January 4, 2023
by Chris Yelland, managing director, EE Business Intelligence
In the energy and electricity sectors of South Africa, there is much that could be done and should be done, that is not being done. On the bright side, this should be a cause for some optimism, as it points to the massive opportunities that are within our grasp.
There would be good cause for pessimism if we were doing much of the right stuff, while still remaining stuck in the current mess.
The purpose of this article is to highlight the substantial challenges that we should be addressing, and, in so doing, appreciate and understand the significant opportunities that exist by successfully addressing just some of these.
Energy and electricity policy
South Africa has experienced a backward-looking failure by leaders at the highest level to understand and respond to challenges facing the international and local energy and electricity sectors, and to adapt accordingly.
Over-complicated and outdated oversight and governance arrangements by an excessive number of government departments and agencies, together with inadequate policy, regulatory, planning and oversight capacity for the electricity supply and distribution industries of South Africa, are plainly evident.
These governance and oversight bodies include the Department or Mineral Resources and Energy (DMRE), the Department of Public Enterprises (DPE), National Treasury, the Department of Cooperative Governance and Traditional Affairs (COGTA), the Department of Forestry, Fisheries and the Environment (DFFE), the National Energy Regulator of South Africa (NERSA) and the South African Local Government Association (SALGA).
At the same time, ongoing energy and electricity policy uncertainty, combined with mixed messaging emanating from the Presidency, the Presidential Climate Commission (PCC), National Treasury, DMRE, DPE and DFFE, is adding to the toll which regular loadshedding is taking on economic growth, business confidence and investment.
In 2022, the frequency and intensity of load shedding to protect the national grid reached new record highs. Data from renowned load shedding app, EskomSePush, indicates that the national utility failed to deliver an estimated 11 797 GWh of energy during 3775 hours of rolling power cuts in 2022, some 4.73 times higher than the 2496 GWh of unserved energy resulting from 1153 hours of power cuts in 2021.
Fig. 1: Estimated unserved energy (GWh) due to load shedding by Eskom from 2015 to 2022. (Data source: Stage 1 (1 GW) to Stage 6 (6 GW) Eskom load-shed hours, from EskomSePush; Graph: EE Business Intelligence.)
There is clearly a need for more consistent, coherent and well-articulated energy and electricity policies and strategies in South Africa. However, there is an apparent inability and/or unwillingness by politicians and government to recognise, take accountability for and/or confront the worsening energy and electricity crisis head-on.
The current electricity regulatory framework in South Africa is no longer fit-for-purpose in the rapidly changing global energy and electricity environment, and there is inadequate policy direction, capacity, regulatory independence and flexibility to adjust and adapt the country’s regulatory framework to something more appropriate.
This is evidenced by ongoing regulatory failures in the electricity sector as indicated by several court judgements against NERSA, following legal action by Eskom challenging the regulator’s electricity price determinations and methodology.
Ongoing delays in promulgating amendments to the Electricity Regulation Act (ERA) that would provide the necessary legal, regulatory and planning framework for a restructured electricity supply industry are also holding back reform of the electricity sector.
Failure by NERSA to implement consistent, predictable and sustainable cost-reflective electricity tariffs in South Africa has significantly damaged Eskom and the economy.
Delays in putting in place an amended national electricity pricing policy and methodology for the country are further inhibiting reform and restructuring of the electricity supply and distribution industries.
In the meantime, ongoing applications by Eskom and municipal distributors to NERSA for extremely high electricity price increases under the current arrangements are fuelling inflation, making electricity unaffordable and increasing electricity theft, non-payment and municipal arrear debt.
Despite several years of discussions, NERSA and municipal electricity distributors have failed to prepare and implement a national municipal wheeling framework and associated wheeling tariffs for transport of electricity across municipal networks from distributed generators to off-takers embedded with municipal networks.
Similarly, Eskom and most municipal distributors still do not have NERSA approved feed-in tariffs for domestic, commercial, industrial, mining and agricultural solar photovoltaic and battery energy storage installations, and do not yet permit generation into the network by low-voltage electricity customers.
