Priorities for our new minister of energy

May 27th, 2014, Published in Articles: EE Publishers, Articles: Energize

 

Tina Joemat-Pettersson faces a daunting task as South Africa’s new energy minister. She will be the seventh energy minister since the advent of democracy in 1994 (on average, ministers have occupied the position for less than three years). None have truly put their stamp on the sector and the challenges the new minister faces are arguably the most serious in 20 years.

Anton Eberhard

Prof. Anton Eberhard

Gone are the years of cheap and reliable electricity. Today it seems inconceivable that Eskom was once voted a leading brand. Now the minister has to provide leadership in resolving one of South Africa’s core economic challenges: providing enough electricity to power growth and employment. She will have to take a position on funding for Eskom, electricity prices, securing coal supplies, procurement of Independent Power Producers, investment in gas for power, cross-border hydro-electricity deals, more renewable energy and whether the country can afford to contract nuclear power.

Eskom has not built enough new generation capacity to support economic growth. Today power demand is lower than it was in 2007.  This is unprecedented in the history of electricity supply in South Africa.  Obviously the fall-out of the economic crisis of 2008 played its part. Electricity prices have also trebled over the past seven years and consumers are saving electricity.  Investments are being made in energy efficiency. Structural change in the economy, with the growth of services and the shrinkage of the primary and secondary sectors, also means less energy is required per unit of GDP output.  But these factors combined do not adequately explain seven years of stagnant electricity sales. We have to face the fact that Eskom has simply not been able to sign up large new electricity consumers.  And international companies know that; they have shifted their investments off-shore to more secure locations.

Eskom’s Medupi, Kusile and Ingula power stations are more than three years late. They will not make a difference to the electricity supply-demand balance for years to come.

Minister Joemat-Pettersson’s first priority is thus to restore electricity supply security in South Africa. The Department of Energy (DOE), the Department of Public Enterprises (DPE), Eskom and the electricity regulator (NERSA) need to agree that all available non-Eskom generation supply should be contracted. Procurement of new baseload IPPs should proceed immediately. Eskom’s demand-side management programme should be expanded and NERSA needs to provide a top-up in its MYPD3 price determination for these programmes.

The Gas Utilisation Master Plan should be completed as a matter of urgency and priority gas projects, such as LNG import infrastructure and linked power plants, should be contracted at either, or both, Saldanha and Coega with connecting pipelines to Mossgas and Eskom’s Ankerlig and Gourika power plants.

A decision should be made to proceed with contracting imports from the Mphanda Ncua hydro-electric scheme in Mozambique and a dedicated project team needs to be established to fast-track this project. Negotiations for hydro imports from Zambia and the DRC should also continue.

The life of Eskom’s existing coal fleet should be extended to the maximum possible and flue-gas desulphurisation retrofitting should be abandoned until there is adequate electricity security. A new heavy haul coal line from the Waterberg to the Central Basin should be fast-tracked to cater for supply shortfalls from 2018. The Coal Road Map recommendations around planning and investment for new coalmines should be implemented.

Shale gas and coal-bed methane exploration should be fast-tracked. The Renewable Energy IPP programme (REIPPPP) should continue with predictable annual procurement windows which will support the sustainable development of a local industry. Eskom’s transmission planning needs to be brought in line with the REIPPPP. NERSA should set national norms and standards on net-metering for roof mounted PV.

The nuclear energy procurement should be delayed until there is clear evidence that costs are competitive with other generation options and that construction and financing risks can be managed.

The above recommendations are primarily around investment decisions. However, there are also some key policy and institutional reforms which need to be made.

Government needs to clarify the structure of the electricity market. It should be made clear that South Africa does not have an exclusive single-buyer market and that IPPs should be able to sell to willing-buyers. Non-discriminatory third party access to the transmission grid should be mandated and IPPs should be allowed to wheel across the grid to customers. Wheeling tariffs need to be finalised by NERSA. Large contestable customers (e.g. those larger than 100 GWh per annum) should be able to choose their own suppliers.

Eskom’s conflict of interest in being a generator, as well as being responsible for contracting IPPs, needs to be resolved through the passage of the Independent System and Market Operator (ISMO) bill and an ISMO needs to be set up which will be responsible for planning, procurement, contracting and system operations. Preferably, Eskom’s transmission business should also be transferred into the ISMO.

Most of the above recommendations have focused on the generation side of the electricity industry. The minister will need to be mindful, though, that electricity supply security depends also on adequate and secure transmission and distribution. Key challenges in municipal electricity distribution remain unresolved. About twelve municipalities distribute over 80% of electricity. Over 70% of the country’s economic activity takes place within the boundaries of these municipalities.  Focus on performance improvements in these municipal areas will yield significant and economically important benefits. At the same time, there are many (mainly small) municipalities which are really struggling to provide electricity services and these municipalities should also be helped. It is therefore recommended that the regulator, a key actor in the reform process, should adopt a strategic approach, focusing its regulatory efforts and attention initially on these two groups of municipalities.  Fiscal transfers will be necessary to deal with the maintenance backlog.

No one said it was easy being the energy minister. Minister Joemat-Pettersson has her work cut-out for her.

Anton Eberhard is a professor at the University of Cape Town’s Graduate School of Business and is a member of the National Planning Commission.