Evaluating the risks of South Africa’s energy sector to the country

May 24th, 2019, Published in Articles: EE Publishers, Articles: Energize, Featured: Energize

Energy is a key risk in any economy and particularly in South Africa due to its energy intensive nature and low readiness for the energy transition.  The South African National Energy Association’s (SANEA’s) second South African Energy Risk Report has begun to track the progress made in the energy sector to help make South Africa competitive in the global economy. 

A set of top 20 risks was prioritised by SANEA members and then further prioritised for the top five risks for impact and likelihood at both a country and an industry level.  The overall top risks for the country for 2019 include:

  • Price volatility and uncertainty
  • Fiscal crisis
  • Changing customer of the future
  • Parochial interests
  • Lack of investment in and breakdown of infrastructure
  • Appropriate policy
  • Activism and civil disobedience
  • Energy transition readiness
  • Energy data availability

The risk of price volatility and uncertainty is significant as it impacts on many other sectors and on the vulnerable in our society. Some of the barriers to treating this risk are out of South Africa’s control as they are global in nature, resulting in a low risk readiness and making it more difficult to treat this risk.

The fiscal crisis also scored highly in both the country and industry perspectives with a low risk-readiness at an industry level, as was the case in 2018.  The fiscal crisis will have a significant impact on the achievement of the objectives of the National Development Plan [NDP] and the energy white paper, due to higher cost of capital and a loss of investor confidence.  It is the only risk from the 2018 top eight to make it into the 2019 top nine, showing that the risk has not diminished and is likely to be in the top ranked risks for some time, unless significant economic growth and other factors are improved.

A lack of investment in and breakdown of infrastructure reflects the constrained financial situation of many energy market participants leading to increased breakdowns and decreased reliability further exacerbating investor confidence.

The changing customer of the future is also primarily driven by factors out of our control due to global technological trends and declining prices for disruptive technologies.  This risk puts additional pressure on market participants to innovate around their business models.

The issue of having appropriate policy is also highlighted as being key if the country and business is going to be competitive by being adaptable and flexible to the rapid pace of change.  This risk is very difficult to manage and is likely to have a high impact and likelihood over the next few years.

The risk of parochial interests is a major barrier to addressing the risk of inappropriate policies.  Increased communication and not embedding long-term policy positions into legislation can help address these risks.

Another consequence of not having appropriate policy is a rise in activism and civil disobedience.  This is an issue that has been rising in importance around the world.

Energy data availability is a barrier to appropriate policy and business model innovation and is a key enabler to be able to deal with parochial interests, so that decision making is fact-based.  Energy transition readiness is really an outcome of many of the top nine and in fact of the top 20 risks as it is an indicator of how the energy system is able to adapt and change.  South Africa has a very low readiness for the energy transition so the treatment of all the other related risks is required before this risk can be moderated.

Subject Matter Experts (SMEs) assessed the top nine risks in detail and when common causes, consequences, barriers and effective responses were analysed for impact, policy plays a fundamental role across all the elements assessed.  It is also important to note that most of the common causes and barriers to treating the top nine risks are within South Africa’s control.  Thus they can be treated and multiple risks and opportunities in the energy sector managed at the same time. The possible exception is that of low economic growth which is, to some extent, impacted by global economic trends, commodity prices, etc.

An effective risk response across industry and nationally was that of increased consultation together with policy coherency, new business models and a general increase in flexibility.  The consultation is linked to the effective risk response of having integration and systemic planning both at an industry and national level.  In response to our increasingly complex and fast changing world, this is a critical risk response to note going forward.

An integrated analysis was also carried out and shows that the number of market and business model risks increased from last year.  Deeper level issues such as funding models, skills and energy data are starting to emerge as risks together with indications of the utility death spiral in the form of the changing customer of the future and a lack of resources leading to a lack of investment in and breakdown of infrastructure.

The technology drivers were lower in number and this indicates that the technology disruptors are no longer causing the level of uncertainty that they were and are better integrated into the energy system. The discussion is now shifting to the policy domain and whether we have appropriate policy to allow uptake of these new technologies and the readiness of our energy sector to transition smoothly.  Policy, regulation and governance issues at a national and industry level are key, as they influence investor confidence and longer term financial sustainability and will impact on the implementation of the NDP.  Socio-economic issues which influence demand and product needs are also important, especially given the need for economic growth, social upliftment and the rising levels of activism and civil disobedience.  The low levels of economic growth are also a strong driver of this risk as well as the readiness for the energy transition.

All of these risks need to be treated, but categorising them differently allows their relative importance, and the strategies to treat them, to be differentiated.  The major drivers of the current energy system in South Africa are the changing customer of the future, appropriate policy and parochial interests.  The major outcomes in 2019 are the lack of investment in and breakdown of infrastructure, energy transition readiness and price volatility and uncertainty.

The major pivots for 2019 are innovative business models, aligned funding models, energy affordability, the national primary energy mix and rising levels of activism and civil disobedience.  Having certainty around the longer term energy mix for the country will encourage both up and downstream investment and decision making and contribute towards the most optimal integrated energy plan.

The transition readiness risk will improve if these pivot risks are addressed.  The major pivot risks for 2019 from an industry perspective, if addressed, would ensure that new business models together with the aligned funding models would positively impact the energy transition in South Africa.  This would need to be supported by aligned government policy, and regulatory coherence.  It also highlights that the funding of the various elements of the energy value chain needs careful consideration.

The energy risk environment in South Africa remains one of high uncertainty and change.  Some certainty has been achieved with the release of the IRP in 2018 and decisive action from government and business in terms of addressing corruption. This has given rise to some country level risks declining in importance and as a result, a deeper level reflection on energy industry specific risks occurred in the 2019 report.

Overall, the country is at risk of not being ready for the energy transition and new and innovative approaches to policy and business models will be required.  Building resilience at a sector level has been explored in this report and it has been identified that although much work is currently being undertaken, a more deliberate focus on resilience is required.

The energy sector can be steered toward a more sustainable future by proactively engaging with the interdependencies of the sector with other sectors, embracing ambiguity in place of an over-reliance on prediction, and by regularly affecting course-corrections in an agile manner.

This is a summary of the report

Click here to download the full report

Contact Wendy Poulton, SANEA, Tel 011 800-2634, poultowi@eskom.co.za

 

 

 

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