Energy and electricity planning
The absence of a comprehensive national integrated energy plan (IEP), an updated integrated resource plan for electricity (IRP), and coal, liquid fuels and gas roadmap plans for South Africa, is a sign that planning in the energy and electricity sectors is far from adequate.
There have been execution delays and poor communication of progress made in implementing concrete plans and actions to end load shedding fast by the National Energy Crisis Committee (NECCOM) announced by the President on 26 July 2022.
For example, there is a lack of any visible implementation of the easiest and fastest actions in the emergency plan to end load shedding, namely, to allow, encourage and incentivise domestic, commercial and agricultural electricity customers to supplement their grid electricity needs with embedded solar photovoltaic and battery energy storage systems.
New generation capacity
The process of ministerial determinations and concurrence by NERSA for new generation capacity procurements in accordance with an outdated integrated resource plan for electricity, is slow, bureaucratic and no longer fit-for-purpose.
Unrealistic localisation requirements, changes in local and international energy and electricity business environments, and difficulties in obtaining Eskom grid access, have resulted in failures to reach financial close by many projects of Bid Windows 5 and 6 of the Renewable Energy IPP Procurement (REIPPP) programme. This has caused delays in the procurement and construction of new generation capacity via the Risk Mitigation IPP Procurement (RMIPPP) and REIPPP programmes.
In addition, the gas-to-power, imported hydro, new coal-fired power and battery energy storage public procurement processes of the DMRE’s IPP Office are yet to commence.
With 11 GW of aging coal-fired power stations due for decommissioning by 2030, a further 11 GW by 2035, and inadequate new generation capacity set to come online in the meantime, the outlook for security of supply in South Africa is bleak.
The unsustainable financial, operational and environmental position of South Africa’s national electricity utility, Eskom, has been apparent for years.
Finally, after several years of talk, resolution of Eskom’s debt position by government taking over a significant portion of Eskom’s debt is expected be announced by the end of February 2023. This will strengthen Eskom’s balance sheet and support its financial sustainability, but it does not address the underlying structural issues.
Investments in upgrading, strengthening and expanding the national electricity grid and associated transmission and distribution substations to provide adequate grid access is now critical to avoid grid congestion in certain areas, and to accommodate the connection of new generation capacity.
However, frequent changes in Eskom’s executive management are unsettling, and visionary, forward-looking board and executive appointments are needed to enable Eskom to navigate the existential threats it faces, and to transform to become a utility of the future.
Generation plant performance
Eskom’s poor operational performance is indicated by the declining energy availability factor (EAF) of the utility’s fleet of coal-fired and nuclear-powered base-supply generators, which in the final weeks of 2022 dropped significantly below 50%.
Fig. 2: Eskom total week-on-week energy availability factor (EAF), from Week 1, 2016 to Week 51, 2022. (Data source: Eskom; Graph: EE Business Intelligence)
Load shedding in South Africa is worsened by inadequate generation capacity reserves to provide the necessary headroom for the required deep-level maintenance of the poorly performing coal-fired fleet of generators.
To meet demand over the past few years, Eskom has increasingly relied on the use of its emergency, diesel-powered, open-cycle gas turbines (OCGTs) to meet demand, thereby consistently exceeding its diesel budget.
In November 2022, the utility had spent about R12-billion on diesel, double the year’s initial budget. In the absence of further financial support from government, Eskom was forced to cut back on diesel usage, and implement more intense load shedding.
The failure of Eskom to meet the legally required minimum emission standards (MES) of South Africa at virtually all of Eskom’s coal-fired power stations, with no plans in place to meet these standards in the foreseeable future, poses further massive risks to security of supply in South Africa.
In 2022, the DFFE ordered the shutdown of a number of Eskom coal-fired power stations as a result of noncompliance with the MES for over a decade. The loss of some 16 GW of power generation capacity now hinges on the outcome of an appeal lodged by Eskom.
