How the electricity crisis is posing a threat to the country’s economic growth
Kholofelo Molewa
Credit Alternatives Portfolio Manager
Key takeouts
SA’s electricity crisis poses a threat to economic growth, government’s credibility and the daily lives of its citizens. The obvious solution is to invest in renewable generation, but the realities of the situation are complex.
The Energy Minister is determined to extend the life of the coal-fired plants, but this should have a hard deadline and be handled by external contractors with strict KPIs.
Policy makers face a delicate balancing act: SA needs to stabilise existing coal-fired generation while moving to a low-carbon future, but without destroying jobs in the coal sector.
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SA’s electricity crisis poses an existential threat to the country’s economic growth, government’s credibility and the daily lives of its citizens. The obvious solution might seem to be to encourage the private sector to invest in more renewable capacity, which will meet both SA’s energy needs and its climate goals. However, the reality is more complex.
Policy makers must ‘thread the needle’, simultaneously stabilising existing coal-fired generation and driving forward the country’s transition to a low-carbon future, but without destroying the millions of South African livelihoods that depend on coal. The hard reality is that load shedding will persist as long as the coal fleet continues to operate at dismally sub-optimal levels. So we have to ask: what are the short-, medium- and long-term trade-offs?
In his State of the Nation address in February 2023, President Ramaphosa announced that he would create a new cabinet post, the Minister of Electricity, to co-ordinate the State’s response to the ongoing energy crisis.
In March he confirmed that Dr Kgosientsho Ramokgopa would take on this responsibility. Dr Ramokgopa has proposed a two-pronged approach: fixing the existing fleet of coal-powered assets while bringing on new private-sector capacity.
So far so sensible, but successful execution of this plan will depend on a variety of factors. The most important will be government’s ability to satisfy its partners in the labour movement that the transition away from coal to renewables will indeed be ‘just’. It will also depend on the new minister having the authority to decide the fate of Eskom’s coal-fired fleet, a prerogative which Section 34 of the Electricity Regulation Act currently bestows on the Department of Mineral Resources and Energy (DMRE), headed by Minister Gwede Mantashe.
During the course of writing this article President Ramaphosa has devolved certain powers to Dr Ramokgopa including the prerogative to:
- determine that new generation capacity is needed to ensure the continued uninterrupted supply of electricity
- decide from which energy sources electricity must be generated, and each source’s share of generation
- set out how and to whom the new generation may be sold
- require that new generation capacity must be established via a tendering procedure which is fair, equitable, transparent, competitive and cost-effective
- provide for private sector participation – across the board, including ramping up efficiencies in Eskom itself
- oversee all aspects of the electricity crisis response, including the work of the National Energy Crisis Committee (Necom)
- work full-time with the Eskom board and management to end load-shedding and ensure that the Energy Action Plan announced by the President is implemented without delay.
These powers were officially transferred to Dr Ramokgopa by President Cyril Ramaphosa on 27 May 2023 in terms of Section 97 of the Constitution and Section 34 of the Electricity Regulation Act. Other powers and functions contained in the Electricity Regulation Act – including those related to the implementation of determinations made in terms of Section 34 – will remain with the Minister of the DMRE, Gwede Mantashe. So effectively the two ministers must still work together; we must hope that they can collaborate in a way that removes bureaucratic friction rather than adds to it.
Much of the detail has still to be worked out, but the clarification of Dr Ramokgopa’s powers is a welcome turn of events.
President Ramaphosa signalled his government’s support for the private sector in July 2022 with a raft of measures, including a doubling of Bid Window 6 from 2.6GW to 5.2GW, rooftop feed-in tariffs and the removal of licensing thresholds to facilitate private investment in utility-scale generation projects. According to Eskom, IPPs have applied for grid access for projects representing 20GW of capacity, which is equal to six load-shedding stages. This number does not even include the projects under the government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which have already contracted 6.4GW of capacity.
To put these numbers in context, the government’s 2019 Integrated Resource Plan (IRP) – the long-term roadmap which guides investments in new capacity – envisaged total installed renewable (wind and solar) capacity of 15.6GW by 2025 and coal-fired generation in that year of 39.4GW (after decommissioning some plants). Four years later the prospects for private sector renewable capacity has ramped up significantly.
In two years’ time, renewables’ share of SA’s power generation will be at the level which the IRP envisaged would only be reached in 2040 – that is, renewable capacity is developing 15 years faster than expected.
Article 4.5 of the Paris Agreement enshrines the principle that the developed world has an obligation to support the developing world’s efforts to combat climate change. Under the Just Energy Transition Partnership (JETP), the US, UK, France, Germany and the EU are committed not only to helping SA to achieve its emission reduction targets, but to do so in a way that ‘recognises the direct and indirect impact that the energy transition has on livelihoods, workers and communities’.
