By Antonio Ruffini, Editor, ESI Africa

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The chairman of the South African National Energy Association (Sanea), Brian Statham, says the country needs to decide what its priorities are in the context of its electricity sector, for it appears to be expecting excellence in too many conflicting spheres.

Sanea is South Africa’s representative at the World Energy Council and is able to take a global perspective on local developments. In this context, ESI Africa approached Statham to gain his insights on a variety of issues ranging from electricity pricing to carbon taxes, the role of the department of energy, the National Energy Regulator of South Africa (Nersa) and Eskom’s future role in South Africa’s electricity industry.

The electricity price debate that ensued in South Africa after Eskom’s requested 16% a year tariff increase over the coming five years, commencing in April 2013, was subject of a number of public hearings during the early part of 2013. In the end, Nersa awarded only about half of the requested tariff increase. Statham’s response on the issue is nuanced. He praises Eskom CEO Brian Dames for having opted for a great deal of transparency that encouraged debate. At the same time he is critical of the majority of submissions made at the various public hearings, suggesting too much self interest in these and not enough consideration of the greater good of the country’s electricity sector, and the country itself. Most of these arguments predictably amounted to ‘we cannot afford such an increase’.

One of the strongest criticisms of Eskom was its (and Nersa’s) desire for it to achieve a real return of some 8% on its assets. This would give the national power company a balance sheet that enables it to tap into international lending markets in its own right. “Criticism that compares this with the real returns of other utilities does not differentiate between Eskom and utilities in Europe and north America that operate in different environments, so it depends on what is being compared,” Statham says. However, while Eskom desires to be a world class utility with a world class balance sheet, just as South Africa wants to be a world leader in environmental policy and at the same time reduce unemployment and achieve an economic growth rate of over 6%, the art of the possible does not include achieving all of the above simultaneously.

One of the areas where Eskom has left itself wide open to a broadside of criticism is that its build programme is late and expensive. According to Eskom’s original projections a good chunk of the 4,800 MW Medupi coal fired power station in Limpopo should be up and running by now. Further, an International Energy Agency (IEA) Organisation for Economic Cooperation and Development (OECD) study that looked at the typical construction costs of coal fired power stations found these to vary between US$1.5 and US$2.5 million per MW in some countries and between US$0.6 million and US$2.0 million in others.

Medupi’s capital cost comes in at above US$2.5 million per MW. Eskom is often accused of arrogance, and in this case it has justified the accusations. “If one considers, when Eskom undertook its last build programme most of the people involved in the current one were fairly junior within the organisation. Eskom made a mistake in emphasising the budget and timing targets that would be achieved and underplaying the difficulties,” Statham says. “Instead of the do-it-yourself option it may have been wiser to bring in a major partner to help avoid some of the pitfalls.” However, Eskom took the view that it could do again what it had done before. Regarding the capital cost, Eskom did come into the market at a bad time.

“Eskom entered the build programme under pressure, and the contractors would have known this.” Statham reminds that some of the cost excess above the norm is probably justified for other reasons as well. “A power station like Medupi is being established in an area where the national infrastructure has had to be rebuilt. In addition, in the previous build programme the contractors set up facilities knowing they would be constructing a fleet of power stations. All this industry capacity has had to be re-established. Further, because South Africa was almost building the Medupi and Kusile coal fired stations under duress, against the government’s stated policy of moving away from coal, the contractors were being asked to set up greenfield operations for one off contracts with no sustainable future business in prospect.”

Contractors would have factored this in when removing some of their finite capacity from other more promising markets, such as China, to a location geographically remote from their main prospects. So, the build programme in South Africa has progressed in a less than perfect manner for a variety of reasons. And, following up upon the developments of early 2008 when the national grid in South Africa almost collapsed, the question that was once virtually unthinkable is now common in a number of quarters. Should Eskom continue to exist as it is?

Here Statham says, “Eskom’s core competencies lie in operating the transmission system and its large base load power stations. Just because South Africa as a country is undertaking to diversify into renewables does not mean Eskom has to be the entity to do it. The Integrated Resource Plan (IRP) 2010 indicates a mix of renewables, coal and other energy forms and this is in line with global practice, but it may be better to demarcate Eskom to handle its base-load coal-fired and nuclear operations with the understanding that other parties will handle other parts of the mix. It is unnecessary to assume that Eskom itself needs to be representative of the national energy mix.” Eskom plans to build a 100 MW concentrated solar power tower project as well as the 100 MW Sere wind farm in the Western Cape, the latter having gone ahead.

Not only does Statham believe Eskom should not be undertaking such projects, which simply distracts focus from its main business, but it should consider disposing of its gas turbine power stations to other operators. “Eskom might have been in a better position of winning people over had it been willing to contract out such areas of operation like the development of renewables and other power projects instead of insisting on doing everything in-house. If this approach had been taken ten or 15 years ago it we would not be in the situation we now find ourselves.”

The result is that South Africa has been slow in opening up the electricity market to independent power producers (IPPs) and lags behind other parts of the continent in this regard. South Africa’s IRP should have been updated in 2012, but Statham believes the delay is not necessarily a bad thing as it allows time for it to be updated in context of the national integrated energy plan that is being developed. It has been argued that the IRP should have been developed as part of such a plan. In spite of the roadmap provided by the IRP with its strong emphasis on renewables, long time environmental activist Richard Worthington says the situation with renewables in South Africa is very much in play. Statham says that a reason for this doubt is that policy makers in South Africa tend to shift with the volatility of popular opinion.

This, coupled with the fact that it has taken longer than expected to achieve financial closure on the initial renewables IPP projects, has created uncertainty. So too has the pushing out of further bidding windows, with submissions for window three of the renewables bidding programme now to take place in August 2013. In addition, the projects that have achieved closure still have to deliver what they promised, and even in construction, if Eskom’s build programme is any indication, there could be unexpected delays related to availability of logistics support equipment and other issues.

