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SA’s electricity sector not healthy

Antonio Ruffini,
Editor, ESI Africa
By Antonio Ruffini, Editor, ESI Africa magazine

South Africa’s electricity sector is in trouble, and has been for some time. There are days when the supply available to meet peak demand is less than the capacity of a single large generation unit available to Eskom, which means margins for error let alone reserve margins are non-existent.

This is in spite of the fact that Eskom is running peaking open cycle gas turbines at an estimated cost of R2.50/kWh for extended periods, plants which are viable economically only if run for less than 5% of the time. It is in spite of the fact that Eskom has again undertaken buyback contracts with energy intensive customers, whereby it pays these at its marginal cost of electricity production to take any available capacity off-line. That this is actually a sensible cost effective move under the circumstances says a lot about the desperate nature of the circumstances.

The mood in Eskom’s head office must be bleak at the moment, unless there is a particular relish for the adrenalin rush of crisis management and the comfort of tallying up generous remuneration packages.

Its build programme is beset with problems, with construction of the 4,800 MW Medupi power station running well behind schedule and over budget. Major flaws have emerged in work done by key contractors, and South Africa’s untenable and often violent labour situation further threatens the frequently extended project deadlines.

While those inside the sector know all this, and how much trouble the country is in, much of the general population remains relatively unperturbed as the lights have stayed on. There was even, if not celebration, some silencing of complaints about the price of electricity as the National Energy Regulator of South Africa (Nersa) granted Eskom only half of the annual 16% price increase it asked for, covering the next five years. Eskom requested 16% on the basis that it was to achieve a rate of return so it can access international finance markets in its own right. It argued this was according to Nersa’s own criteria for the utility.

Nersa’s decision reeks of political interference. South Africa’s regulators lack independence from their political masters and are in general weak. In any case, as the Free Market Foundation points out, Nersa has an impossible task. The regulator is being asked to set prices by guessing what the price is that would be set by consumers buying from competing suppliers. That Eskom’s proposal was slashed indiscriminately, including its budget for desperately needed and useful demand side management, puts Nersa’s decision into question.

Even a strong opponent of Eskom’s price increase request, the Energy Intensive Users Group (EIUG), suggested that the utility could cope if given a 10% a year increase for the next five years. No winners will emerge from inaccurate pricing of electricity and an obviously political decision is unlikely to have determined the accurate pricing.

On top of this, the national treasury has announced it will be implementing carbon taxes from 2015. This will make South Africa one of the few countries to implement carbon taxes and a world leader, none of the others being a coal energy dependent developing country with massive unemployment problems. South Africa is one of the most, if not the most, coal dependent economy on the planet, and the biggest carbon emitter is Eskom.

Such a carbon tax is a tax on every electricity consumer, unless exemptions are given to Eskom, in which case it is simply an unfair tax on the country’s already beleaguered productive economy. Such a tax is equivalent to the country deciding to implement a special tax on potable water everyone uses, in order to save the planet’s scarce water resources. A carbon tax at this stage will not change behaviour, other than to drive energy intensive industries out of business. Even if the sole aim of implementing a carbon tax is for treasury to collect more income, it will not work as it will almost certainly reduce productive economic activity and the tax base, resulting in an overall loss of tax revenue.

In addition, carbon tax is effectively very much being implemented already in the form of the country’s decision to implement its renewable energy independent power producer programme, which adds less useful and often more expensive intermittent generation while base load capacity is desperately needed.

All in all, such is the faith in government decision making and its ability to deliver, that in spite of its repeated assurances about South Africa’s planned 9.6 MW nuclear build, its major base load capacity plan beyond Medupi and Kusile, questions remain as to when or even whether it will actually happen. It is a programme whose implementation is already late, but which makes a lot of sense for the country in terms of all its objectives.

Yet if a much more stable Germany can make an irrational decision to eliminate its nuclear power capacity and replace it with new coal fired capacity, all bets are off on what will happen in South Africa.