South African Energy Industry: Powered Down

For consumers, South Africa’s power crisis started in 2008 with rolling power outages or ‘load-shedding’. But the crisis has much deeper roots: government decision-making has been poor over the course of the past two decades, and public and private sector investment in building new power stations never matched demand during the post-Apartheid economic boom. The effect on industry and the wider economy is significant, and has damaged South Africa’s efforts to compete internationally. According to Lynne Brown, the Minister of Public Enterprises, blackouts have cost the economy around USD 20 billion during 2015. The crisis, however, is far from unsolvable, and recent developments in renewables may suggest a brighter future.

ROOT CAUSES: POLICY v POWER

The historical causes of the power crisis are fourfold. First, large-scale changes in personnel and management during South Africa’s transition from Apartheid left a knowledge gap in the power industry that has taken two decades to fill. Second, little investment in maintenance led to dwindling capacity at South Africa’s ageing power stations as they strained under increased demand. Third, successive governments have been committed to keeping electricity prices artificially low to keep voters and business interests happy, and this has skewed the market unfavourably towards consumers. Fourth, from 2001 to 2004 the government barred Eskom, a public utility, from investing in new power-generation projects.

For many, the Eskom decision has had the most notable long-lasting effects. The government was trying to reduce Eskom’s monopoly over power generation (and increase private-sector investment), and had previously attempted (and failed) to privatise the utility. But, with electricity prices set by the government and kept well below market rates, few investors were prepared to set up independent power producers (IPPs) to sell cheap electricity. No one stepped into the breach.

Following the drought there was a flood of projects, but the results have been a long time coming. In 2004 Eskom was allowed to invest again in the power-generation industry, and began building new power stations as quickly as possible. Few projects have run smoothly. The coal-fired Medupi (commissioned in 2006) and Kusile (commissioned in 2007) power stations have yet to be brought fully on line. Construction projects have been plagued by contractor disputes, labour problems and ballooning costs, but the next few years should see a 9,564 MW total joint capacity increase following their completion, representing an increase of almost 20 percent on current capacity.

HOPE FOR RENEWABLES AND NUCLEAR?

For some years, the government has been promoting renewable energy as part of the solution to the country’s power crisis, and South Africa’s renewable IPPs may have more luck than their coal-fired counterparts. Certainly they have drummed up more interest from investors.

As at August 2011, a total of 64 projects had been awarded to private solar, wind and hydroelectric companies, with $14 billion investment, which will hopefully contribute to the generation of 3,916MW. While renewable energy accounted for less than 1 percent of South Africa’s energy mix in 2012, this is expected to reach 12 percent by 2020.

The government has also, more quietly, been procuring nuclear deals over the past two years with South Korea, China, Russia, France and the US. The arguments for nuclear power are well known: lower greenhouse gas emissions, high generation capacity and lower running costs for established operations. Yet, many commentators have expressed concern that a nuclear solution is divorced from South Africa’s power crisis. The start-up costs are exceptionally high, and the lifespan of nuclear power station construction is 10 to 28 years—a long time to wait for the lights to come back on.

South African also lacks the financing to construct the facilities. Russia, the frontrunner for the nuclear contract, is prepared to stump up for initial construction, but controversial clauses in the Russian proposal will give Russia significant control over South Africa’s energy future. With no alternative plan under development, South Africa will be dependent on Russia’s support. Many believe that more short-term and medium-term projects, including a mix of lower-cost renewable and non-renewable power, represent a more appropriate response to South Africa’s power crisis.

South Africa is still struggling to find a way out of its power crisis, despite some promising signs. The government’s commitment to renewable energy is sage, and the country may finally begin to benefit from investment decisions made back in the mid-2000s, which will bring on significant coal-power capacity over the next few years. The country’s nuclear ambitions may also be an important part of the long-term solution. Despite this, South Africa continues to suffer from poor decisions made almost a decade ago in an industry that demands sound, long-term planning and investment. The country continues to face a harsh reality: load-shedding is not going anywhere soon.