Last week, President Zuma gave his state-of-the-nation address, and analysts listened attentively to what he had to say about energy policy in South Africa, with particular reference to the electricity generation capacity crisis, and the direction government is taking to lead the country out of the mess in which it finds itself here.

 

It is worth considering carefully, point-by-point, what was said in the address, in order understand the issues and nuances:

 

 

A long-term, 20-year, national energy integrated resource plan is an essential part of the electricity capacity planning and funding process, and it should have been developed in a consultative and inclusive way, involving policy makers, energy experts and stakeholders, several years ago. The so-called interim "3-year integrated resource plan" that was belatedly presented fait accompli to the industry by the Department of Energy (DoE) in December 2009 is indeed a shoddy and inadequate piece of work. From the day it was published, it was misaligned with the very basis and assumptions of Eskom's prior applications to the National Energy Regulator of South Africa (NERSA) for massive price increases over the next three years. Without a properly developed national energy IRP detailing the required energy mix for the country, and the expectations of Eskom for new electricity generation capacity to meet projected demand over the long term, is it conceivable that Eskom can do proper planning in the national interest? Without a 20-year IRP, how is it possible for Eskom and its shareholder to develop a meaningful funding plan? And without a funding plan incorporating the necessary mix of debt, equity and tariffs, how can Eskom possibly make a rational application to the Regulator for a multi-year price determination? It is a national disgrace, reflecting very poorly on the DoE and NERSA, that we still do not have a proper 20-year national energy IRP in place, more than two years after the generation capacity crisis. And it is astonishing that only now, months after Eskom's two price applications and the associated NERSA public hearings, has an inter-ministerial committee on energy been established to develop the required 20-year IRP. Who knows when it will actually be ready!

 

 

The need for participation by IPPs in the generation capacity mix of South Africa was detailed in the official government white paper on energy policy twelve years ago. Yet we are told in the state-of-the-nation address last week that the 20-year IRP, which still has to be developed and published by the inter-ministerial committee on energy, will only now "look at" the participation of IPPs, while the necessary enabling environment - the policy, legal and regulatory framework - is still to be established and put in place. Is this not a somewhat weak, half-hearted and reluctant response that comes as too little, too late? It is, however, heartening to see that the participation of IPPs is now at least acknowledged by government as having some role to play, and in protecting the poor from Eskom's fast rising electricity prices! Surely, however, IPPs will also play an important role in protecting other customer categories - commercial, industrial, mining, traction, agricultural and domestic - from Eskom's exorbitant price trajectory? Even Eskom now grudgingly acknowledges that IPPs in fact are essential to meeting the country's further power capacity needs, which is critical to preventing shortages and blackouts in the short to medium term.

 

 

One also has to marvel at the policy flip-flops that occur along the way in South Africa, without anything actually happening on the ground. The position of the 1998 government white paper on energy policy was that the electricity supply industry would be significantly restructured. Eskom Generation would be unbundled into about five nominally independent and competing generation companies. New generation capacity would be provided by foreign domestic investment. IPPs would introduce diversity and further competition in the generation sector. A state-owned, independent transmission system operator would be established, together with an energy market and/or independent power procurement agency. The electricity distribution sector would be rationalised from the few hundred municipal electricity distributors into a significantly reduced number of economically viable regional electricity distributors (REDs), run on business principles. However, in the subsequent twelve years, nothing concrete materialised from this grand vision. Later, as a result of the pending generation capacity crisis, the policy was duly reversed, and Eskom was given the green light to proceed with its massive (and unaffordable) new-build programme, even without knowing how it would be funded. Now, the state-of-the-nation address appears to revert back to the earlier policy. But in the light of government inertia and the powerful vested interests for the status quo, will anything actually happen? Of course an independent system operator (ISO) is a critical pre-condition for non-discriminatory access to the transmission grid to enable the entry of IPPs operating on level playing fields with Eskom power stations. And so is an energy market and/or power procurement agency independent of Eskom. But twelve years later, let's get beyond the intentions and the talk!

 

 

Well, this doesn't say anything new, and would seem pretty obvious. But as a matter of urgency, the 20-year national energy IRP must be put in place. This will define the overall energy mix for South Africa based on the available energy resources. Taking into account the need for diversity, risk mitigation, national renewable energy targets and commitments for carbon emission reductions, it will also specify the optimum electricity generation mix and capacity required to meet the anticipated electricity demand for the years ahead, based on the least-cost options (including the cost of externalities) for the country. With due regard to affordability, diversity and other practicalities, the split in additional capacity to be provided by Eskom and other generation sources must be clarified, thus also enabling a funding plan to be put in place. Finally the necessary policy, legal and regulatory framework must be in place, and it must all be made to happen. These are surely the missing details!