The Long View: Fixing Energy To Enable The National Development Plan
Sufficient, reliable and affordable energy is a fundamental pillar of the NDP. At the present moment, several developments conspire to cast a dark cloud over this pillar, and thus the entire plan:
- Our electricity is no longer sufficient, nor reliable, and industry insiders think it may be five years before this problem is fixed;
- Several factors combine to start to make our energy unaffordable. There is the huge cost over-runs on the Eskom new-build that ultimately reflect in the electricity price or an inevitable Government bailout for Eskom (ZAR 50 – 100 billion just on Medupi, interest included); the very high cost of diesel for the OCGT plants (often well more than ZAR 1 billion per month); and the fact that municipalities impose high mark-ups on electricity to fund themselves; and the currency depreciation that impacts on the cost of new power plants, conventional or renewable. Indeed, it is sobering that the greater part of the ZAR 25 billion in tax hikes announced in the national budget will be used just to pay for the annual OCGT diesel use;
- Load shedding not only leads to lower electricity sales by Eskom and thus lower revenue plus budget shortfalls, it also leads to lower electricity sales by municipalities and is likely to lead to budget shortfalls at municipal level;
- With lower reliability and higher prices, there is an ever-increasing incentive for self-provision and grid defection by the well-to-do consumers, leading to a lower base of consumers for Eskom/Municipalities, lower sales and revenues, higher prices and a snowball effect. Also, this would create pressure on poor consumers as there would be fewer well-to-do connected to grid to cross-subsidise the poor.
- The National Development Plan requires everyone to walk together, to be “connected” through a common vision and to be bought into a good aggregate outcome. A fragmentation of the electricity sector into a self-provision phase would both symbolically and practically mean that faith has been lost in the viability of the NDP and that it is each person for themselves now. This would simultaneously signify that the political middle ground isn’t managing to hold. And indeed, the glue that holds our democracy together has hardly set.
It is not surprising then to note that a ‘War Room’ has been created to deal with the electricity “emergency” (the word “crisis” has not been popular in this context). The last week has seen decisive action in dealing with Eskom’s problems, the exact merit of which can be debated, but the clear intent has been signalled to take this seriously.
In looking forward, there is again the option of immense gloom, or very cautious optimism. One could fixate on how low we may drop before we (maybe) start to rise. The ultimate risks are that a dysfunctional electricity system stifles growth, leads to inflation, prevents investment, drags the country’s credit rating down, and that the negative feedback loops of lower welfare payments and civil strife exacerbate the situation and fracture any sense of a good, collective future - to be replaced by narrow self-interest.
But given only one credible vision of a good aggregate outcome in the NDP, this practically is not an option. Cautious optimism is required, and there are sufficient, cogent reasons to choose this approach:
- South Africa has procured about 4,000 MW of renewable energy within three years, and about 1400 MW of that is in full production, with the remainder no more than 2 years behind;
- The net cost of the renewable energy in 2014, given the diesel use and load shedding it avoided, was less than zero, and will likely be in that range for some years to come as shown in this CSIR report ;
- All capital has been sourced from the private sector, leaving Government at liberty to use its funds for other pressing priorities;
- Wind power in Round 4 of the REIPPPP will cost about 40% less than Eskom Medupi power and will probably also be cheaper than Eskom’s average selling price of electricity. The wind sector can easily grow to 20,000 MW with the right planning on grid.
- More than ZAR 11 billion has been committed for socio economic and enterprise development in deep rural communities around RE plants;
- The country has the potential to install 500 MW of rooftop solar PV per annum at costs equivalent to municipal selling rates and to install battery storage for this PV at costs that would still make this electricity far cheaper than OCGT costs
- Renewable Energy creates multiple opportunities for South Africa to become a major technology player on the continent and on the globe
- The country has an opportunity to modernise its grid and greatly increase its energy efficiency so that future decisions on ‘base load’ can be made against a baseline of sustainability, not waste and inefficiency.
The following graph shows how wind (blue) and solar (red) is already avoiding load shedding on a daily basis by adding to supply also in peak periods.
Indeed, we have several challenges to resolve, of which municipal finance is just one. But we‘re in the fortunate situation that hope is more than the only option, is firmly underpinned by progress on a number of fundamentally important fronts. Yes (to paraphrase the football anthem) we’re walking through a storm, through wind and through rain, our dreams tossed and blown. But we need to hold fast to the collective vision, with hope in our hearts, and never walk alone.