South Africa’s Energy Future
Times are a ‘changing in South Africa and not least for its energy sector. The landmark government changes taking place after the nomination of Cyril Ramaphosa to the presidency in February 2018 seem to already be causing a shift in the prospects of South Africa’s power generation industry. However, the question remains: will the change be enough, and will the new leadership be able to overcome the coal lobby and the nuclear power supporters to promote a more sustainable and future oriented power sector for South Africa?
Today, Sub-Saharan Africa’s biggest economy finds itself at a crossroad. Uncertainty over regulation, concerns over the national utility Eskom’s growing debt, the constant postponement of the signing off on projects under the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) and years of delays in deploying the country’s integrated resource plan (IRP), which outlines the strategy behind South Africa’s power generation sector, caused the sector to lag, and represented considerable losses in foreign direct investment. Now, players in the industry are hoping a new leadership will finally push the development of the sector forward.
Already, the main positions overseeing the sector have changed. Particularly, the appointment of Jeff Radebe, at the helm of the Department of Energy, brought some peace of mind to the sector. Thought to hold a more pragmatic and market-driven view than his predecessor, Mr. Radebe is facing several challenges in the very near future, from fuel pricing, to signing off on new power generation projects and addressing Eskom’s chronic issues. He will work directly with the new minister of finance, Nhlanhla Nene, who will oversee the approval of financial disbursements in the sector and their implication in the country’s fiscal situation. At the same time, he must also coordinate with Mr. Pravin Gordhan, the new minister of public enterprises, who oversees Eskom, which is in dire need of restructuring.
With over 80% of its energy coming from coal-fired power plants, South Africa stands as one of the biggest CO2 emitters per capita in the continent, while being particularly vulnerable to the effects of climate change. At the same time, Eskom’s near monopoly of the energy generation network, controlling over 95% of the country’s output, has made the sector particularly inflexible.
All that seems bound to change. Just weeks into its tenure, Mr. Radebe announced he would be signing off on 27 new renewable power generation projects which had been stalled for years under previous administrations. It is no small move. These projects will add 2305 MW of generation capacity by 2020 at a cost of R56 billion (USD$4.77 billion). According to the minister, this investment could create as many as “61,600 full-time jobs, of which 95% will be for South Africans”.
The announcement touches upon four fundamental issues for South Africa’s energy sector today.
First, the country’s IRP predicts a sustainable, environmentally friendly, and cost-reduction driven plan to move away from coal-dominated power generation through investment in renewables. Second, the 27 contracts, within the REIPPP, will be attributed to independent power producers, moving away from Eskom’s overwhelming monopoly of the sector. Third, it addresses the goal of energy security and decentralization, moving away from large-scale costly and centralized power generation centres to self-standing smaller-scale wind and solar parks that can function locally even with a collapse in transmission infrastructure.
Finally, there is the matter of the cost of power. Over the last decade, Eskom increased the nominal price of electricity by four-fold and its real price by nearly three-fold. At the same time, the use of the company’s services has consistently diminished to below 2007 levels.
The price of power from the national grid in South Africa, once one of the continent’s cheapest, has now become too expensive for both consumers and industries. Municipalities, that lack the power and know-how to pursue their own sustainable energy solutions, pile up debt to the national utility, which, in its own end, battles with financial difficulties.
And yet, the implementation of such forward looking changes driven by independent renewable energy projects is easier said than done.
In the eve of the date announced for the signing of the power-purchase agreements between Eskom and the independent power producers, lobby group Transform RSA NPC and the National Union of Metal Workers of South Africa (NUMSA) appealed to the High Court in Pretoria. They demanded the court to issue an interdict aimed at blocking the ministry from signing on the renewable energy projects, claiming that the contracts could cost thirty thousand jobs in the coal industry.
With over 90% of the continent’s coal reserves, South Africa boasts a strong coal mining industry that employs thousands and is highly dependent on the coal-fired power plants to continue to be viable. The rise of renewable sources of power will ultimately deem some of these plants redundant, affecting companies and workers.
According to Mr. Radede, the court did not grant them the interdict, but, after a cabinet reunion, the minister announced the signing ceremony would be postponed to the 27th of March. It wouldn’t be until the 29th of the same month that the court would officially dismiss Transform RSA and NUMSA’s petition. The following week, the government finally signed off on the renewable energy projects, in a major win for President Ramaphosa and a clear indication of a brighter future for South Africa’s energy sector.
His cabinet seems confident that the push towards renewables is today unstoppable in South Africa. The coal lobby, however, thinks differently. The move away from coal is one that has long been demanded by environmentally-conscious agencies both public and private but has faced considerable challenges. Just seven years ago, South Africa had one of the world’s fastest growing renewable energy sectors, but it has since come to an almost complete halt.
In a paper released by the national planning commission in January 2018, this transition away from coal is described as an urgent need, not only because of the finite nature of the fuel and environmental sustainability issues, but also for a matter of economic competitiveness. The paper underlines the need for a “just energy transition” through a “phased and predictable approach over time (that) should also ensure minimal shock to the incumbent industry, economic growth and energy prices”. It goes on to suggest that a “carbon pricing mechanism with appropriately designed allowances will send the required signals for substitution of carbon-intensive fuels to enable a transition to a low carbon economy”.
While South Africa will not transition to a carbon-neutral economy over night, these developments are welcome and give new hope for the country’s energy sector.
Further, the document pushes forward the idea of using natural gas as a transition fuel to a carbon-light economy. This prospect opens a few possibilities for the country. South Africa has little in terms of proven oil and gas reserves although it is thought to hold shale gas amounting to more than 390 trillion standard cubic feet and potential major reserves in its offshore basins. However, Mozambique’s natural gas industry’s fast track development around its Rovuma basin discoveries by Anadarko and ENI could supply South Africa with a relatively cleaner, cheap and easy to transport fuel to power its industry.
Further, the appointment of Mr. Mantashe as Minister of Mineral Resources also comes with the promise of a strong push for the passage of the South Africa’s Minerals and Petroleum Resources Development Act (MPRDA) Amendment bill, which has been before parliament for over five years. The passage of the amendment bill should bring clarity to South Africa’s oil and gas exploration sector, which has lagged in recent years. Exciting developments led by Africa Energy Corp in block 2B and French exploration and production company Total in block 11B/12B, with the drilling of the high-potential Brulpadda prospect scheduled to take place before the end of the year, could bring further attention and investment to the country’s offshore oil and gas prospects. While the country is aiming to move towards a greener economy, hydrocarbons production, particularly natural gas, could serve as an engine of economic growth.
On the other hand, the apparent current governmental support for the indefinite postponing of new nuclear power infrastructure is also refreshing. Within the mentality of focusing on less costly smaller-scale decentralized power generation units and considering Eskom’s continued statements that its current peak demand will not justify the construction of a new nuclear plant until 2050, it seems that the love affair with nuclear technology that was sustained for so long under president Zuma is finally ending.
In all, Mr. Radebe has a colossal task in front of him, both in pushing for the publication and implementation of the new IRP, resisting the might of the coal interests, the restructuring of Eskom and the build-up of a sustainable, competitive, and environmentally friendly power generation sector. Through a knowledge-based, pragmatic and sustainable approach to the sector, power generation players and consumers have reasons to have hope in the future, but only time will tell.
NJ Ayuk JD/MBA is a leading energy lawyer and a strong advocate for African entrepreneurs, he is recognised as one of the foremost figures in African business today.