PETER ATTARD MONTALTO: Time for state to get into gear on energy policy

Posted in: Energy, i-Blog, South Africa on December 7, 2020


The government should just get on with the business of dealing decisively with energy policy, show some leadership and cut the stalling.

This column was first published in Business Day.

It’s time to call out the nonsensical nature of energy policy in SA.

I don’t understand how the notional short-run political upsides of not dealing decisively with energy policy and those causing the blockages can be worth it versus the long-run damage to one’s legacy, reduced growth, higher unemployment and lower investment.

After three years of stalling, 2021 will be make or break not just on actual energy policy but for the wider credibility of the government’s commitment to an economic recovery in the eyes of both local and foreign investors.

This isn’t about the fact that we are finally due early in the new year to get the next (much delayed) bid window of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme, or that Eskom is stabilised, or that some new regulations have been signed. This is fundamentally about a mindset problem at the very heart of energy policy that cannot be changed incrementally but must be swept aside.

A decision must be made on the role of the state versus a liberalised system that sidesteps the state. Is the National Energy Regulator of SA (Nersa) working? Is the department of mineral resources & energy working and capacitated? Is the existing Integrated Resource Plan (IRP) process correct? Is the Electricity Regulation Act fit for purpose? Is the right leadership in place?

Proper performance management within the government will soon highlight that the answer to all these questions is no.

At the moment the private sector is made to feel grateful that there is a bid window for renewables coming. This is mad.

Changing a regulation that allows municipalities to procure IPP power is meaningless if the process still rests on opaque and delayed ministerial discretion. Removing the need for a ministerial authorisation to deviate from IRP is meaningless if private projects cannot navigate a Nersa process in a timely manner anyway.

Similarly, the IRP is now out of date, as Eskom’s own recent system planning exercise showed, and there is still a dangerous 5GW gap between supply and demand likely to emerge in the coming years that will result in unprecedented load-shedding. It is this fear that has led Eskom CEO André de Ruyter to call for liberalised energy procurement to allow him to achieve his number-one job target — keeping the lights on.

A key part of his ability to do this is going to be a spun-out Independent Transmission System Market Operator (ITSMO).  Eskom has been clear that it is getting ready for this. Yet the process and the “by end-2021” target for an ITSMO is doomed to failure because of the nine regulatory and legislative steps required to allow Eskom to spin it out. All of these involve the department in some way or another. The consensus in government circles seems to be that it will be more like three to five years before there can be an ITSMO given the lack of leadership on the issue.

But this isn’t about any one step of action, it is about a new mindset of speedy evidence-based policy. Business and investors would be far happier with someone gallantly battling a dysfunctional system than looking for praise for small morsels.

The problem is that the energy situation is a very large and complex puzzle that has many inputs and outputs at a micro level but with macro consequences.

Next year will see increasing alarm from both fixed capital and portfolio investors about the carbon content of electricity into final goods and services produced in SA. But it will also see alarm about the challenges of being able to remedy this.

It is interesting to note that despite some headline promises of streamlining Nersa’s processes and time limits, there is still not only a complete lack of trust in the regulator among experts but also deep confusion and tea-leaf reading every time they make a move. This is not a reputation a regulator should have.

Foreign and domestic companies will increasingly be forced to look at carbon on a total look-through basis — forced by both shareholders and governments. The EU plan for a carbon import tax will spread to other countries quickly through 2021 and so SA will again stand out like a sore thumb. This will be especially so given SA’s exceedingly slow movement and our risk aversion to making any commitment towards a zero-carbon point.

A 2050 net zero-carbon target for the whole country needs to be put in place before the middle of 2021. This would then start forcing current discussion on a Just Energy Transition (JET) into firm policy since decommissioning rates for Eskom (and Sasol and others) would have to accelerate meaningfully and be specific.

There would be strong signalling benefits globally, and especially into the COP26 conference in the UK in November 2021, to make such a commitment that has previously been politically impossible. Such a commitment is also crucial to gaining access to the JET financing that Eskom needs to manage its decommissioning process. If the country misses this point next year, then this whole plan becomes far harder if not impossible to finance at the required scale.

A carbon commitment should then be the foundation for a new IRP that is automatically run every two years through an outsourced, competitive process between expert modellers along guidelines (anchored around least cost and least carbon) set by the government. The result should then, with feedback but not sign-off from Nedlac, become government policy, thus sidestepping the bizarre sight of unions with no mandate arguing for a nuclear policy.

As it is, 2021 risks being a year of nuclear, new coal and exaggerated gas-to-power procurement confusion. Equally, Eskom’s need to decommission will arrive with a bang in 2021, and while Eskom has made valiant efforts on a just transition so far, this will suddenly become a much bigger issue as political interference starts.

So much will depend on perceptions of whether SA “gets it” (beyond the specifics) with energy and climate policy in 2021 or falls behind.

The direction of required travel and the requirements of investors can be accepted as is or dismissed as a colonial neoliberal conspiracy.

It will be the seminal nexus of issues for the year, with consequences well beyond. A reshuffle might be a good place to start.

Attard Montalto is head of capital markets research at Intellidex. 

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