Cabinet reshuffle: what this means for the energy industry

April 11th, 2017, Published in Articles: EE Publishers, Articles: Energize


South Africans are in a state of shock following President Zuma’s seemingly abrupt decision to reshuffle his cabinet. Paired with the subsequent credit downgrades, the country’s future is, yet again, riddled with uncertainty.

Travis Hough

The new minister of energy, Mmamoloko Kubayi, has held positions within the telecommunications and postal services industries, and is a member of the National Assembly. It is unclear whether these positions have given her enough experience to be apt in energy matters but to some extent this is not what will concern the energy sector of South Africa.

What is a major worry is the fate of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). The concern is predominantly spurred on from recent announcements to halt the programme, due to the high cost Eskom will be contractually required to pay, and the decision taken by the power utility provider that it could no longer support the Power Purchase Agreements (PPAs).

The president then announced during his State of the Nation Address that projects will be signed as agreed. Eskom clarified and gave a benchmark tariff of R0,62/kWh per project that is now considered suitable for signature. This process took over six months to get in place but the delay has tarnished the REIPPPP which was seen as a benchmark by many countries on how to develop a renewable energy sector.

The delay in signing the PPAs will undoubtedly have an impact on other incumbent energy industries such as Liquefied Natural Gas (LNG). The combined lack of adherence by Eskom to the REIPPPP, unexpected cabinet reshuffle and subsequent credit downgrade could cause anyone considering the LNG sector in South Africa to have second thoughts.

If they haven’t already decided to walk away from prospective deal, LNG players will now be running new calculations, taking into account not only the increased borrowing costs and weaker rand, but also adding on an increased cost to any project based on country risk. For most companies operating in the energy sector, there are not many jurisdictions in which they wouldn’t operate. The difference though is the higher the country risk, the greater the margin investors will expect to see. This balancing of risk versus reward may very well see companies being unable to justify the risk of setting up operations in South Africa.

The future of South Africa’s energy industry will not be shaped solely by our new energy minister. Our ministers are rarely in one position long enough to make any major contribution. Rather, our energy sector will be defined by the government’s willingness to assure investors that programmes and policies they put in place are going to be adhered to and changes will be made through a consultative process.

If the most recent round of projects had such a difficult journey to find clarity, what would be the fate of future rounds South Africa once envisioned? Without this stability and engagement, we will be left with no further investment in renewables, LNG or any other energy source open to IPPs, putting nuclear back on the cards as it will be the only option.

Perhaps this is the end goal of government. The decision between renewables and nuclear should be made with caution in light of the newly issued junk status, which will increase borrowing costs.

The nuclear vs. renewable debate has become increasingly political. The deal requires approval from treasury in order to proceed, something Pravin Gordhan was opposed to. Zuma’s choice to replace finance minister Gordhan with previous home affairs minister Malusi Gigaba begs the question — could the R1-trillion nuclear new build have something to do with the sudden game of musical chairs?

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  • Alan M

    Examine the South Australia grid’s catastrophic experiences lately with blackouts and near blackouts to see why renewable energy powered generators are not welcome on any national high voltage electricity grid. Even if they don’t charge the grid operator anything for their MWh production, the renewable energy powered wind and solar farms on the South African grid depend on the already running load-following and spinning reserve coal powered generators backing off their MWh production by exactly the MWh amount of renewable electricity that is injected into the grid. So why spend capital (that can only be repaid by increasing customer tariffs) on putting “comes and goes” electricity on any grid? The expenditure contributes nothing useful (even if you actually believe over-stocking the Eskom coal stockpiles will save the planet from the CO2 that is vital to life on earth). “Comes and goes” electricity is a parasitic expense on the grid, benefitting from Eskom’s fixed costs of using already started up coal plant to back up the renewables when they go into their “rest and relaxation” guaranteed 65% loadshedding for wind and 80% for solar, that results from the capricious unavailibility of wind and solar energy. Wind and solar on the Eskom grid will cast South Africa’s credit junk status ratings in concrete. Mr Koko has patiently explained to us all that at least one credit rating agency has told Eskom that their liquidity is threatened by their IPPs (Idiotic Power Purchases). He is quite right to avoid signing the 20 year ‘fixed price’ PPAs (Parasitic Power Agreements). He needs written instructions from his sole shareholder from hell, and the Daft Agreement of the equally Deluded Accolyte shadow energy ministers, so that they take the heat when we have priced our mains electricity out of the reach of SMEs and the masses. What we urgently need now to grow our economy adequately, is to get information and binding priced proposals for practical least cost ways of financing and providing nuclear base load electricity with its long building time frames. Mr Koko will not be able to decommission any coal plants if we follow CSIR ideas of adding huge on-grid installations of wind and solar electricity by 2050. Cheaper quicker options for gas fired electricity can be explored later, if not dependent on imported fuel. Unfortunately, politically misdirected efforts from the early 80’s last century have literally decimated the value of our currency, and we may be on an irrecoverable economic downward spiral as a result. Seemingly cheap and definitely nasty renewable energy powered electricity is the modern analogy for the glass beads and mirrors that bought land from the local South African inhabitants in the late 1600s for those returning Africans rendered pale by their adventures abroad after leaving the cradle of mankind’s Garden of Eden, tens of millennia ago, and now reviled as colonials for introducing ….the world’s most economical electricity last century?? Wind and solar? No GOOD (Not on Grid Or Our Distribution) !

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