Energy policy flaps in the wind, and confusion in the sector is due to poor planning

The energy sector is fraught with with different stakeholders pushing in various directions - leading to, among other things, 'policy inertia' in planning. (Delwyn Verasamy, M&G)

The energy sector is fraught with with different stakeholders pushing in various directions - leading to, among other things, 'policy inertia' in planning. (Delwyn Verasamy, M&G)

BUSINESS ANALYSIS
Key stakeholders agree on the reason Eskom doesn’t want to buy more independent green power: policy inertia — and it’s paralysing planning for South Africa’s energy future.

In a letter sent from the Eskom board chairperson and reportedly addressed to Minister of Energy Tina Joemat-Pettersson, the utility said it would only buy energy from the independent power producers (IPP) that is already in the pipeline.

Eskom’s chief executive, Brian Molefe, has frequently made comments about independent power putting a strain on Eskom’s budget and proposing nuclear power as the way forward for Africa.

But Finance Minister Pravin Gordhan, no doubt wary about state-owned entity boards trying to take matters into their own hands, this week said it was not Eskom’s place to make policy decisions.

Joemat-Pettersson has reiterated the importance of renewable energy, describing it as an irreversible path.

The Renewable Energy Independent Power Producers Programme (REIPPP) is driven by the department of energy.
Under it, green power is procured from the most competitive independent suppliers.

Eskom connects these projects to the grid and buys power from them at the predetermined price. This cost is taken into account by the National Energy Regulator of South Africa when it makes decisions on what electricity tariff Eskom may charge customers. The programme has successfully completed four rounds of bidding, with a smaller one, round 4.5, almost finished.

Eskom has since said it was simply asking for clarity regarding the next phase of independent power. “That does not mean that a decision has been taken to abandon the IPPs,” it said.

But concerns remain that Eskom is attempting to scupper the renewable energy procurement programme, seen as one of the country’s most successful project in recent times.

But whoever’s job it is to shape energy policy does not appear to have achieved much.

Energy analyst Chris Yelland said policy and planning concerning electricity supply has been “completely chaotic”, and a lack of policy direction is at the heart of the problem.

The Integrated Resource Plan (IRP) 2011-2030, now six years old, maps an energy future based on out-dated assumptions about costs and economic growth rates. “It is completely meaningless,” Yelland said.

It is required to be updated every two years, but the one updated version was not passed when submitted to the Cabinet.

So, while the department steams ahead with independent power production initiatives and Eskom continues to build new coal projects and contemplates extending the lives of existing coal plants, unco-ordinated planning continues, resulting in too much capacity and the threat of an imminent oversupply.

“Eskom is starting to see the writing on the wall and it is panicking. Huge costs were sunk into these mega-builds but now there may be no sufficient demand,” Yelland said. “The [demand] cake is getting smaller, and they are saying they don’t need any more power from IPPs.”

The only way to cover costs in the face of weak demand is to put the price of power up, and that threatens their business model, Yelland said.

Eskom claims the now stable system is the result of a rigid maintenance schedule, but critics say it is also a result of low energy demand, which is at 2008 levels, because of a flailing economy — and helped little by rolling blackouts in recent years.

A renewable energy insider said: “When Eskom needed power, they would take it from anywhere. Now that they believe they have enough, we are no longer a bonus to them.”

The insider said it is possible that the growing efficiency of renewables may be a worry to the utility. “Eskom probably has very legitimate concerns about its feasibility in the future.”

But Doug Kuni, an IPP consultant, said the most likely reason for Eskom’s move is that it can’t afford more independent power.

“I have always maintained the IPP programme will finish Eskom financially,” he said.

He questioned South Africa’s commitments to the international community relating to decarbonisation of energy.

“You can’t go for an emission reduction strategy if you don’t have a secure power system,” said Kuni. “Eskom has now realised it is having to pay for power which is not benefiting the system much. What they need is power on demand.”

Although the energy regulator allows for a “pass through” of the cost of buying from these independent producers in the tariff increases it awards Eskom, the immediate cash to pay for it still has to come out of the utility’s pocket, Kuni said.

On top of that, Eskom incurred huge bills running the open-cycle gas turbines on diesel and has continued to incur huge costs on the long overdue giant Medupi and Kusile coal-fired power stations and the Ingula pumped storage project.

