Building South Africa’s new energy future

March 26th, 2018, Published in Articles: EE Publishers, Articles: Energize

Over the last ten years the rate of change in the energy sector has taken world by storm. Thirty years ago, those who spoke of a sustainable energy future were considered to be either dreamers or science fiction authors! However, we have seen unprecedented technological, environmental, social, political and economic developments which have turned these dreams into present day reality.

Dr. Steve Lennon

In the last year alone we have seen record low prices for wind and solar generation as well as ground-breaking developments in the use of large scale batteries for grid based energy storage. We have also seen the rate of increase in demand for energy globally drop to the lowest levels ever – in spite of increases in demand for electricity in most nations. All of this heralds a fundamental shift in the energy sector – and that shift is happening faster than most forecasters envisaged. In addition, it may be concluded that as technological innovation is coupled with economies of scale and replication, this rate of change will accelerate.

As such it is clear that the oft cited timeframe of 10 – 20 years to manage a change in power systems is shortening to closer to five to ten years. Many may not yet be aware of this reality, but if South Africa does not seriously consider what the new energy future means for its current and future energy system, it runs the risk of making expensive and potentially harmful decisions.

Current leadership changes in South Africa, and what appears to be a renewed appetite for change and challenging the current “business as usual” mindset, creates a window of opportunity to put South Africa on a path to a new energy future which will have considerable economic, social and environmental benefits for the country. The scene for this renewal is set by the National Planning Commission’s (NPC’s) discussion paper on energy released for input in January 2018. The NPC affirmed the following objectives for the energy sector.

Objectives for the energy sector

South Africa will have an energy sector that promotes:

  • Economic growth and development through adequate investment in energy infrastructure. The sector should provide reliable and efficient energy service at competitive rates, while supporting economic growth through job creation.
  • Social Equity through expanded access to energy at affordable tariffs and through targeted, sustainable subsidies for needy households.
  • Environmental sustainability through efforts to reduce pollution and mitigate the effects of climate change [National Development Plan 2030].

It is a well-established fact that recent development in the economics of technologies such as wind, solar, battery storage, electric transport, lighting, motor drives, heating and cooling, present excellent opportunities for these objectives to be realised. In fact, currently there are minimal technical or economic reasons why a 2030 power system should not be able to achieve 50% plus levels of renewable energy, with minimal coal generation, universal access, electric powered mobility, reduced demand and an economy at least twice the size of today – with jobs to match. All of this should be achievable with electricity prices being considerably lower than rates charged currently and the creation of a vibrant local electricity private sector.

There are examples around the world of countries well on the path to achieve this – and South Africa has an unparalled window of opportunity to build a globally competitive economy powered by a new energy future. This is driven by Eskom’s current excess capacity, the appetite for alternative energy supply and high efficiency end use technologies and an investment friendly environment for sustainable technologies and business models.

The transition to this new energy future is however not a step change, but rather a process. This process required a few small initial steps to be followed by bold and transformative steps. The first five small steps are as follows:

Tidy up the current REIPP process

Bring existing commitments to fruition. It must be accepted that the process is not perfect, but the benefits in reduced costs to date must be locked in and secured for future benefit. (bearing in mind that most of these plants will all take two to three years to come on stream fully). In particular, the role of Eskom as single buyer should cease. The single buyer function, along with the portion of the tariff ringfenced for renewable IPPs should be moved to a truly independent third party. Eskom then merely becomes a collection agency for the portion of the tariff allocated to IPPs

Unleash the power of the private sector

The current policy and regulatory limitations on grid access for small generators, energy trading and private power should be lifted. There is no reason why generators less than 10MW should not be allowed to connect to the grid with minimal costs and regulatory bureaucracy. In addition, such generators should be allowed to sell to who they wish and to use the grid for a transparent and affordable rate. Energy traders should be easily licenced and able to buy and sell electricity on a willing buyer, willing seller basis. As such it is recommended that these projects should be exempt from the requirement to be licensed by NERSA, simply requiring registration with NERSA and a simplified Grid access process. They should have minimal bureaucracy attached to them and in particular not require an IRP allocation or a letter of deviation from the Minister of Energy.

