/ 20 September 2019

Beyond baobabble, toil & trouble

(John McCann/ M&G)
(John McCann/ M&G)




Finance Minister Tito Mboweni, no doubt frustrated at the somnolence of the economy and a noticeable lack of ideas to regenerate it, last week exhorted South Africans to wake up.

“Rock the boat! Shake the baobab tree! Do the unusual, disrupt the comfortable zones. Get things moving. Irritate the Establishment! Let them think! That is how you get Movement forward. This country needs Movement! Disrupt, destruct inertia!” he tweeted.

We have too many urgent problems such as rising unemployment and poverty to allow a mixture of deep sleep and policy paralysis to rule. In the case of electricity, in particular, the terrain is changing so fast that new approaches need to be adopted and implemented. Soon.

We know too well that Eskom teeters perilously on the edge of financial and operational meltdown and that without the billions of rands Mboweni has agreed to pour into it, it will collapse and bring down the economy with it.

But at the same time the market for the resource it burns — coal — is being disrupted in a manner unprecedented in its history. The United States research group the Institute for Energy Economics and Financial Analysis, in a report released this week, said global capital is fleeing the coal sector at an electrifying rate.

“Since 2013, coal exit announcements have occurred at a rate of over one per month from globally significant banks and insurers holding more than $10-billion worth of assets under management,” the institute said.

“Since 2018, a bank, insurer or other financial institution has announced a restriction on coal financing on average every two weeks. In the first half of 2019, that rate increased to one per week and now over 100 financial institutions around the world, including South African banks, have made a move away from coal already.”

But, if the need for policy action in the energy sector is urgent, reform has been dormant. There is no shortage of South Africans who want to shake the baobab, but government won’t let them. The City of Cape Town is a case in point. It wants to source its own clean energy as part of a commitment to a cleaner environment and also to break its dependence on failed parastatal Eskom.

Back in 2015, Cape Town’s mayor (then Patricia de Lille) asked the energy minister (then Tina Joemat-Pettersson) to allow the city to source renewable energy, but did not even get a reply.

Kadri Nassiep, executive director for energy at the City of Cape Town, says the city was forced to take the legal route after “high-level frustrations” trying to get ministerial permission. He describes Eskom as a liability because of its load-shedding and price spikes, some of which the city was forced to absorb because it said consumers could not afford them.

The City of Cape Town vs the National Energy Regulator of South Africa and the Minister of Energy, which is before the high court in Pretoria, is being seen as a test case for the freeing up of the electricity sector, but has yet to be heard in court.

The Centre for Environmental Rights (CER) applied to the court this week to be admitted as a friend of the court. It says its application seeks to highlight the constitutional obligations of local government to protect the environment, as well as people’s health and wellbeing.

The CER’s Nicole Loser says in the application that “section 24 of the Constitution provides a right to an environment protected for the benefit of present and future generations, including in the context of South Africa’s electricity landscape and in the light of the need to reduce the harmful effects of SA’s reliance on coal for electricity”.

The City of Cape Town court papers are dated July 25, 2017. Lance Greyling, the executive for enterprise and investment, says in the papers that the city has a constitutional and statutory duty to provide basic services, including electricity, to its inhabitants and that this includes the right for it to determine how best to discharge this duty without interference from others.

“In November 2015, the city applied to the minister for a determination that would allowit to purchase solar and wind power from an independent power producer (IPP) who would establish new generation capacity to supply it,” the papers say.

“The minister has, however, to date failed to determine the city’s application. The minister moreover recently informed the city that she has placed all new determinations on hold.”

The city was advised that the law does not preclude anybody from establishing and operating new generation capacity as long as it is licensed to do so by the National Energy Regulator of South Africa (Nersa) under the Electricity Act.

The city’s problem, the papers say, is that Nersa believes that an IPP may not establish and operate new generation capacity “without a ministerial determination”.

Cape Town says in the papers that in May 2010 the city decided with regard to the Energy and Climate Action Plan on 11 key objectives, including a goal of 10% renewable and clean energy supply by 2020.

It notes in its application that it is not asking for something that is not already in effect. “It is significant to note that a private company, Amatola Green Power (PowerX), holds a trading licence (which was renewed for a further 15 years by Nersa in 2014) to purchase renewable directly from IPPs.

“PowerX currently operates in the Nelson Mandela Bay Municipality (NMBM), where it procures renewable energy and sells it to private consumers through the existing electricity grid infrastructure. It is free to operate and conclude power purchasing agreements throughout the country.

“What PowerX is doing in the NMBM is exactly what the city wishes to do in Cape Town. The city already holds a power distribution and trading licence, which incorporates all the rights that PowerX enjoys (and more) — however, Nersa contends that for the city to procure power from IPPs and sell it direct to consumers (as PowerX does) requires a [ministerial] determination.

The papers add that the Ekurhuleni metropolitan council has commenced its own process of independent renewable generation and procurement to attain a target of 10% renewable energy supply.

The court papers list eThekwini, Richards Bay, KwaDukuza, Mangaung and Buffalo as municipalities that want to source their own power.

It is understood that the case will now be heard in March next year, but even if the findings are in favour of Cape Town, it is expected that this will be appealed and that both Supreme Court of Appeal and Constitutional Court hearings will follow, meaning it is likely that it will be several years before the electricity market could be freed through this avenue.

In the meantime the electricity crisis and the attendant health and environmental effects worsen, while reform measures appear at best glacial. It could be said that Gwede Mantashe, who had energy added to his ministerial portfolio of mineral resources in May, and who has described coal as a sunrise industry, is no baobab shaker.

Inevitable technological change will hit South Africa’s coal exports

South Africa’s thermal coal export industry is facing long-term, permanent decline. Aside from the domestic issues that the South African coal industry faces, the sector will also need to come to terms with the prospect of fading demand from its major export destinations.

South Africa is more heavily dependent on one nation, India, for its export volumes than other major thermal coal exporters such as Indonesia and Australia.

In 2018, 48% of all South African exports out of Richards Bay Coal Terminal went to India, a nation with a clearly stated policy of reducing reliance on coal imports. In the first half of 2019, that rose to 60%.

This export industry decline will not happen overnight or even in the next few years — there is time for policymakers to prepare for the coming transition and the inevitable social and economic consequences.

At its heart this is a technology transition and is hence unavoidable. It will happen whether policymakers want it or not. A lack of planning will result in a chaotic transition with negative social and economic effects of the type South Africa can ill-afford.

As tends to happen in technological transitions, new energy technology will replace coal-fired power faster than most predict.

According to Bloomberg New Energy Finance (BNEF), two-thirds of the world’s population already live in countries where wind or solar (or both) are the cheapest source of new power generation.

By 2030, wind and solar will be cheaper than running existing coal- or gas-fired plants virtually everywhere. This is already the case in India.

By 2032, BNEF foresees there will be more solar and wind power capacity installed globally than coal-fired power. Coal-fired power generation will decline 51% by 2050 by which time it will supply just 12% of the world’s electricity.

Global mining giants such as Rio Tinto, BHP, Anglo American and South32 have either withdrawn from the seaborne thermal coal market already or are now considering it. — The Institute for Energy Economics and Financial Analysis