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.

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  • Brian Bakker

    Correct me if I’m wrong but Eskom falls under Department of Public Enterprises rather than the Department of Energy. Certainly, we expect Joemat-Pettersson to take responsibility for the Gas Utilisation Master Plan and we’d expect her to try to ensure that we exploit the shale gas reserves under the Karoo as soon as possible. But I, for one, won’t be holding my breath. Based on her poor performance at DAFF, I expect we’ll be saying the exact same thing about the new Minister of Energy in five years time.

    • Brian, as a state owned enterprise, Eskom reports to the Dept of Public Enterprises. But energy policy and all generation allocations are controlled by the Dept of Energy. So the Minister of Energy is responsible for the Govt White Paper on Energy Policy (outdated and ignored for 15 years), national security of energy and electricity supply, the Integrated Energy Plan for SA (still to be prepared after years of delays), the Integrated Resource plan for Electricity of 2010 (outdated and the 2013 draft needs finalisation), the Gas Utilisation Master Plan, a Coal Roadmap for SA in respect of primary energy for Eskom and others, the nuclear build programme, the Renewable Energy IPP Procurement Programme, the ISMO Bill and all IPP policy, legislation and regulations, all liquid fuel (oil, diesel, petroleum, etc.) procurement, gas and oil exploration, production and pipelines, shale gas legislation regulations, exploration, production and distribution infrastructure, and much more…

      • Brian Bakker

        Thanks for the correction. A daunting list of tasks. But, on the basis of Dame Tina’s previous performance, I don’t expect any of the above to advance more than marginally. I’d be very surprised if it did but then maybe she knows more about energy than she did about agriculture and fisheries.

        😉

  • Alan Cargill

    Nice article making a lot of sensible suggestions. An interesting point chatting to a Californian was that they peaked on demand some years ago and have been seeing steady decrease in demand. Perhaps their knowledge based economy requires less power per $ GDP than we do in SA.

    I agree on delaying Nuclear. I used to support more nuclear, but lately feel there are far too many tripping points, cost, waste, decommissioning, and now safety.

    I would like to see more detailed debate around natural gas and all the various possible providers. What are the options for extending Mocambique gas in SA? If it is already pumped into Sasol and Durban, then could that not be extended to tie into possible developments further south? What about prospective gas customers? A lecture on Ibubesi seemed to indicate that the chicken and egg nature of negotiations were an issue, ie no customers, no supply. No supply, no customers. What about cost of LNG? I have heard some good ideas, but can we afford it. As far as Karoo gas is concerned, there is much focus on fracking and water use/contamination. If there is a viable supply, then my concern would be around the general Karoo environment. What are we doing to ensure that the karoo would not become a criss-cross of roads and pipelines? Some more info on number of wells, production rates, network plans would be welcome.

    Based on recent SANEA lecture I would like to see the net metering take into account peak and off peak generation value. The value of straight PV without storage seems to me to be limited. In a domestic situation, battery storage can be an option, in which case grid operators (Eskom or otherwise) would more be more likely to embrace the technology. Or am I just hopelessly naive?

    • Richard W

      Steady on, Anton! Everything immediately? How about a bit of prioritisation?
      To keep procuring renewable energy generation makes great sense, including for its short lead time and the fact that investors have not been able to get enough. Scaling up and providing assurance of sustained procurement will also improve prospects for localisation and thus realising the higher job creation potential of these technologies compared to stock energy options. The cap on renewable energy that has been imposed through the IRP proses must certainly be lifted.
      Energy efficiency and demand side management are also obvious priorities with short term returns, so even Eskom’s efforts in this regard do merit support. However, going all gung ho on fossil fuels offers far less prospect of relief to short term constraints and smacks of opportunism. Endorsing recommendations of the Coal Road Map is reckless and extending the life of existing coal-fired plant is also not an immediate priority.
      The most aggressive fast-tracking of fracking is not going to deliver substantial new energy supply this decade, even if economically viable reserves are there to be found, so there in nothing to justify the amplification of risks of a frantic approach, either for shale gas or coal-bed methane. Importing Liquified Natural Gas is a far more reliable and timely option that is also compatible with our long term plans in providing bridging to a low carbon economy.
      There is more than enough for our new minister to do finally getting resolute for developing renewable energy industries and efficiency, without seeking to use the electricity supply crisis as a platform for deepening our dependence on coal.

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