Open the market for small scale domestic and commercial rooftop PV in South Africa

This would entail the removal of current institutional and regulatory barriers and the establishment of standards for installations, metering and grid feed in – all of which are readily available internationally. South Africa is blessed with a rich solar resource which, at a domestic level, has been mainly used for water heating. The potential for domestic consumers to reduce their electricity bills as well as their environmental footprint, whilst assisting in the provision of electricity nationally is enormous. With payback periods of 5 – 7 years we would see the gradual roll out of systems which effectively add capacity at no cost to the State, Eskom or the electricity consumer – possibly aided by soft loans or incentives to build momentum. In addition, a small feed in tariff based on a discounted short run marginal cost of generation could be considered for power to be exported into the grid. Whilst this would not enable a stand-alone business case, it would essentially provide an incentive for investment without a net cost to the off-taker.

Structure Eskom for unbundling and independent market access

The opening up of the power sector and the creation of a power market and trading platforms are considered essential in South Africa’s new energy Future. This means that Eskom will need to be unbundled into separate and independent entities across the electricity value chain. Eskom can readily be structured for such unbundling in a relatively short period (the models and structures have been applied in Eskom in the past and as such may be readily resuscitated.). As a priority this unbundling structure should use the current Eskom Holdings structure to create a transmission/system operator subsidiary company with its own independent Board of Directors. This process can be readily undertaken within existing governance, policy, regulatory and legislative boundaries and as such can be achieved very quickly.

Develop a new universal access plan and roll it out

A plan should be developed based on latest technology to achieve universal access to electricity within five years. Funding of this plan is already included in the current electricity tariff, however the opportunity to electrify with stand alone, modular systems in rural areas is now very real and a least cost option in many cases.

The Energy, Finance and Public Enterprises Ministers should be requested to expedite these five steps. They should be easily achieved in 2018 and will send strong signals to the entire power sector value chain, investors and the broader South African stakeholder that a new, positive trajectory is being set for the energy sector and the economy as a whole. Whilst these steps set a foundation for a lower cost, low emission and self-funded industry, a truly sustainable foundation required far bolder steps to be taken. This should entail the complete reform of the sector over the next five years.

Fundamentally restructure the power sector

Unbundle Eskom into at least five generating companies, a transmission and system operator and provincial based distribution wires and retail companies. Create a power market managed by an independent power exchange and further develop the short-term actions undertaken (as per above).


Eskom’s generation fleet should be divided into similarly sized businesses with a mix of plants. All existing plant should be relicensed with very specific environmental criteria mandated, emissions caps and with finite lifetimes for current coal plant. Ideally these should be sold to private sector bidders with a strong black economic empowerment focus. Whilst there is undoubtedly value in Eskom’s assets, it is debatable whether the high level of indebtedness will be covered by the sale of Eskom assets. A process to recover and residual debt from the whole sector is unfortunately the only reasonable option to consider.

It should be noted that it is not sustainable for the all new generation capacity to be sourced from the private sector on the basis of “take or pay” power purchase agreements, as has been the practice in recent times. In such a case the load to be imposed on State finances through guarantees will become onerous and place all the risk on the State. The market can however be designed to incentivise new capacity and ensure that the majority of the risk will lie in the hands of the industry itself.

The utility death spiral will continue to be a reality for all large scale generators with a large fixed asset base and high levels of debt. Other than short term support to ensure security of supply through the transitional period of 5 – 10 years, there is no reason to subsidise high cost (in terms of society, economy and the environment) generators. In order to sustain their businesses they will have to join the energy deflation trend through efficiencies and alternative operating models.

Independent transmission and system operator (ITSMO)

Once the Eskom subsidiary is operating independently, it should be spun-off into an independent transmission, system and market operator.

The ITSMO should be an independent, fully regulated monopoly responsible for the development, maintenance and operation of the Transmission system, as well as to ensure non-discriminatory third-party access to the grid and wheeling to third party off-takers. The transmission company should be responsible for managing the fully transparent process by which third parties can identify optimal points for grid access.

A key element in modern industry developments is the ability of the transmission company to “smarten” the grid to ensure that the future integrated network can happen efficiently and to maximum advantage of the country. In addition, integration with the Southern African Power Pool needs to be a priority and enabled in any future structures.

The system operator element of the ITSMO should be responsible for the efficient, safe, reliable and quality operation of the national grid and the balancing of supply and demand in South Africa and the region where relevant. The system operator should also be responsible for long term security of supply and the identification of supply and demand side options which will ensure the country is able to have sustained, secure, reliable and affordable electricity to power the economy.

The ITSMO would also be able to eventually establish a power market to enable the use of the full diversity of market mechanisms that are available to the industry. This could include the integration of the independent power exchange to manage the South African power market. Initially, and as a first step towards sector reform, this power exchange should be established as an independent single buyer with full independence from Eskom.

