The driving force behind South Africa’s energy market is the state-owned power utility Eskom. Major changes to be implemented will see the power giant split into several units in the near future.
South Africa is preparing to restructure and privatize its electricity supply industry
South Africa’s energy market is almost entirely supplied by its state-owned power utility, Eskom – the world’s fifth-largest electric utility, which produces around 95 per cent of the country’s power generation. The 39 870 MW total capacity is mostly coal fuelled (35 627 MW).
The company’s parent, Eskom Enterprises, was formed in 1999 to carry out energy and related activities outside South Africa. It also houses information technology, telecommunications and consulting services. Eskom Enterprises has already begun to establish a presence in Mali, Ghana, Tanzania, Congo, Angola, Zambia, Mozambique, Swaziland, Namibia, Uganda and Botswana. The company’s South African assets include one nuclear power station at Koeberg (1840 MW), two gas turbine facilities (342 MW), six conventional hydroelectric plants (661 MW), and two hydroelectric pumped-storage stations (1400 MW). It also has 3556 MW of mothballed coal fired generation, and is currently constructing 1426 MW of additional coal fired capacity at its Majuba plant.
The remaining five per cent of generating capacity (2436 MW) is owned by South African municipalities of which the maj.ority (1932 MW) is coal fired. An additional 836 MW of generating capacity is privately held. The South African government has long been planning to privatize Eskom. Talks for the distribution sector have gone that step further with many municipalities implementing power distribution centres, while power transmission will, for the short term, stay in state control, mainly to avoid any potential ‘teething’ problems. Further talks have lead senior energy committees to tackle the carbon problem engulfing the country.
South Africa is a comparatively energy and carbon intensive nation. The most widely used renewable energy source in South Africa is fuelwood, which meets the daily energy needs of more than one-third of the country’s population. Deforestation attributed to increased fuelwood consumption by a growing population has prompted interest in developing other renewable energy sources, particularly solar, which could play an important role in supplying power to rural areas not connected to the electric power grid.
During last month’s earth summit held in Johannesburg, the country’s energy structure was discussed among world leaders. The country has long suffered with its rich and poor divide – two-thirds of the population exists outside the economic mainstream – with the poor side continuing to encounter electricity shortages and at worst going without electricity altogether. This being the forefront of talks, the balance of evening out wealth and creating more renewable sources for the country were highlighted. Discussions prior to the summit developed a ten-year plan to develop around 10 000 GW of green energy by 2012/13. This will equate to two per cent of overall demand.
Turning to green energy is literally seen as a matter of life and death for South Africans. Official statistics show acute illnesses due to noxious gases emitted by fossil fuels as one of the biggest killers of children under five, which is why the government is taking the issue seriously by pushing for a white paper. This seeks to lay out a regulatory framework for the renewable energy sector, a pricing structure and create an attractive environment for foreign direct investment.
Financially, Eskom is the envy of power companies with its economic stability, a stark contrast to many troubled power giants around the world. Rating agencies have put this down to the company’s direct role with the nation’s economy. Nonetheless, there are negative concerns about how the privatization will threaten the company.
Paul Lund, utility analyst at Standard and Poor’s said: “Eskom forms part of the economic rehabilitation of South Africa. I think there is a future threat to the rating, which is the reorganization or restructuring of Eskom. If the transmission and distribution networks are split away from the generation side of the business then it’s hard to say exactly what will happen at that point because we don’t know how those units will be structured and how much debt will be placed in them.”
One way that Eskom can prepare for any financial frailties is to increase tariff prices. This would not be embraced by consumers – especially in the poorer regions, because the country has seen price drops of up to 15 per cent in the past five years, a major factor that has influenced customers against privatization altogether. Lund adds: “Other players are being introduced into the market so Eskom will be forced to sell off some of its generating plants but Eskom would be keen to do so because lower prices will support growth. But that is changing slightly now as the regulatory resume is becoming more supportive and you’re probably going to start getting [price] increases.” This notion is supported with a report that outlines a potential increase as part of a white paper put forward early last month.
The South African government is in the process of finalizing a blueprint to restructure and partially privatize South Africa’s SAR21 billion ($2 billion) power sector. Public Enterprises Minister Jeff Radebe has stated that ten per cent of Eskom’s generation will be sold to a national company by next year and foreign bidders will be invited to tender for a further 20 per cent shortly thereafter.
Improving quality of life and providing low-cost energy are key drivers of the reform
Officials at the Public Enterprises department outline certain expectations which it plans to tackle. Ana Bellver, deputy director at the Department of Public Enterprises in Johannesburg, said: “After studying international experience and the key issues facing the South African electricity industry, the government recognises that there are significant gains to be made in restructuring the electricity supply industry. The main drivers of the reform are the need to keep providing energy at a low cost and high quality, on a sustainable basis, and the need to increase the qualify of life of all South Africans by making energy accessible and affordable.”
The restructuring, she admits, is not straightforward: “The restructuring of the ESI is a complex process. The government has therefore directed that a managed liberalization approach will be used for the ESI restructuring process that addresses some of the positive developments arising out of a competitive multi-market model and ensuring Eskom plays a role in the development of South Africa. This will be done on a phased basis, with the programme designed to accommodate South Africa’s unique circumstances and its timing in line with government’s policies for the sector.”
The key aims are to ensure electrification targets are met. However, the Congress of South African Trade Unions (Cosatu) believes that electricity should remain publicly owned and controlled. The union claims that public ownership allows the state to drive universal service provision, ensure equal policies, and determine affordable pricing structures. The idea of private ownership or a more commercial operating structure, the union fears, would shift Eskom’s ideals towards profit maximization over social objectives.
The privatization proposal forms part of a broader restructuring effort that, according to the state’s own advisors, will raise electricity costs by up to 50 per cent. Cosatu believes privatization of Eskom would contradict the government’s commitment to enhance services for the poor and support economic development. It claims the selling of these assets is negative for national development programmes, such as electrification, the installation of and access to telephones, and the accessibility of water to millions of South Africans.
The need for rural electrification has created opportunities for private investment by joint venture consortiums. Although excess generation capacity exists in the country, it is likely that power plant upgrades for life extension, or refurbishment with newer technologies are needed to ensure that electricity supply remains reliable as capacity demand begins to increase. Therefore, a window of opportunity exists for ventures specializing in energy efficiency; the energy intensity (i.e., energy use per unit of economic output) of South Africa is one of the highest in the world.
The greatest opportunities for electricity related investment appear to be in the field of renewable energy. Since a lot of South Africa’s population is situated in areas far from current and anticipated electrical grid connections, off-grid renewable energy sources, and photovoltaics in particular, are expected to play a big role in South Africa’s energy future.