PETER ATTARD MONTALTO: Something clicked with Ramaphosa’s power-generation move

Posted in: Energy, i-Blog, South Africa, Sovereign risk on June 14, 2021


It is the first time there has been a policy reform that has uncontrolled scalability.

This column was first published in Business Day. 

Some oomph has arrived. Why was last week’s 100MW announcement by President Cyril Ramaphosa so important? It isn’t even the policy issue in the narrowest sense, but that this was the first time there has been a policy reform that has uncontrolled scalability.

It is a liberalisation that may allow as much as 15GW of new power-generation capacity to be built rapidly in the next decade or less. This is about half of total current demand for electricity.

The inputs will be new bank lending and new jobs — new SMMEs, big companies and demand pipelines stretching into the distant future that create sustainable localisation of onshore photovoltaic and wind manufacturing, in a way that dictates from the department of trade, industry & competition never would.

It cannot be said what will happen, when and where — it will not be centrally planned, but it will be the kind of emergent system that has been rare in the past decade and a half in SA.

The upside is hard to calculate — there could be R100bn of investment in the coming decade, yet the short-term impact on sentiment must also be factored in as well as the effect on foreign direct investment and domestic investments ticking up — particularly as investors will be able to source clean power for projects and not be bound by SA’s carbon intensity.

How SA copes with this new uncontrolled expansion of projects in the years ahead will be interesting to watch. Already the calls for empowerment requirements for corporate self-generation has started, though this is like saying that a bank must ensure every single branch is empowered, not the whole company — a power-generation facility in a company is just like another division. Similarly buying wheeled power across the grid has the same BEE requirements and positive scorecard incentives as any other input to a company through its supply chain would have.

Online system

There has oddly been much doom-mongering and cries of chaos. Sure, if people were to randomly connect to the grid however they like and if no action were to be taken to protect Eskom’s finances from the impact, there would be chaos. But this is patently absurd.

Registration (rather than licensing) of projects will be required with energy regulator Nersa — as is occurring relatively smoothly now — though Nersa needs to move to an online case management system for registrations that should be bureaucratic and not have regulatory decision-making input into them if the required conditions are met.

Eskom has also been working with metros and municipalities on how wheeling can occur. Charging for this grid service can be undertaken on a vastly larger scale than before. This is important if you are going to be a foreign direct investor in data farms in Cape Town and need to get wind power from the Northern Cape. The about 24 months from now that it will take the first projects to come on-grid is enough time for Eskom to put the right framework in place.

If we are talking about half of current demand potentially defecting, a much wider shift in energy policy is needed. This was the hidden extra announcement last week from the president — that a new Integrated Resource Plan (IRP) is needed. The IRP has become such a contested and bogged-down football in recent years, stuck endlessly in Nedlac and the cabinet, but now needs to be transformed.

Short exercise

Business has already laid out in Nedlac, after the last IRP in 2019, how this can occur using an independent secretariat and a more regularised and transparent updating process in a rolling two-year cycle.

Nedlac should also be a short sharp consultation exercise, not an interference mechanism — the technocratic exercise should naturally run its course with jobs a key focus within it already.

On these pages last week, the presidential climate change committee already raised the likelihood of much faster Eskom decommissioning being required to meet a more appropriate carbon net zero glide path. The liberalisation of the energy system is likely to result in unreliable and costly-to-maintain old power stations being rapidly retired.

Eskom can focus instead on using its expertise to manage a complex transitioning grid with storage battery technology at utility scale and backup gas, as well as transmission strengthening investment programmes, not to mention paying overdue attention to its distributions business.

Lower revenues will require tariff reform to protect free electricity for the poorest and extract appropriate cost-reflective charges for backup and transmission.

Lower revenues will require an acceleration of Eskom debt deleveraging as its asset base starts to shrink rapidly (throwing its asset to debt ratios out of whack) and revenues fall. The sovereign will ultimately need to take over about R200bn of debt — also allowing space for new borrowings to fund the strengthening of the transmission grid and social costs of the just energy transition. Unbundling in this world becomes even more important.

This is certainly complex but the answers will be found already on the table. It is a time for the department of mineral resources & energy to provide new leadership on energy policy as this transition takes hold — to provide the foundations for liberalisation to occur smoothly and to ensure the risks are known and mitigated.

Load-shedding will intensify in the next two years before new private electricity-generation capacity comes on-grid with existing green projects already under way. It will be a tough period though a path through and out the other side is much clearer now.

Clear thinking will be required in this period. The folly of 20-year agreements with Karpowership rather than two-year ones to bridge this gap becomes all the more obvious.

These are exciting times for the electricity system and its stakeholders. A huge, interconnected web of issues is being forced to morph by a single decision. Change could become infectious, especially, as unions have finally figured out, this can be win-win all round. Win-win is why last week was so important.

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

 

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