Edition: May/July 2018
Editorials

ENERGY POLICY

Renewed hope

Fair processes are needed for the private sector to play its part in stimulating modern technology for cheaper and more sustainable electricity, insists Paul Semple of Futuregrowth.

Recent leadership changes in government have ushered in an optimism about the growth and developmental potential of SA’s economy. A plethora of new investment opportunities is anticipated.

Underpinning these prospects is the premise of a reliable and affordable energy supply that, perhaps most importantly, also plays a part in addressing the country’s glaring socio-economic development challenges.

While SA had some of the least expensive electricity in the world in the early 2000s, this is no longer the case given its aging infrastructure and poor operational management:

  • In dollar terms, taking a comparative pool of the top 30 developed and developing countries in the world, SA is now mid-range in terms of electricity prices. Notably, SA has dropped into the bottom third when affordability is measured as a function of the median income of its citizens. Put into context, over the past 10 years Eskomís electricity prices have increased by some 356% while inflation over the same period was 74%. This means that electricity prices have increased more than four times faster than inflation;
  • With regard to the ageing infrastructure, almost 80% of SA’s power generation is still sourced from environmentally unfriendly coal-fired power plants - a technology that is rapidly becoming a sunset industry in many other countries;
  • Allegations of widespread corruption and mismanagement of its balance sheet over the past few years have put the Eskom utility under severe financial strain. A significant amount of money will be required over the next 10 to 20 years to recapitalise Eskom, replace aging power plants and bring additional cost-effective generation online.
Semple . . . certainty is essential
Semple . . . certainty is essential

This has precipitated an increasing number of industrial, corporate and private-sector consumers moving to self-generation. It’s due to concerns about the future cost trajectory and reliability of Eskom-supplied power.

The new energy-mix plans by government will need to reflect these realities so as to procure new power generation from least-cost technologies, arrest the trend of migration from the grid and ultimately ensure the viability of the public power utility.

Savvy investors are looking not only for good financial returns but also for positive social and environmental impact from any new power generation. These factors are key to long-term sustainability.

Historical under-investment in rural areas, accompanied by escalating unemployment, has not been helped by an energy generation model that is centralised in SA’s north-eastern region. Over the past five years the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) has helped to spread new power generation plants across the country. It has also helped to create employment, transfer skills and boost the social and economic upliftment of rural communities.

Preferred bidders in REIPPPP were evaluated on a 70:30 split between price and a basket of economic-development criteria covering job creation, local content, management control, preferential procurement, enterprise development and socioeconomic socioeconomic development. Implementation of these initiatives has so far been highly successful. Millions of rand have already spent by REIPPPP projects on socio-economic investment in rural areas, making a real difference to uplifting the lives of the poor and marginalised.

Contrary to the shunning of REIPPPP by Eskom over the past two years, government should be seeking to marshal private-sector investment to help the utility procure the cheapest and most sustainable energy for the country. A transparent and corruption-free auction process is critical, as has been demonstrated by the success of REIPPPP so far.

The recent intervention by the National Union of Metalworkers to prevent Eskom signing 27 new Power Purchase Agreements (PPAs), awarded under round four of REIPPPP, has nonetheless highlighted prevailing concerns about job creation in the broader energy mix. It is crucial that government takes heed of these requirements in its developmental plans for the sector.

Many existing independent power producers are in the meantime dealing with acute pressure from local communities. Their expectations of a better life have been raised by the renewable energy investments in their areas and the promise of a new dawn for the country.

Central to the future development of the SA’s energy sector is finalisation of the updated Integrated Resource Plan being considered by Parliament. It should reflect the realities of the country’s developing economy -- particularly with regard to the constrained affordability by consumers, prevailing socio-economic challenges and Eskom’s limited financial resources.

The energy sector desperately needs to deliver a forward-looking, more inclusive, sustainable and broad-based model. To meet this need, certainty on energy policy is a prerequisite for increasing fixed investment. It will ultimately facilitate transformation of the energy sector in fulfilling its economic growth and developmental potential.