South Africa

Ticking down: SA’s (energy) clockwork orange

By Dirk De Vos 2 October 2014

It is hard to be optimistic about where we, as South Africans, find ourselves with our electricity system. The electrification of many areas in communities that once did not have access to electricity counts as a post-democratic success story but the chronic under-investment in our electrical infrastructure meant that we were merely kicking the required-investment can down the road. By DIRK DE VOS.

We should in fact be re-assessing our economic performance in the Mbeki-Manuel years, which saw our government debt reduce to 27% of GDP in 2009, following strict budgeting controls of the GEAR policy and the running of a budget surplus in 2007 and 2008 despite massively increasing the public service wage bill, social grants and providing access to electricity, water and other basic services. We know now that some part of this apparent success was due to the consumption of capital or, as it is also known, a dis-saving. For Eskom, the bill that cannot be deferred any longer and now amounts to at least R250 billion.

It is current Finance Minister Nhlanhla Nene, at the end of the line, who must now deal with this “good story to tell” as a “hospital pass”. How he deals with it will become apparent later this month in his mid-term budget policy review. What is clear for all to see, and that includes the rating agencies, is that Eskom’s funding requirements are not just Eskom’s alone, they are and should properly be considered part of the government’s debt. By some estimates, total State Owned Enterprise Debt now amounts to nearly R470 billion which, if added to total government debt, takes it from an already uncomfortable R1.551 trillion (about 47% of GDP) to an unsustainable level of over R2 trillion (about 63%) of GDP.

A large part of our problem comes from the fact that Eskom, a monopoly, represents more or less our total electricity system and therefore it suffers from two problems – firstly, the inherent problems of any monopoly and central planning; and secondly being subject to political control.The merits of market based options are not immediately apparent because electricity utilities, like say mining, are hugely capital intensive and therefore require planning horizons that extend to 20 years or more.

Some mines do operate like Eskom has done over the last decade or so but those mines are ones where a decision has been made that the resource has largely been mined out and that the remaining resource should be mined at the lowest cost with no re-investment in the mine itself to the point where the mine is formally closed down or decommissioned. It need not have been this way. A study produced by Prof Anton Eberhardt in 2001 showed how competition in electricity markets could have been introduced. It is a worthwhile read not only to show us what could have been but also to give guidance to what we should be doing now.

The extent of Eskom’s and therefore our electricity problems was laid bare in its presentation to a number of Parliament’s committees on 29 July this year. Perhaps it is a measure of the trouble that we are in that Eskom has now ceased avoiding disclosure of the state that it is in and has now placed most of its cards on the table. In it, the extent of the under-investment in generation is tracked, the age of its generating plants and time to decommissioning is disclosed and so is the extent to which Eskom has run its plants too hard in an effort to keep the lights on. The alarming fall-off in plant availability is also explained. Eskom also makes an effort to describe the position with the Medupi, Kusile, Ingula (pumped storage) investments, the transmission grid, the decommissioning schedule and likely new sources of generation capacity.

The presentation also points to another problem: Municipal debt. South Africa’s local government owes Eskom just under R3 billion in unpaid electricity with just under R2 billion unpaid for over 90 days. The biggest delinquent municipalities are from the Free State (over R1 billion owed), Mpumalanga (over R800 million) and the North West (just under R400 million). Matjhabeng (Welkom) and Emalahleni (Witbank – where Eskom generates much of its electricity) owe so much, it is hard to imagine there debts to Eskom ever being repaid.

There are additional issues not covered. This is the question of the coal supply. Currently, Eskom is supplied on a cost-plus tariff (below what coal can be sold for on international markets). But beyond 2017, only 60% of Eskom’s coal supply is contracted for. The rest will be a tough negotiation with coal suppliers. The interesting point is where Eskom thinks future generation will come from and it is overwhelmingly from gas. There is no mention of nuclear power.

What is clear though is that we are in for a hard time in the next five years or so. Load shedding will become part of our lives and we will need to get used to it. Eskom’s much-needed change of maintenance philosophy will reduce its generating availability for 2015 by 7,400 MW, 5,900MW in 2016, 4,200MW in 2017, 2,200MW in 2018 and by 1,100MW in 2019. Clearly all such ability to meet such timelines is dependent upon Eskom’s funding and engineering capabilities. Both of these are in short supply.