Municipal electricity distribution
in many areas of the country, the dysfunctional and unsustainable financial and operational state of many municipalities and municipal electricity distributors in South Africa presents as much of a challenge as load shedding by Eskom.
A significant number of municipalities and municipal electricity distributors are unable to meet payments for their current electricity purchases from Eskom, to service their arrear debt, or to meet repayment arrangements on this debt. Municipal arrear debt to Eskom currently stands at above R50-billion.
Most municipalities and municipal electricity distributors also fail to provide free basic electricity to the significant majority of indigent households in their areas of supply, and instead misappropriate about 70% of the funds budgeted and disbursed by National Treasury for this specific purpose.
A backward-looking approach to electricity distribution by the municipal electricity distribution sector and NERSA has inhibited the implementation of feed-in tariffs for embedded generation and battery energy storage in South Africa.
Similarly, electricity distribution sector appears unable or unwilling to formulate and implement a national municipal wheeling tariff framework and associated wheeling tariffs in South Africa.
Payment for electricity
Where there are high levels of overloading due to illegal connections, electricity theft and non-payment of electricity, Eskom has been targeting areas supplied directly by the utility with cut-offs during peak periods, a practice euphemistically known as “load reduction”.
The biggest challenge in these Eskom areas of supply is in Soweto, where the level of non-payment is around 80%, and where a culture of non-payment and resistance to the installation of prepayment meters has existed for decades. Failures in addressing electricity theft and non-payment in Soweto has resulted in Eskom regularly having to write off billions of Rands of arrear debt by residents.
In recent weeks, Eskom has been targeting municipal electricity distributors having high levels of arrear debt with additional rotating cut-offs, over-and-above that required by the normal load shedding schedules. The situation is now approaching crisis proportions, with SALGA urging municipalities to resist Eskom’s efforts to recover municipal arrear debt.
Electricity sector reform and restructuring
Despite being a key part of the 1998 Government White Paper on Energy Policy, and the 2019 Eskom Roadmap published by the DPE, delays in electricity sector reform and restructuring continue to this day.
Talk of unbundling Eskom to establish an independent National Transmission Company of South Africa (NTCSA), a diversified competitive generation sector, and day-ahead, balancing and ancillary service electricity markets, is still ongoing.
However, more than a year since it was established as a legal entity and subsidiary of Eskom Holdings SOC, NERSA has still not processed a transmission licence for NTCSA, the DPE minister has yet to appoint a board of directors for the company, and NTCSA is still not operational.
Work on the rationalisation and restructuring of the electricity distribution sector was abandoned in 2010, and the separation of the electrical energy and wires businesses, and the establishment of a competitive retail electricity sector in South Africa, has not even started.
A longstanding disagreement between Eskom and municipalities represented by SALGA, in respect of claims by municipalities for exclusive executive authority over electricity distribution and reticulation in South Africa, will be heard in the High Court in 2023.
However, whatever the outcome in the High Court, the matter appears set to be heading to the Supreme Court of Appeal and Constitutional Court, and the dispute could still take some years to resolve.
Increasing levels of electricity, steel, copper, aluminium conductor and cable theft, as well as vandalism of electricity infrastructure and threats to personnel, are reaching a stage where Eskom and municipalities are beginning to abandon certain areas of supply as “no-go” zones.
In addition, maladministration, procurement irregularities, fraud, corruption, criminality and sabotage within Eskom and its power stations, and at municipalities and their electricity distributors, is a major challenge, to the extent that the army has been deployed to protect assets at a number of Eskom power stations.
It is evident that there exists a significant lack of capacity by the South African Police Service (SAPS), by specialised crime investigative, prosecuting and enforcement authorities, and by the justice department, to bring electricity criminals to book.
From the multitude of challenges facing the electricity supply and distribution industries of South Africa, it is clear there are indeed significant opportunities that could be realised by successfully addressing just some of these.
However, a continued failure to address these challenges will have the inevitable result of ongoing economic decline and loss of confidence by citizens and business entities in South Africa, leading to political, economic and social instability.
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