Independent body to level the playing fields with Eskom {writer: Leon Alberts}

The government will be establishing an independent system operator (ISO) for the provision of electricity in South Africa, President Jacob Zuma promised in his State of the Nation Address to parliament on 11 February.

It came only days after a reputable business risk consultancy warned that energy, or the lack thereof, has emerged as one of the top three risk factor for potential investors into South Africa.

President Zuma further reported that an inter-ministerial committee on Energy has been created to develop a 20-year integrated resource plan (IRP) for new-generation capacity for power-stressed South Africa.

In addition, the committee would look at another crucial element of providing energy security for the country and establishing viable alternative renewable electricity sources of electricity generation, namely the participation of independent power producers (IPPs).

While 27% of the South African population was reportedly still without access to electricity, President Zuma said that the committee would look at ways to protect the poor from rising prices
of electricity.

The warning about electricity supply as an international investment risk factor by Anne Fruehauf, senior southern Africa analyst with the consultancy Control Risks, came only days before an international television audience saw a Super 14 rugby match in Bloemfontein being plunged into darkness – only to be completed in semi-darkness. It is the same stadium where a number of matches in the Fifa Soccer World Cup will be played later this year.

The establishment of an ISO was regarded widely as crucial to levelling the playing field for IPPs, which felt that the current model – set up by Eskom as the ‘single buyer’ of power generated by private producers – was a constraint
to investment.

Certainty on viable tariffs at which electricity would be fed into the national distribution grid was regarded also as crucial for the meaningful development of independent private generators and particularly for the alternative renewable energy sector.

The ISO was to buy electricity from both Eskom and independent power producers for distribution to third-party customers, including municipalities. Originally, it was thought that only electricity from IPPs would be bought, but it has not been broadened to include Eskom’s power.

The aim of the new system was to create a level playing field between Eskom and IPPs and avoid a situation where the IPPs had to negotiate price agreements with Eskom.

Seven years ago, then Department of Minerals and Energy announced a target of 10 000GWh of renewable energy contribution to the country’s energy consumption by 2010. With only three years to go, there was still no meaningful implementation of renewable technologies in place. The lack of a comprehensive IRP, combined with the uncertainty about the tariffs at which privately generated electricity would be fed into the national grid, are blamed widely for this situation.

The new ISO model is used extensively in countries where the private sector contributes to power generation, including in Australia, the United States, Argentina and Norway.

The Department of Energy (DoE) had promised progress on the legal framework for such an ISO, which would probably need to be capitalised by the government and backed by a State guarantee, by March this year.

However, Minister in the Presidency Collins Chabane, speaking on television after the address, promised that the necessary regulatory framework for the introduction of IPPs would be in place only by year-end.

Nevertheless, African National Congress secretary-general Gwede Mantashe argued that the plan for an ISO was a major departure from past policy in the electricity supply sector and would be important to encourage investment by IPPs, which were currently unhappy with the situation of having to contract with a competitor, in the form of Eskom.

Also only days before the president’s speech, the chairperson of the South African National Energy Association Brian Statham warned that the first attempt at an IRP, a document of barely two pages published in December last year, held insufficient information.

While analysts described the document as being so thin on detail that it was meaningless, Statham said there has been no formal public participation. He warned that South Africa was at risk of becoming trapped in a situation where its energy plans included many elements that were theoretically great but practically not implementable.

South Africa had to ensure that the targets set in the IRP were measurable and achievable and had to bring together business, the government and non-governmental organisations in order to be implemented successfully.

There was much optimism in the IRP, but this was no time for idealistic dreams, since the country was not facing up to the hard realities in terms of the
energy sector.

However, the DoE had promised greater consultation on the development of the so-called second IRP, following the release of the highly disappointing first version that was gazetted on 31 December last year.

President Zuma stressed that Eskom would continue to build additional generation capacity and improve the maintenance of its power stations. The cash-strapped utility was currently pursuing a R400-billion investment programme.

According to Control Risks, South Africa had, until 2007, received credit for what was then perceived to be a strong suite of infrastructure assets. Together with crime and the skills shortage, the inadequacy of southern African infrastructure, and more specifically power infrastructure, was now viewed as a material constraint
to investment.

The Control Risks report covered the business-risk environment for 2010 across 173 countries and asserted that the electricity crisis, which abated in line with the falling demand associated with the recession, would soon re-emerge across the Southern African Power Pool (SAPP).

It also came at a time when official statistics indicated that South Africa’s power consumption had jumped 7.5% year on year in December. It was the largest increase since February 2004.

While Eskom had put special measures – including postponing maintenance at some of its power stations, demand management from its bigger customers, and augmentation from the country’s neighbours – the country faced the prospect of a repeat of rolling blackouts after the completion of the Fifa World
Cup tournament.

And the utility’s chief officer for Networks and Customer Service Erica Johnson recently warned that, while there was no short-term threat to security of supply, the system would be extremely vulnerable from 2011 through to 2012 ahead of the grid synchronisation of the new Medupi power station’s first of six 790-megawatt units in April 2012.

The Control Risks report warned that the lack of spare capacity to support an economic upturn will impose an unbreachable ceiling on growth and expansion prospects.

While Eskom had embarked on a huge expansion build programme, the expenditure on power projects eventually would ease the crunch, but it would persist for at least two to three years, said Fruehauf.

She noted that there is a “privatisation agenda” emerging around the electricity sector, despite general talk of the developmental state and the even more vocal nationalisation debate. “I think this will be a very interesting undercurrent to watch in 2010,” she said.

In recent times, the frustrations of independent power supply aspirants had reached boiling point. Early in February this year, Irish energy company Mainstream Renewable Power accused Eskom of not wanting renewable energy to succeed in the country. The company was in a partnership with local Genesis Eco-Energy, which aimed to build wind farms to generate 500MW in the Eastern, Northern and Western Cape. The uncertainties about who will pay what for the electricity generated had stifled progress with the wind farms to date.

There was an abundance of ideas for alternative ways – including renewable sources – to generate electricity. If the necessary legal framework came into place before the end of the year, the country could see the development of an entire new sector.

There could be additional positive spin-offs. A recent report for an international research organisation Global Climate Network (GCN) indicated that some 36 400 new direct jobs and 109 100 indirect jobs could be created in the renewable energy sector in South Africa alone.

These figures were derived assuming a 15% target for energy generated from renewable sources by 2020. This followed from the government’s long-term mitigation scenarios document, which guides policy.

“Significant opportunities for employment lie in clean energy sectors and can be harnessed if the South African government scales up its renewable energy ambitions.

Targeted government policies to increase local demand for priority renewable technologies – such as solar photovoltaic – and measures to encourage investment in the domestic market will be necessary to ensure job opportunities are maximised,” the study stated.