PETER ATTARD MONTALTO: Holding on to central control of energy holds us all back

Posted in: Capital Markets, Economics, Energy, Politics, SOEs, South Africa on May 3, 2021


A choice on which infrastructure rollout system works for the state has never really been made.

This column was first published in Business Day. 

How exactly does the government want to achieve “development” — conceived broadly?

By moving around pieces on a chess board (or a matrix of little coloured blocks in a policy document), or by freeing up a complex system to deploy its own solutions while it provides the guide rails of the sort of social and economic development it wants to see?

The question is more pressing now as we move towards a crunch point on infrastructure — there is a fork in the road where a number of choices are required — yet are at a fundamental system design level.

The government infrastructure push at a high level is meant to be about co-ordination and strengthening capacity. Yet a choice on which infrastructure rollout system really works for the state has never really been made.

As such, we are increasingly moving down a track of centralised control, multiple levels of signoffs and oversight as projects are sucked from lower levels of government up towards Infrastructure SA without the capacity of funding to make them sustainable at a local level, or even the fundamental changes to regulations to allow municipalities to undertake long-term planning and make financial commitments.

In the move to champion infrastructure, it seems to have been forgotten that more than half of infrastructure development happens at provincial and municipal level. This is partly a function of constitutionally laid-down responsibilities. One system design shift has been the district development model which puts in place another layer to sidestep problems at lower levels. But this  may well create more complexity, especially when the centre is also trying to wrest control. If the district development model is meant to work, then power and capacity should be deployed to that level.

The question of designing systems fit for the future is most pressing in the energy space.

Short-run problems are rearing their head, one being that the risk mitigation programme gets derailed by allegations of corruption. The process will never reach financial close under a mountain of court cases and might drag down the low-risk battery plus renewable energy facilities that are part of the programme.

There is therefore going to be a yawning hole between electricity supply and demand for longer,  and with it worse load-shedding.

This is what happens with highly controlled centralised procurement systems. SA does not have an energy market. Independent power producers (IPPs) get access to a 20-year party, but there is no wider ability to buy and sell power to whomever you want in any easy way.

The topic is coming up now with a new Schedule 2 amendment to the Electricity Regulation Act gazetted for public comment by the department of mineral resources & energy (DMRE). This has been framed as a narrow shift in the threshold for where electricity generators have to go: now, they must go through the more onerous licencing process at the National Energy Regulator of SA (Nersa) rather than simply registering with the regulator.

However, Schedule 2 is a blueprint for how the electricity system in SA works: who can generate, buy and sell and to whom. The debate therefore needs to be much broader and be about the kind of system we want to see come from a Schedule 2 blueprint.

This is not about change for change’s sake but about making it fit for the future.

Schedule 2 and wider energy planning policy as encapsulated in the integrated resource plan (IRP) are about central control. Does anyone know exactly what demand is every year, as well as new supply, so that this information can be put in a document that is updated once every five years at best? Even if it was updated every year, how can that be socially compacted?

The bigger challenge therefore, which government seems unwilling to take on, is to conceive a Schedule 2 which allows market forces to work in the electricity space through many suppliers generating electricity and selling to a number of customers — Eskom, intensive users, smaller users and individual distribution entities and municipalities. This is known as many-to-many wheeling.

The system would naturally gravitate towards least cost to the end user while working within social and economic development imperatives set by the government.

Moaning sounds cry out that this wouldn’t work for Eskom or that people might not be grid-compliant. Yet Eskom itself is calling for this type of system and working to provide the thought leadership at a system level and the expertise down into municipalities to allow this kind of system to develop and ensure grid compliance.

Instead, we ring a much-siloed system of individual generators tied to individual buyers, whether Eskom, Sasol or other companies, which is not efficient and may not be least cost nor adaptive to change.

The implication of the department’s poo-pooing of the idea that the integrated resource plan (IRP) needs to be updated, and from the Schedule 2 draft, which raises the generation licencing threshold to only 10MW from 1MW and does not allow many-to-many wheeling, is that there is a thirst to retain centralised control. Never mind that this ignores the evidence from President Cyril Ramaphosa’s own advisory committee on the benefits of raising the threshold to 50MW, the jobs and investment it would create, nor the demand from users for much easier wheeling and a proper market from which to buy energy. There is also international evidence from places such as Vietnam of the power of unlocked energy markets. After all, how could unworkable generation plans stand any chance at all if you let go of central control?

The world is changing fast, in particular the energy space, and the current mode of policymaking and the system it is trying to hold on to simply isn’t fit for the future. It will take everyone — corporates, experts, unions and civil society — to show there is another way that is sensitive to all the developmental requirements a country such as SA has. Yet it seems more likely that as load-shedding intensifies through next year, we will again get “surprise” and “shock” as the response.

The energy supply/demand constraint remains the president’s most pressing issue that has the largest impact on potential growth. Behind it sits this wider question of central control or releasing market forces that is continually brushed over with straw-man arguments rather than finding solutions. If the opportunity to reform isn’t taken now, it may well be lost until after the 2024 election.

Attard Montalto is head of capital markets research at Intellidex, a SA research-led consulting house.

 

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