PETER ATTARD MONTALTO: Government should liberalise energy sector to allow private sector in

Posted in: Economics, Energy, i-Blog, Politics on January 18, 2021


Amending Electricity Regulation Act could unlock rooftop self-generation investments and jobs.

This column was first published in Business Day. 

The president has insisted there is no money to support the economy through the current lockdown. The Treasury has clearly “won” a battle to keep the status quo.

Yet the notion is untrue, the bizarre decision to bail out SAA should be replaced by monies being redirected to supporting the economy, paying for vaccines and extending the Covid-19 top-up grant.

Cuts could be found elsewhere with some proper expenditure reviews, including reducing mid-level public workers to hire more nurses and doctors. There are choices that are not being made, debates not being had. We seem to be on course for a rather dull status quo February budget.

The context is important. The Treasury lost several battles over reprioritisation and cuts in the medium-term budget policy statement. Opening up these kinds of discussions and the likely resulting slippage would accelerate the fiscus over the cliff edge. We are therefore stuck in an equilibrium that is understandable but unsatisfactory. The political economy is holding us in this odd place.

The required, logical step is not taken. If the fiscus cannot provide and the Reserve Bank will not cut interest rates, the government must step back and allow the private sector to provide through radical liberalisation. This is true especially of infrastructure and energy.

There is limited discussion of reforms to public-private partnership regulations, the Public Finance Management Act and the Municipal Finance Management Act rules that would unlock a faster pace of private sector-led infrastructure investment but would mean that the government loses control of a politically and vested interest-directed process.

No-one cares

There is limited discussion in government circles of an actual plan to liberalise schedule 2 of the Electricity Regulation Act that could unlock a wave of large and small business rooftop self-generation investments and the jobs and new businesses created to support that. Vietnam has shown an astonishing ability to increase rooftop capacity by 9.3GW in just the past six months of 2020. Exactly the same demand exists in SA.

Stage 2 load-shedding, which Eskom forecasts is likely to last until mid-April at least, even when electricity consumption was down 2.1% on the year — should be cause for panic, but I suspect no-one cares. Stage 2 load-shedding has become far too normalised in our psyche. We need some proper stage 6 load-shedding to get some action.

The problem is social partners — the government, business and labour — are all quite content with tick-box policymaking. So supposedly the Integrated Resource Plan (IRP) 2019 solves all problems.

This is far from accurate. At the time it was released there was such a relief and a view that it would unlock Renewable Energy Independent Power Producer Procurement (REIPPP) round 5 immediately (we are still waiting) and its flaws were ignored. Instead, we are stuck with a plan that will lead to record levels of load-shedding in the coming three years as the economy slowly recovers, constantly butting up against energy constraints.

The IRP was seen as the reform, as opposed to the reality that would flow from it.

Dangerous distraction

The flaws were deep, such as about pricing path assumptions for renewables, battery storage and artificial, unjustified assumptions made on throttling procurement volumes for new renewables. They assumed the energy availability factor rapidly returning to 75.5% from the 65% average in 2020, despite the consensus of energy experts and even Eskom’s own internal system modelling being that at best it would stabilise at 70% and likely lower.

It was assumed in IRP 2019 that there could be new coal to the tune of 1.5GW in the coming decade, despite banks stating at the time they would refuse to fund it and the global trends already being obvious. We will now see a wild-goose chase in 2021 trying to get new coal “because it’s policy”. A dangerous and pointless distraction. Equally, it was already consensus within energy expert circles that Inga 3 could not provide another 2.5GW to SA within any reasonable time frame, yet it was still part of the planning.

The most serious problem now is nuclear, which will again be a serious distraction in 2021. Nuclear appears “beyond the window” of 10 years in the IRP, but it is now within ministerial performance contracts released by the government before Christmas that new nuclear should be procured by 2024 given the lengthy build timelines to get power on grid by this point just after the IRP window.

A wake-up call — new nuclear will not be built. It’s not financeable, it’s not affordable, and it will drown in environmental NGO court cases. There are no commercially viable small-scale reactors with adequate proof of concept that can be procured under law by the government. Nuclear was only pushed through Nedlac by fringe elements of labour working with the department of mineral resources & energy.

Different versions of the IRP and of cabinet reports from Nedlac describe nuclear in different ways yet it is now in performance contracts and is “policy”. In 2021 we will again be off down the garden path.

Even if what it awards preferred bidder status to will actually be viable and achieves financial close, the ongoing REIPPP risk procurement round will get bogged down in gas and environmental impact assessments. Getting 2GW of energy on grid end-2021 will not happen and is likely to delay REIPPP round 5.

Yet all this is known, indeed Eskom seems clear on this front, but nothing changes. A stronger line from business on wild-goose chases down garden paths, and a broader pro-jobs line from labour is required. Both need to point out that SA is running to stand still with some procurement taking place but not enough to solve load-shedding and a 5GW energy gap in the coming few years.

No doubt the answer will be to compact an updated IRP, ensuring that all actors are happy, which will take another few years, but the government can’t direct, and compacting is inappropriate. It must stand back, admit that having a piece of IRP paper means nothing, and allow problems to be solved and growth to emerge in more efficient emergent ways.

This will be the test of 2021 and the credibility of the state of the nation address.

Attard Montalto is head of Capital Markets Research at Intellidex.

 

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