A bold plan to close SA’s energy gap

By Ockert Doyer, lead portfolio manager, Sanlam Investments Sustainable Infrastructure Fund

After more than a decade without a reliable electricity supply, South Africa desperately needed a plan that was bold enough to close the electricity gap. And that is what was announced last week.

We welcome this plan. The alternative – declaring an energy emergency – would have been a substantially weaker solution. In the execution of this plan, the President will have to get various government departments and Ministers to work together and play their part. By declaring an emergency, all parliamentary oversight and procurement procedures could have been sidestepped.

The current shortfall in electricity supply is around 6 000MW. If we take the decommissioning schedule of Eskom’s coal plant into consideration, new dispatchable capacity of around 20 000MW will have to be added to the grid over the next 10 years. Will this plan get us there? With a bit of luck and a lot of hard work, it can. It is now up to the various government departments to remove any unnecessary blockages and for the private sector to put their money where their mouths are.

Before announcing the plan, President Ramaphosa consulted widely: Eskom executive management, power station managers and former Eskom personnel, labour federations, Business Unity SA, the Black Business Council, community representatives, several experts in the energy sector, and political party leaders. There seems to be wide support for the proposed changes. And that is important, because these changes will fundamentally alter the energy landscape in SA. In 10 years’ time, the energy sector will be unrecognisable from the current arrangement, so broad support was needed. There are vested interests that will be disrupted, and President Ramaphosa will need all the support he can get to ensure this plan is implemented without the habitual delays South Africans have become accustomed to.

The plan itself? It is effectively a 5-point plan –

1. Improving the performance of Eskom’s existing fleet of power stations: This will be achieved by increasing the budget that Eskom has to perform much needed maintenance, and procure skills from the private sector. This is a key requirement. Although new private sector generation will replace Eskom’s aging coal fire powerplant over 15 to 25 years, the country is still very much dependent on the output from the Eskom fleet.
2. Accelerate the procurement of new generation capacity: By doubling Bid Window 5 of the Renewable Energy Independent Power Producer’s Programme, an additional 2 600MW can be connected to the grid within the next 18 to 24 months. Also, by reviewing the mix of energy sources, timing and the volume as outlined in the current version Integrated Resource Plan, new procurement can be expedited substantially.
3. Increase private investment in generation capacity: About a year ago, President Ramaphosa announced that the licensing requirement for independent power producers would be lifted from 1MW to 100MW. This was seen as a big step forward, but many market commentators asked why the 100MW cap was even needed. If the private sector could put a large-scale project together and raise the funding for it, why not allow more than 100MW? And it is exactly what was announced – there would be no licensing requirement, regardless the size of the project. Although projects will still need a host of permits, it was also announced that these permitting requirements will be streamlined in order to reduce waiting times.
4. Enable businesses and households to invest in rooftop solar: This is quite a substantial change. Effectively, Eskom will establish a ‘Feed-in-Tariff’ scheme so that individuals or entities that have installed solar panels or other energy generation facilities, would be able to sell excess energy into the national grid. This should incentivise many small scale private solar projects to be completed. This will also reduce the strain on the Eskom grid and provide additional energy into the grid.
5. Finally, fundamentally transforming the electricity sector and positioning it for future sustainability: Here the President alluded to the restructure of Eskom into three separate legal entities and the fact that a solution for Eskom’s balance sheet woes would be announced at the mid-term Budget speech in October. After many decades of Eskom being the sole producer, transmission entity and distributor of energy, we will see a fundamental transformation of these roles, with more private sector participation and a competitive energy market.