One of these issues is likely to be the timeframe for connection to the grid. The South African grid is isolated in ways that Europe and other parts of the world are not, and it is fragile with little spare capacity. “This means transmission engineers are going with tried and tested options and are very risk adverse. Perhaps if there was more capacity in the system, where it would be possible to island parts of the network without adverse effects, it may have been a bit different.” The upshot is that gaining access to the grid is likely to be a critical path bottleneck, particularly for the novel projects beyond the early rounds of the renewables programme.

A spectre that hangs over South Africa in general is that of the government’s planned carbon taxes. Worthington is very much a fan of carbon taxes, though the economic implications for South Africa would be dire. “South Africa’s mooted carbon tax would certainly place the country at the cutting edge globally in terms of such environmental policy,” Statham says. It is certainly not something other major coal based electricity economies such as Poland are considering. And here the point

Statham makes about the country needing to decide what its priorities are comes to the fore. An obvious example is how South Africans are all for green energy, until they realise it will cost them more, and then the enthusiasm dampens rather rapidly. However, Statham says that if South Africa does not pursue renewables it will not achieve its carbon dioxide emissions reduction targets. “Every department and interest in South Africa wants to be world class, but until we look at what is possible to achieve in a concrete manner over the next five years, we will not have progress. South Africa’s policy flip-flops depending on who shouts the loudest. Because there is no clear direction people feel they can throw whatever they like into the pond. If there was a clear direction they could look at what works on the theme. At the moment programmes progress until they run into others, where the contradictions are exposed.”

Carbon tax is clearly a case in point. “In a country like South Africa, what are the alternatives to using carbon intensive power, and consuming less electricity is not necessarily what we want? South Africa should have the courage to take a hard stance, as did India, where its equivalent of a director general in its department of energy told the world at a conference – we have coal resources, and we have a lot of poor people without access. We are going to use this coal to generate power; get used to it and come and help us do this in the most benign way possible.”

At the same time, while the use of renewables has progressed around the world, there has been a large absence of similar progress in South Africa, especially on the role these technologies can play in mini-grids and rural electrification. “Instead, South Africa is trying to match the rest of the world in producing the largest grid connected renewables plants it can. A tremendous opportunity is being missed. For example, South African companies are producing 500 kW wind turbines that are being sold in countries like Mozambique – this is simple technology that can be exploited locally,” Statham says. “And if you get 70% reliability off a rural mini-grid, it is a lot more than people currently get in these non-electrified areas.

The development of such systems could be the basis of a real technology export market to Africa and other parts of the developing world.” For a long time, Eskom as the main reservoir of capacity in South Africa’s electricity sector was effectively the country’s de facto policy maker in this area. The country’s former department of minerals and energy was focused on minerals and petroleum; electricity was a distant afterthought. Then, following the delay in expansion of much needed new generation capacity that exposed the inertia in the sector, came the formation of the department of energy.

However, Statham says the department of energy has been conflicted. “As a policy-maker it should not have been the entity responsible for the IPP deals in the renewables programme, as it has little capacity for undertaking commercial transactions. That work should have been the responsibility of another government department. This has been a huge distraction, without which it might have been able to make more progress in other areas.” The regulator Nersa also leaves a bit to be desired. An issue that has come up in South Africa is the already high prices being paid by customers supplied by municipalities.

Electricity distributed by municipalities is often double the price charged by Eskom, as electricity revenue is used to cross subsidise other activities. Nersa has been relatively ineffective in protecting these customers. Statham agrees that in context of international trends Nersa is a weak regulator, but he points out that all the regulators in South Africa are weak. “South African regulators are not truly independent and are subject to political interference.” He does not even see civil society pressure as a solution, as people in South Africa like laws which suit them, but prefer to ignore those that don’t, and this is a theme that crosses all spheres of society.

“It is unlike countries such as Switzerland, the USA, and Australia, where there is a universal understanding that the laws should be applied and respected.” On some of the current themes that are topical across the world, and to which South Africa is not immune, such as the hype about gas and smart grids, Statham is sceptical. “I believe the hype about gas for power in South Africa is simply that – hype. We don’t even know what the actual resources will be off the coast of Mozambique.”

Regarding smart grids, “It is not the time for that in South Africa, where we don’t have enough sophisticated consumers for it to make a difference. Even the proposal of allowing consumers to reverse their meters would come with a great deal of extra costs, and will these customers accept paying network charges to cover protection equipment that is associated with this desire to put some power back onto the network?

Overall such a step and the associated costs do not make sense in South Africa at residential and light commercial customer level.” However, Statham says this would work at large client, industrial level, where it could make a positive difference. However, on the issue of carbon capture and storage, Statham says that it is important for South Africa to stay abreast of such developments. “If the world goes in the direction of carbon capture related to the burning of fossil fuels, as an economy based on fossil fuels South Africa will end up in trouble if it is does not adapt as well.”

In general, while numerous countries in Africa forge ahead, using private public partnerships, and not necessarily as defined formally, South Africa risks lagging. “For example, in other parts of Africa you have a mining company that builds a village for its workers, and electrifies it and there is less concern about regulations preventing it being able to do this. There is a pragmatism in other parts of the continent that is absent in South Africa, where bureaucracy impedes progress, although this can lead to more corruption. Certainly governments there appear less concerned about trying to put world class policy into place and more concerned about delivering services,” Statham says. “This impacts on the energy sector as well as across other spheres of life in South Africa.”

To read further articles from ESI Africa magazine, edition 2 2013, click here and create a login.