of economically viable regional electricity distributors (REDs), run on business principles.

Does anyone see any resemblance to what actually happened? In the subsequent 12 years, nothing concrete materialised from this grand vision. Later, as a result of the pending generation capacity crisis, the policy was duly reversed and Eskom was given the green light to proceed with its massive (and unaffordable) new-build programme, even without knowing how it would be funded. Now, Zuma appears to want to revert to the earlier policy.  With the government more or less inert (that’s useless in day-speak), and Eskom more immersed in politics than energy creation and distribution, nothing is likely to actually happen. Twelve years later, they’re still talking. And the band plays on.

“Eskom will continue to build additional generation capacity and improve the maintenance of its power stations.”

Well, this doesn’t say anything new, and seems pretty obvious anyway. But surely the details are missing. If we ever had an IRP, we would have known diversity, risk mitigation, national renewable energy targets and commitments for carbon emission reductions, we would also specify the optimum electricity generation mix and capacity required to meet the anticipated electricity demand for the years ahead, based on the lowest cost options (including the cost of externalities) for the country. We would have known what affordable, diverse and  practical options are there, and what is the split in additional capacity to be provided by Eskom. Other generation sources would have been clarified and a funding plan would be possible. Of course, the legal and regulatory framework would have been in place.

But we have none of it.

In reading the brief sentences on energy policy in last week’s address, one wonders whether Zuma appreciates the fundamental change that occurred in South Africa’s electricity supply environment in the last quarter of 2009 – a significant defining moment and mind-shift in Eskom’s thinking, as the harsh reality sank in. It was analogous to the late realisation by the leadership of old Soviet Union that its empire was an anachronism in the modern world, and the propaganda of the socialist dream was revealed to be a house of cards. The cupboard was bare, there was no more money and the previous game was over.

In its revised 35%-a-year price application submitted to Nersa in November 2009, Eskom clearly acknowledged it no longer had the wherewithal to continue as sole builder, owner, operator and maintainer of generation capacity in South Africa on an exclusive basis. The revised application is unequivocally based on Eskom’s assumption that:

  • a substantial private equity partner will be found for the R142 billion Kusile power station;
  • Eskom will not be building the third new coal-fired power station planned to follow Medupi and Kusile;
  • Eskom will not be undertaking the nuclear power stations programme.

In so doing, the troubled public enterprise has in fact conceded the game, and passed the ball squarely back to the energy department. But has it actually realised this?

So, to say the state of the nation address was thin on detail and specifics, is an understatement. If Eskom’s sole shareholder is not willing or able to fund new generation capacity, it should not, through its policies or inaction, prevent alternative equity partners and independent power producers from engaging. Unfortunately there are still ideological dinosaurs roaming around, and they still hold the development of the country and the economy to ransom. Be very afraid.

By Chris Yelland

(Yelland is the Managing Director of EE Publishers)


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