A key output of this ITSMO will be a transparent and integrated supply, demand and transmission plan for the country, as well as engagement with policy makers, regulators and the market on how to ensure that this plan is best implemented. This plan would be a combination of the current IRP and transmission development plans.

Distribution, retail wires and retail customers

It is recommended that a pragmatic approach be adopted to the structure of the distribution industry which recognises its complexity and history and rather focuses on creating an enabling environment for organic change. As such it is recommended to retain the integration of wires and retail, largely aligned to current structures. This would entail the creation of local (municipal) and provincial (currently Eskom), fully regulated monopolies whilst providing the sector with the freedom to optimise itself over time.  It is in this sector that one can anticipate major changes from the new energy future, with rooftop PV systems, domestic and commercial storage and micro trading platforms enabling small consumers to fully benefit from the prosumer revolution.

Revise the regulatory environment

The regulatory environment will need to become a lot lighter and focus on safety, environment, performance, security of supply and competition. Light price regulation in the form of caps and floors can also be affected.

Public good initiatives

It is essential that public good initiatives such as universal access, skills development, empowerment, R&D, free basic electricity and industrial development be identified and specific plans be put in place to ensure continuity of these critical functions.


As described above, the responsibility for planning should fall in the independent system operator. In this regard an independent plan, based on agreed assumptions and analysing defined scenarios, should be produced and revised annually. This plan should not be treated as a legislative tool, but rather as a platform against which the status quo can be tested and plans be put in place to ensure that electricity market is able to meet the objectives of Government – environmentally, socially and economically.


Currently non-renewable electricity is subject to an environmental tax and there are plans to introduce a CO2 emissions tax. In the current centralised control system, a carbon tax will have limited impact as future emissions are centrally planned into the system via the IRP process. In the sector structure summarised here, a carbon tax will be able to play exactly the role intended – to incentivise low emissions technologies and to reduce dependence on fossil fuels. A phased introduction of the carbon tax timed to ensure the viability of the transition process to a new energy future is recommended. Legacy fossil generators could start with the tax kicking in at their legacy emissions levels – and have this threshold reduced by a defined percentage every year to encourage efficiencies and offset initiatives.

A significant risk is presented to grid systems by the utility death spiral. The legacy system will not be able to sustain the levels of investment necessary to transition to the smart grid (or grids) of the future. As such mechanisms such as private sector grids, taxes and levies will have to be considered in evolving to an optimal future network.


The NDP states that “…what the electricity sector end state should be is unresolved”. It is suggested that the electricity sector end state is one which is increasingly being informed by technologies, processes and markets outside of the easy “command and control” of Government or central planners. As such the inevitability of a very different future should be embraced and actively enabled. If this is done, then there is a real possibility that the 2030 South African electricity sector could be characterised as follows:

  • An integrated network of smart grids and micro grids connects the electricity and information infrastructure of the region, enabling the “crowd sourcing” of sustainable and reliable electricity managed by a system operator which ensures overall system integrity and security through advanced control systems and technologies (with strong artificial intelligence support).
  • End use electricity prices are considerably less those currently experienced
  • A power system of around 80 GW capacity with at least 50% renewables generation and of this 10 GW is sourced from domestic and commercial prosumers.
  • Coal based generation is limited to around 20 GW with the balance provided by grid and decentralised storage, demand management and gas plant. As a result, local air pollution levels will have reduced by more than 50%, as will water consumption and CO2
  • There is a thriving electricity market with a plethora of suppliers, users, traders and transporters.
  • The South African innovation space ensures a continual stream of new and exciting businesses are created to serve the new energy future and to position South Africa as a leader in sustainable energy systems.
  • The low cost of electricity is catalysing a new era of technology uptake with low cost water desalination, electric mobility and date intensive applications adding enormous value to the economy, society and environment.
  • Tens of thousands of South Africans are commercial participants in the electricity value chain.
  • Jobs in the power sector will shift from coal to renewables with a net increase.
  • All South Africans, their homes, businesses, schools and clinics, will have access to electricity, with the poor being protected via free basic electricity.

There are those who would say that this vision is one only to be realised in the pages of science fiction. It is however contended that this is rather a current reality which is being rolled out in nations and communities around the world. Through the steps summarised above, South Africa has a window of opportunity to learn from these developments in creating a new Energy Future which is inclusive, affordable, sustainable and an agent for positive change for all South Africans.

Contact Wendy Green or Dr. Steve Lennon


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