Rolling blackouts, renewable energy and lessons learned

http://finweek.com/2015/03/31/news-rolling-blackouts-renewable-energy-and-lessons-learned/
In early 2008 South African society was shocked into the reality of inadequate power reserve margins required by Eskom in order to consistently keep the lights on. Suddenly new terms such as “load shedding” and..

In early 2008 South African society was shocked into the reality of inadequate power reserve margins required by Eskom in order to consistently keep the lights on. Suddenly new terms such as “load shedding” and “rolling blackouts” were introduced to our daily language.

There was a rush to buy private power generators and increasingly there was chaos on the roads and early shop closures as power was unexpectedly switched off around the country. Productivity losses cost the fiscus billions of rands of lost revenue and the mining industry in particular was hit hard hit by power cuts.

However the crisis has been in the making for the past 30 to 40 years since the early 1970s when the government of the day commenced the roll out of a massive power investment programme within Eskom. Demand growth was overestimated and the construction of new coal fired stations resulted in an over capacity of power generation over the following 20 years.

As the cost of this investment was paid off, it culminated in South Africa enjoying the cheapest electricity prices in the world. However with virtually no new investment in new and replacement power generation over the next 20 years, the country was lulled into a false sense of security and a complacency around pursuing further investment. In 2004 the power reserve margins dropped sharply as economic growth accelerated and in 2008 the country suddenly realised that cheap and reliable electricity was a luxury of the past.

Post 1994, the Department of Energy (DOE) was mandated to take over Eskom’s exclusive role to produce and manage a power plan for the country. In 2010 the DOE promulgated an integrated resource plan (IRP) which envisaged the doubling of power generation in South Africa by 2030 and significantly this included a 42% allocation of the new build to renewable power (18000 MW), the rest comprising coal, nuclear, gas and diesel fired power generation. This was followed by the launch of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme in 2011, the biggest single public private partnership (PPP) initiative in South Africa to date.

The DOE sought the assistance of National Treasury’s PPP Unit to set up a small and dedicated technical team, most of whom had vast PPP experience, to manage the roll out of the REIPPP programme. From the outset this was a successful arrangement for a number of reasons:

• The team operated outside the formal departmental structure of national government and thus was not hamstrung by onerous policies and procedures.
• There was significant project development experience in the team including individuals who had drafted the rigorous PPP appraisal framework whilst working in National Treasury.
• An open door policy with the private sector was vital to facilitate dialogue with the professionals behind the projects and ensured there was clarity around key design and implementation issues.
• The renewable energy team ensured the maintenance of high standards throughout the process, particularly in respect of meeting deadlines and clarifying expectations by both the government and the private sector.

This enhanced the credibility of the programme in the market’s eyes and was a departure from the distrust of government by the market that was evident in previous private public partnerships in infrastructure during the past. The REIPPP program is now widely recognised to be in the top ten infrastructure investment programmes in the world over the past three years.

There are a number of lessons learned in the REIPPP programme that can be transferred to other private public partnership investment initiatives by government in future as follows:

• Maintain a business-friendly approach to the investment industry in order to build confidence in the sustainability of the programme through dialogue and a high level of trust by the investors.
• Take advantage of available private sector funding and use it to gear up donor and development finance investment money
• Make a case for renewable energy (or the relevant infrastructure investment thesis) and keep making it. Constant lobbying of government by the renewable energy team has ensured ongoing government support for the programme.
• Find a programme champion within the team with good experience and credibility in the eyes of both the private sector and government to ensure that there is sustained momentum behind the programme and that it remains goal directed and productive

This will attract investment into the country by the international community and should be high on the agenda of government. It should ensure a win win scenario in respect of the massive need for infrastructure investment and the no less amount of international investment money that is seeking deployment into emerging market economies such as ours.

– Paul Semple: Portfolio Manager