/ 9 August 2021

Green shoots for energy security, bad news for Eskom’s revenue

Eskom Holdings Soc Ltd. Financial Woes Cause Worst Pollution In 20 Years
Eskom told the Mail & Guardian it had only received a R9 billion World Bank loan to decommission its coal-fired Komati power station. (Waldo Swiegers/Bloomberg via Getty Images)

Eskom is expecting a drop in revenue when the new threshold for independent power generation allows the state utility’s biggest customers to turn to self generation. Mining companies and other big industries will have the greenlight to generate up to 100 megawatts of power for their own operations and without licensing, through renewable energy sources when the amendment of section 2 of the Electricity Regulations Act is published on 10 August. 

This is expected to take demand pressure off Eskom’s strained supply and reduce the need for the scheduled power cuts, or load-shedding, which have dogged the economy for more than a decade. The downside, however, is the risk to the utility’s already insolvent balance sheet as revenue is slashed.

According to a Council for Scientific Industrial Research analysis, raising the licensing threshold to 50MW would unlock about 3 300MW to 7 400MW of new energy (likely estimate: 5 300MW). A higher threshold of 100MW is likely to unlock additional capacity, but result in fewer projects of a larger size.

Coincidentally, the energy department has defended a 2 000MW emergency energy procurement programme because of an anticipated shortfall of between 4 000MW and 6 000MW over the next few years at Eskom. 

The programme led to the current controversy around the Karpowership deal, which was denied environmental clearance to go ahead, and missed financial close at the end of July. That deadline has now been extended to 30 September for preferred bidders. 

Mineral Resources and Energy Minister Gwede Mantashe has previously rejected liberalising the regime by increasing the threshold from just 1MW without licensing to 50MW, as a way of clearing regulatory limitations towards reducing Eskom’s shortfall. 

The June announcement of the 100MW threshold by President Cyril Ramaphosa is double that. 

“​​The mining industry can rapidly bring on board at least 1.6GW, largely renewable and private-sector funded, embedded-generation projects that are already being planned by mining companies,” the Minerals Council South Africa said at the time of Ramaphosa’s announcement.  

The organisation, which represents about 90% of the mining industry in the country, estimates that the move could lead to additional short- and medium-term investment by the sector in embedded-generation projects of about R27-billion. 

“This has the potential to raise South Africa’s overall growth rate,” it said.

​​Gold Fields has been awarded a licence to develop a 40MW solar plant at its South Deep mine and has not written an expansion off the cards since the higher threshold announcement.

The energy department’s 2019 energy-sector report shows that Eskom sells power directly to some 2 703 industrial, 51 848 commercial and 81 638 agricultural customers. The upside to allowing more independent energy is that it will open the door for investment, which the department of public enterprises estimates at about R120-billion. It will also create much-needed jobs. 

Eskom will offset the potential loss of revenue posed by the new threshold by measures such as persuading investors to put capital into evacuated infrastructure, like decommissioned coal-fired power stations, according to its chief executive André de Ruyter.

Six power stations in Mpumalanga, as well as Lephalale in Limpopo, will reach their end of life by 2030 and three are already due for decommissioning between now and 2026. 

Low-cost concessional finance with climate-change-related conditions, is one of the financial mechanisms the utility plans to use to develop stranded infrastructure that will generate socioeconomic benefit for Mpumalanga’s communities. An attractive threshold for embedded generation is another. 

Public Enterprises Minister Pravin Gordhan has said that a “huge pipeline of projects” was waiting on the right regulatory framework — and the new threshold is expected to give them the greenlight. 

The presidency’s Operation Vulindlela, established to probe policy responses for structural reform in the country’s economy — found that the new threshold would have a nominal impact on GDP of about 0.5%. 

The reforms to embedded generation will enable further private-sector participation in the generation space, but not in distribution or transmission. In addition, Eskom and municipalities will remain in control of access to the grid.

The licensing threshold increase next week follows the closure of the independent renewable energy programme’s bid window five (for 11 813MW) and the anticipated launch of bid window six in the coming weeks. Eskom remains the sole purchaser of independent power generation. 

On Friday, it was revealed that among the financers for bid window five was a newly formed investment platform for renewable energy.

Billionaire businessman Patrice Motsepe’s African Rainbow Energy and Power has partnered with Absa to form African Rainbow Energy, which is envisaged to boast of R6.5-billion in gross assets covering 31 renewable assets.

In the announcement on Friday, the new entity said its establishment would expand the pool of funding available for renewable energy developments in South Africa, “at a time when the country is accelerating its plans to expand and diversify its energy base” through the Renewable Energy Independent Power Producer Programme. 

“The private sector is simultaneously expanding its energy supply. This is an important step for the South African economy, which aims to source reliable and cost-effective renewable energy to drive growth and employment,” the company said. African Rainbow Energy will also invest in the private power sector.

“Renewables have been one of the most successful asset classes globally offering a unique mix of attractive long-term, inflation-linked returns and growth providing significant scope to deploy further funds. African Rainbow Energy is engaging with other investors to increase its equity base and fund further growth with the aim of listing on the JSE in future,” chief executive Brian Dames said.

The effective date of the fund is subject to the fulfillment of certain conditions, which are expected to be concluded in the fourth quarter of 2021.

Tunicia Phillips is an Adamela Trust climate and economic justice reporting fellow, funded by the Open Society Foundation for South Africa.