As ever, policy objectives are just words until the money is found to pay for them. In this case, the objectives of the JETP will be realised on the ground through the Just Energy Transition Investment Programme (JET-IP) announced in October 2022.
Under JET-IP, these international partners have committed US$8.5 billion as seed funding for a R1.5 trillion investment programme designed to transform SA’s energy sector between 2023 and 2027. If the IPP roll-out takes place as expected, will it give Dr Ramokgopa and his colleagues in cabinet, the fiscal and political space to consider extending the life of coal-fired power plants? The government has to juggle the imperative to keep SA’s lights on with its obligations under the JETP. These obligations are contained in the sustainable development plan (SDP) framework, under which the South African government is committed to achieving net zero emissions by 2050.
Under the JET-IP framework, three of Eskom’s 15 coal-powered plants will be decommissioned: Komati (under way), Hendrina and Camden. But to avoid the catastrophic costs of load shedding, government has to ensure the remaining 12 power stations keep performing.
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To put this in context, the Council for Scientific and Industrial Research estimated load shedding costs about R91/kWh, versus a levellised cost of electricity for wind of R0.46/kWh or Eskom’s average tariff for large industrial users of R1.15/kWh in 2019/20.
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The largest item on the JET-IP investment plan is the cost of decommissioning and repurposing coal plants.
Given the size of the Eskom workforce at these plants, the social impact of a low-carbon future is obvious. It is hard to see a political future for any transition away from coal if it does not address the interests of labour and local communities. The support of the unions is essential to the political sustainability of both Eskom’s and the government’s attempts to realise the JET-IP’s objectives.
The Congress of South African Trade Unions (COSATU) has been publicly supportive of the JETP, calling it a ‘historic breakthrough’ and a ‘game-changer’ for SA’s developmental and climate goals. COSATU has also been involved in developing a social compact with the government and other stakeholders to ensure that workers’ rights and livelihoods are protected in the transition.
COSATU’s leadership might be singing from the government’s hymn sheet, but within its membership there are differing views. The National Union of Mineworkers (NUM) is more sceptical of the JETP, as it is unconvinced by promises to cushion the impact on workers and their communities of closing coal mines and power stations.
The National Union of Metalworkers of South Africa (NUMSA) is even less on board. Its leadership has opposed the JETP, calling it a ‘neocolonial project’ that undermines SA’s sovereignty and democracy. NUMSA has also accused the JETP of being a bail-out for Eskom.
It believes that the JETP will not address the root causes of Eskom’s crisis, such as corruption, mismanagement, and privatisation. Dr Ramokgopa has argued that one of the ways to reconcile all interests would be to agree to a finite extension plan for Eskom’s coal plants. This would need to have a hard deadline, explicitly informed by detailed costing and technical assessments.
Given that one of the conditions of National Treasury’s bail-out of Eskom is no new capex related to the existing generation fleet, the life extension of these plants (and ultimately their redirection away from coal) would mainly be handled by external Operations and Maintenance (O&M) and Engineering, Procurement and Construction (EPC) contractors. These O&M and EPC contractors could be set up as new stand-alone entities in which labour would be a shareholder. These entities would have contractual obligations to transfer skills and deliver economic benefits to workers and communities.
For example, the O&M contractor’s obligations would include decommissioning and would be costed upfront. The O&M contract would specify detailed service levels and KPIs, including the Energy Availability Factor (i.e. percentage of up-time). The contractor would only be paid when performance criteria were met. If performance failed to reach minimum service levels, the contractor would be fined in cash. KPIs could also include climate and ESG criteria.
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Under these arrangements, labour would have an opportunity to secure its future well beyond the life-cycles of these coal plants, which must be decommissioned sooner rather than later.
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SA’s energy crisis is a complex problem. Any politically-sustainable solution must reconcile the competing interests of stakeholders, who include labour, business, civil society and the international partners supporting JETP. The government must craft this solution while respecting its fiscal constraints, its environmental commitments and its social obligations. Encouragingly, the bail-out announced in the Budget has given the government important leverage over Eskom.
The Minister of Electricity’s proposal to extend the life of some existing coal plants makes sense. Renewable capacity cannot ramp up fast enough to replace Eskom’s coal fleet, even in the medium-term, and it will take time to implement the industrial strategy that will provide new forms of employment for the coal-dependent workforce.
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To extend the life of those plants while encouraging private sector renewable capacity seems a practical way forward that should satisfy most of these interests.
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However, this proposal would need to be carefully designed and implemented, with clear and transparent rules and incentives for all parties. It would need to be aligned with the broader vision and strategy for the country’s energy transition, as outlined in the IRP and the SDP frameworks. Ultimately, the energy crisis is not only a technical and financial challenge, but also a political and ethical one. It requires leadership, collaboration and innovation from all sectors of society. Dr Ramokgopa has his hands full.