View from the outside

South Africa supplies two-thirds of the continent’s electricity and until recently, was one of the four cheapest electricity producers in the world. But lack of investment in the sector in recent years has left state-owned enterprise, Eskom, struggling to meet demand – and the time is ripe for independent power generation, according to an article recommended by one of our readers.

Last week, we reported on how the latest Eskom request for tariff increases will, over a period of five years, turn South Africa's once investment-friendly electricity cost regime into one of the most expensive in the world.

Commenting on the article, Alex Lambe suggested we take a look at an article in Power Engineering International entitled, "South Africa: Time is ripe for Independent Power" – and we did just that. Here is an extract from that article written by Chris Webb. The full article can be viewed at www.peimagazine.com.

About the electricity industry in South Africa, he writes that generation is dominated by Eskom, which supplies some 95% of South Africa’s electricity, and also owns and operates the national electricity grid. In global terms, the utility is among the top seven in generating capacity, among the top nine in terms of sales, and has one of the world’s largest dry-cooled power stations – the Matimba facility.
So vast that it was recently described by a senior banker as the "flywheel of SA’s economy", the company nonetheless faces challenges on several fronts. Not least is the threat of mounting industrial action, started by construction workers, which could paralyse its modernisation plans. The unrest stems from high inflation, growing socio-economic inequality and huge salary gaps between management and workers.

About the previous round of tariff increases, he wrote that “Eskom is itself at the centre of a row over increased prices. After much pressure from the company, the National Energy Regulator of South Africa (Nersa) agreed to grant it a huge tariff increase of 31.3%, effective from the beginning of July. Eskom has attempted to assuage a consumer backlash, telling them that it was inevitable and they must accept that the days of cheap electricity are over.
“Eskom says the rise is needed to revitalise the country’s capacity-stressed electricity market, and has pledged to spend R385 billion ($47bn) to expand its generation and transmission capacity over the next five years.

“Specifically, the company is shoring up cash to fund the construction of coal power plants to double capacity, from 40GW to 80GW. While this is bad news for the pockets of consumers in the short term, it is very good news for companies such as Siemens, which is continuing to budget for growth in orders and sales in South Africa and southern Africa this year despite the descent of Africa’s biggest economy into its first recession in 17 years.

"The company has recently completed a major contract to assist Eskom in doubling its open cycle gas turbine facilities in the Western Cape, raising capacity to over 2 000MW.

“Ambitious though they are, Eskom’s plans are not welcomed by everyone. Critics believe there is no need to raise capital at all, as there is no shortage of private investors willing to invest billions in green energy if the necessary incentives and take-off agreements are in place. They believe Eskom has calculated its need for a hike in tariffs based solely on the cost of new coal power plants without taking the power produced by independent power producers (IPPs) into account. They claim that if Eskom bought from IPPs and added more renewable sources, it would not have to load its capital spending.

"Another area of concern is the very real threat of a shortage of coal. South Africa currently produces about 250 million tonnes of coal a year. In the next 10 years, it is estimated that about 48 million tonnes a year of this capacity will be lost as mines reach the end of their productive lives and close. Eskom’s own specialist coal consultant, Johan Dempers, has been quoted as saying that South Africa will need to commission as many as 40 new coal mines at a cost of some R110bn in order to meet the country’s electricity needs by 2020."

Many industry observers want to see diversification in the energy and electricity sector. The Cape Chamber of Commerce says the recent increase in the price of electricity makes it imperative that South Africa develops its offshore and onshore gas resources as rapidly as possible. It is also urging Eskom to consider producing cheaper power by using natural gas.

However, despite Eskom being unable to meet demand in the long-term, there has been little evidence of any urgency to encourage, let alone introduce, additional players. While Eskom is the only buyer of power from IPPs, it has made little progress negotiating Power Purchase Agreements (PPAs) with them. Issues around price determination and the management of relations between IPPs and Eskom have also been sluggish to materialise.

South Africa, despite being a developing nation, has not escaped the Climate Change debate. Although it has signed the Kyoto Protocol, it has not committed itself to reducing its carbon emissions, as it believes the problem has been caused by developed countries, which should, therefore, shoulder the responsibility for slowing down global warming.

Others have a different view. Speaking at a climate change summit in Durban in July, Dr Zoe Lees, an associate director at KPMG, said that South Africa produced 495 million tonnes of carbon dioxide in 2007, 53% of it from coal. “Eskom, which relies on coal to produce power for the national grid, is a major contributor to this and needs to eventually change its energy mix,” she said. “South Africa’s emissions are higher than those of most countries in the world and very close to China’s.”

However, it is unlikely that targets would be imposed on South Africa until sometime between 2020 and 2025, as huge capital projects with enormous energy demands would become non-viable if they were not allowed these long lead times.

“The saving grace for Africa, if South Africa’s nuclear projects do not get off the ground, could be hydroelectric projects, such as those in the Democratic Republic of Congo, although there are major challenges across Africa to bring them on stream,” said Lees.

South Africa has been relatively slow off the starting blocks with renewables, but there are plans to build a wind farm with an initial capacity of 100MW by March 2010, and later expanded to 200MW.

The government has also unveiled plans to have IPPs on board to supply 400MW of wind power in the next three years. Last March, Eskom secured a €100-million ($143-million) loan from French development agency, Agence Française de Développement, to help finance a wind farm near the town of Koekenaap, east of Vredendal in the Western Cape, which will be operational in early 2010.

With the advent of higher electricity prices and a greater presence of IPPs on the South African power scene, a hitherto conservative electricity sector could be on the brink of major change. Particularly if nuclear power and renewables expand, as is widely seen to be probable.

And, with Eskom proposing carbon credits and taxes in line with international standards, there could be a major impact on all manner of other innovation – even ‘peripherals’ such as micro-combined heat and power technology. It is a case of 'watch this space'.