“So what you have is a situation where Eskom’s cash is finished,” said Kuni.

Now the economy is flatlining, which has seen some major energy users, such as Evraz Highveld Steel and Vanadium, going under. This affects electricity sales, revenue projections and Eskom’s ability to meet its commitments, he said.

Another further cash injection from the stretched government coffers is unlikely.

“Government has sold all the family silver — all R23-billion of it — and given it to Eskom,” said Kuni. “On top of that, Eskom has gone back to the energy regulator and said it will only apply for a double digit increase.

“The future of the utility is in question and we are staring at disaster in the face. Government has the attitude that Eskom is too big to fail, but it is in fact too big to save.

No one involved understands how a power system works. If they did, they would have seen this problem five years ago,” Kuni said.

“Instead what you have here are a whole lot of politicians who have political ambitions and don’t understand the realities of the power system. The reality dawns when you have to put your money in your pocket and pay.”

Others see the latest development as something more sinister — a last-ditch attempt to get the contentious nuclear deal off the ground.

Concerns over excess supply becomes an issue for a nuclear build, Yelland said, because nuclear is expensive to build but cheap to run.

“It pays itself off when run a lot. But, if you don’t have enough demand, you can’t justify it.”

There is a concern that refusing to connect more independent power and renewables could be the work of certain parties trying to retrofit the nuclear deal.

Molefe has spoken favourably about nuclear power, a programme that would be driven by the department of energy. Eskom would only own and operate the new plant.

Asked why nuclear is still on the cards when there is risk of oversupply, Yelland said: “It’s about whether South Africa takes its commitments around the environmental issues seriously or not.”

Cutting out the nuclear option could see South Africa missing emissions reduction targets, which might result in the international community applying economic pressure on the country, he said. There are arguments that nuclear power is not the only way to achieve the targets, and there are arguments that it is. Yelland said the ideal solution is likely to be a mix of different types of energy supply.

It is said the updated IRP is constantly being reworked in an attempt to have a larger nuclear component included in it, with an appropriate price tag attached.

Andrew Kenny, an engineer and independent energy consultant, warned that the excess supply won’t last long; typically there is 1% growth in power demand for every 1% growth in gross domestic product. He said the existing coal stations, some of them 40 years old, will need to be replaced some time soon.

For this reason, future power generation capacity has to be planned now, even with the expected power from Medupi and Kusile taken into account, said Kenny, a proponent of a nuclear build.

“We need to go ahead full steam or there will be a tremendous shortage,” he said, noting there is “no hope in hell” that the 9 600MW outlined by the 2010 IRP could be built in time.

Kenny said he would like to see control of the grid taken away from Eskom, which could remain a state-owned power generator, and run by an independent operator who procures the cheapest electricity. In this scenario, he believed renewables wouldn’t be able to compete.

“I’m all for IPPs being allowed to compete. They should be. And I think Eskom should stop putting obstacles in their way if they are,” said Kenney. “[But] in a free market, very few IPPs would be able to compete with Eskom.”

The renewable energy insider believes that, should Eskom refuse to connect more green power, it will not stop the march of renewable energy.

“Renewables win either way. but the country will lose. People will defect from the grid when there are higher prices, maybe as a result of expensive nuclear.”

Johan van den Berg of the South African Wind and Energy Association said that even a stop-start growth of renewable energy would see the country migrating to a zero-carbon electric future based on renewables. However, an industry with a local centre of gravity, high levels of local content and maximal job creation requires policy certainty, investor reassurance and cohesion between the public and private sector.

For example, local development finance institutions could fund a local blade manufacturing industry for the wind sector.

“This one intervention costing as little as R350-million would take the local content level of wind farms up by almost 10% to about 55% and save the country billions in imports while creating jobs,” he said. 

Eskom said it supports the role that the IPPs play, and remains committed to facilitating their entry.

“In the 2015-2016 financial year, Eskom spent R15.4-billion on procuring power from the IPP,” it said. 

Lisa Steyn

Lisa Steyn

Lisa Steyn is a business reporter at the Mail & Guardian. She holds a master's degree in journalism and media studies from Wits University. Her areas of interest range from energy and mining to financial services and telecommunication. When she is not poring over annual reports, Lisa can usually be found pottering about the kitchen. Read more from Lisa Steyn

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