This is not all – we can expect electricity price increases significantly above inflation. Our 30-year investment holiday where we enjoyed cheap and abundant electricity is now well and truly over. We will have to pay what it costs to produce it and deliver it and, soon, start to pay the external environmental costs in the form of carbon taxes. We can’t avoid these now. This much is clear from last week’s recent UN climate talks held in New York, more so as the USA now understands its own leadership role and China has committed itself to reducing its own emissions. Our own International commitments to the COP processes are significant: South Africa committed itself to domestic targets of reducing its greenhouse gas emissions to 34% below the business as usual growth trajectory by 2020, 42% below the business as usual growth trajectory by 2025, plateau to 2035 and begin declining in absolute terms from 2036.

So, what to do? Well, for a start, looking on the bright side will be helpful (as it always is). Had we invested in new generating plant as we should have done, it would have been largely coal-based, which would have made a reduction of our greenhouse gases that much harder. We have also commenced our investment in renewables at just the right time. New gas discoveries around the world will start to come online and be available for us to access just as we have to make the decisions to build new generating capacity to replace generating plant that must be decommissioned.

But there are going be some hard decisions. Certain sectors such as those that produce commodities (i.e. price takers) that have electricity as a big part of their basic cost base will not survive – this includes aluminium smelters and marginal gold mines. Perhaps some budget from government should be specifically set aside to ease and facilitate this difficult process.

For the rest of the economy, we will have to become more productive and do more with less or, put in another way, decouple GDP growth from growth in energy capacity. Many countries are grappling with the same problem right now and the answer lies in energy efficiency, which also known as a “hidden fuel”. This much is clear from a recent analysis done by the International Energy Agency. The important take-away from this studyis that energy efficiency provides a bigger economic benefit than the impact of any new supply. For example, a McKinsey report showed that the USA’s entire commitment to cut greenhouse gas emissions by 17 percent from 2005 levels by 2020 could be met through energy efficiency improvements while saving that economy $700 billion including savings on health expenditure caused by pollution and environmental degradation.

Focusing on energy efficiency requires a change in mind-set not obviously in evidence. But if one looks harder, there is policy. The National Energy Efficiency Strategy is part of the National Energy Efficiency Action Plan and is currently already in its fifth iteration. The Integrated Energy Plan envisages energy efficiency savings equal to 3.7GW, an amount bigger than the average size of one of Eskom’s newer coal fired plants. Although this policy is set for a full launch next year, some progress has been made with the introduction of certain tax incentives (s12i and 12L of the Income Tax Act).One of the main disincentives that will need to be addressed comes from the municipalities. As much as 24-34% of total municipal revenue is sourced from the sale of electricity, which cross-subsidises other activities. Worryingly, these funds are often not used for their primary purpose – the upgrading and maintaining local distribution grids. The reliance on this source of revenue is a disincentive to implement energy efficiency programmes, as is the introduction of fixed service and network charges. This has got to stop, otherwise any efforts to improve the parlous state of municipal finances will clash with our essential efforts to use less electricity. The quicker time-of-day variable tariffs can be implemented, the better.

While Eskom is primarily a problem for Treasury and the Department of Public Enterprises, new generating capacity is something that falls under Tina Joemat-Petterssen’s Department of Energy. The real problem with her apparent fixation with the nuclear programme is less the proposed nuclear programme itself which, at best, could only deliver capacity 15 years hence and rather how it diverts attention from immediate decisions which is to secure electricity supply at a sustainable price. South Africa now knows how to procure energy at the best possible rates – the renewable energy programme has shown that this is possible. The key to this is a stable and transparent procurement programme.We need to move quickly to fast-track our other independent energy procurement programmes with a focus on more renewables, a source of energy set to grow exponentially andgas sourced initially from our neighbours and the development of a gas import, storage and power stationinfrastructure.

The institutional framework to do this is already in place. Small things could help. Allowing investors in the renewable energy sector to trade their equity and debt commitments in a secondary market would free up a large amount of private capital.But we need to do something about the under-investment in our national grid. Bidders in the later rounds of the renewable energy programme are already experiencing delays of up to 18 months to connect to the grid because the grid is not ready to handle the introduction of this additional capacity. The amount of capacity introduced by these awaiting renewable projects is small compared to that which would be introduced by a new gas-fired project.This underlines the reason why the grid and generating capacity must be formally separated.The Independent System and Market Operator Bill that has languished in Parliament for many years must now be passed to allow an independent grid operator to procure energy from independent power producers on a non-discriminatory basis.

What we no longer have in our favour is time and the longer the necessary decisions are postponed the more likely the system will buckle and if it does, all bets on the future of this country, from whatever political persuasion you might be, are off the table. Tick-Tock. DM

Photo: Medupi Power Station near Lephalale in Limpopo as seen during a media visit on Thursday, 11 April 2013. Picture: Werner Beukes/SAPA

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